“Give me lucky generals,” Bonaparte used to say. The emperor did not trust skill, or training, or brains. He didn’t really know why some generals won and some seemed to lose. He chose the lucky ones. But on this day, 189 years ago, their luck ran out. Grouchy had not kept the Prussians back. Ney had failed to take Quatre-Bras. D’Erlon never quite got into the fight.
Arthur Wellesley, Duke of Wellington, retired from the battlefield on the 18th of June 1815 as a great hero. He fought the greatest military genius of his time — Napoleon Bonaparte — and won. Never beaten by the French, Wellington then became the head of allied forces occupying France. He was generous, organizing loans to the get the nation back on its feet. Then, he returned to Britain in 1818 and became Prime Minister in 1828.
“It was a damned close thing,” he recalled of the battle. Mistakes were made. Communications were missed. The weather complicated things. It might have gone either way. But in the end, it went Wellington’s way…and Napoleon was beaten.
Luck favored the Allies. It rained. Bonaparte had to wait for the ground to dry before launching his attack, giving his opponents time to get into defensive position…and time for the Prussians to come closer.
Looking through the long lens of history, we see heroes. Vercingetorix, Washington, Wellington, Jackson. We don’t know if they were smart, virtuous…or just lucky. Looking at today’s wars up close, would-be heroes often turn into villains, blunderers, and scalawags. We see too much.
But money is our beat. So we turn away from war to finance…where the stakes are lower and the characters are funnier.
The present chairman of the Federal Reserve is the most famous bureaucrat since Pontius Pilate. He is also probably the luckiest.
And like Pilate, he merely gave the mob what it wanted. Not blood this time, but bubbles.
Alan Greenspan came to the Fed when a very long cycle of falling interest rates and falling inflation was just beginning. For the 38 years until 1981, bonds had been in a bear market that peaked out with average yields on Treasuries over 14%. Paul Volcker had already done the hard work; he had slugged the inflation monster so hard it remained asleep for the next 2 decades. When Greenspan came to the Fed, inflation was out cold…interest rates were falling…and bonds were going up. All he had to do was nothing. Most likely, the great trend would continue throughout his tenure in office. The last bull market in bonds had lasted 26 years. It began in 1920 and continued through the ’29 crash, through the Great Depression, through WWII until it finally came to an end in 1945 with a Treasury yield below 2%.
Greenspan might have been a hero — just by being lucky. But there seems to be some failing, some pernicious gene that drives the lucky to acts of self-destruction.
Bonaparte could have stayed on Elbe…written his memoirs and enjoyed a satisfactory retirement. Greenspan could have done nothing.
Instead, each over-reached.
Mr. Greenspan cannot be blamed for Japan’s bubble of the late ’90s — even though it happened during his watch. Nor is he the real culprit behind the LTCM blowup or the technology bubble in America in ’98—2000.
But surely he, more than any other human being, is responsible for America’s current real estate bubble, its consumer debt bubble, and even China’s capital spending bubble.
A predecessor, William McChesney Martin, once remarked that the real job of the Fed was to “take the punch bowl away” before the party got out of control. It would have been easy; just follow the rules — take the punch bowl away. Volcker had done it; the mob burned him in effigy on the capitol steps, but he retired with dignity. When he speaks in public, people do not snigger behind his back.
Yet Mr. Greenspan did not remove the punch; he spiked it with the high-proof gin of easy credit. Each time the former gold-bug faced a problem, he eased over to the punchbowl and dumped more in, until Americans were wobbling under the influence of the lowest interest rates in 45 years…and a 1% key Fed lending rate for only the second time in history.
According to the central bankers’ code, Greenspan has committed neither sin nor crime. He is seen as a paragon of virtue, not vice. Yet, as Talleyrand once remarked to Napoleon, “Sire, worse than a crime, you have committed an error.”
The Fed chairman’s error was to offer more credit on easier terms to people who already had too much — including consumers, business, and the government.
During Greenspan’s reign at the Fed more new money and credit has been created than under all the rest of the Fed chiefs combined. Consumer debt rose to its highest level in history…the ratio of debt to income also higher than it has ever been. The effect was not only to inspire bubbles all over the world — but to make Americans poorer.
“A taste of the looming fiscal disaster is provided by the fact that, in the space of just one year, the trustees [of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds] have moved up the expected date of ‘asset exhaustion,’ writes James Grant. What he refers to is commonly known as Medicare. And ‘asset exhaustion’ is another way of saying ‘going bust.’
Senator Joseph Liebermann summarizes: “the entire U.S. government is going broke.”
Mr. Greenspan’s error seems to be catching up to him. In the West, the armies of inflation are approaching. The CPI is advancing at a 7% annual rate…came a dispatch last week. This week, the PPI — producer prices — are moving up at a 10% rate (also annualized from May figures.)
In the East, the forces of worldwide deflation are stalking him too. Mortgage rates are going up; consumers are backing off. Asian factories continue to spill out goods. Wal-Mart keeps offering, every day, lower prices than the day before. Oil, gold, copper, and bond yields — all seem to have peaked out.
Our man is caught in a giant pincers movement, and his bubbles could be pricked any day. He has no room to maneuver. He cannot cut rates much further; there is little left to cut. Nor can he increase them — to do that would be to bring crashing down the entire proud tower of debt he built up.
The day Mr. Greenspan’s luck runs out cannot be far off.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.