Greenspan Speaks

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Alan Greenspan’s
autobiography was released on September 17. He was interviewed by
Leslie Stahl on September 16 on CBS’s “60 Minutes,” for what has
to be the most successful book promotional appearance I can remember.

The
book’s title is The
Age of Turbulence
. Yawn. The guys in the marketing division
should have insisted on Straight Talk — Finally.

Mr. Mumbles
at long last has come clean about what I had said for almost two
decades: his mumbling was deliberate.
“I
would engage in some form of syntax destruction, which sounded as
though I were answering the question, but, in fact, had not,” Greenspan
admits, with a chuckle.

At one hearing,
Greenspan said, “Modest pre-emptive actions can obviate the need
of more drastic actions at a later date, and that could destabilize
the economy.”

“Very profound,”
Greenspan says, after listening to his testimony.

I like the phrase,
“syntax destruction.” The master of this art — the mixmaster
— was President Eisenhower. He was equally deliberate. He was
perfectly content to be ridiculed by the press as a verbal incompetent.
He played the press like the puppets they really are. Greenspan did
the same, with equal success.

In the interview,
Stahl referred to his advance on the book’s royalties: $8 million.
Even I was stunned. If he was paid top royalty — 15% —
then at $35 per book, the publisher needs to sell over 1.5 million
copies in hardback just to break even. This advance was extraordinary
for an autobiography. It indicates just how influential he was and
remains.

She asked
him which currency he would prefer to be paid in. He said he plans
to diversify. That was a way of saying, “I will not stick with the
dollar 100%.” He has the picture.

I do not begrudge
him his $8 million. It was clearly worth that to get him out of
the Federal Reserve System. I do begrudge the way he got it: by
presiding over the FED and relying on monetary inflation to bail
out the stock market in 1987, 1990—91, and 2000—2004.

He said that
he did not grasp what was happening in the subprime mortgage market
until late 2005. Stahl did not know enough to ask him why he did
not recognize that a federal funds rate falling from 6.5% in mid-2000
to 1% in mid-2003 was inevitably going to produce arbitrage opportunities
between the short-term rates and long-term, just as yen carry trade
did, beginning in the early 1990’s. The strategy of “borrow short,
lend long” created the savings & loan bust in the mid-1980’s in
the United States. Why did he think it would be different after
2000?

Both Stahl
and Greenspan kept coming back to Greenspan’s love of economic statistics.
The show’s Greenspan segment ended with this:
When
he’s not working these days, he does what he’s always done to relax:
he flips through government reports with all those geeky numbers.

“He loves
these data. I mean, I mean look at this stuff here,” his wife,
Andrea Mitchell, tells Stahl, looking at his morning reading,
including a report from the Bureau of Labor Statistics.

“I just
love getting into the detail of what the . . . say, protein content
of hard red winter wheat was because — the differential in
price. The differential in price between . . . ,” Greenspan says.

“It’s very
romantic,” Mitchell remarks.

." . . Kansas
City and Chicago was. . . ,” he says laughing. “No, it was romantic
to me. That’s what the joke is. And I’m still that way. I really
just love that stuff.”

This was Greenspan’s
problem for two decades: a preference for data that were separated
from a coherent economic theory of the business cycle.

When he was
a young economist in the 1960’s, he was a devoted advocate of the
gold standard. He understood cause and effect in economic theory.
He understood how monetary inflation distorts the capital structure,
leading to booms and busts. But, at his accession to the Chairmanship
of the Board of Governors in 1987, his personal love for, and deep
faith in, economic statistics overcame his mid-1960’s faith in stable
money as a matter of economic principle. He adopted the print-and-spend
policies that have plagued every nation that has adopted central
banking, which is all of them except Monaco and Andorra.

To begin with
statistics is to begin with built-in blinders to economic cause
and effect. Statistics are merely what government agencies have
sampled in the past. Following statistics rather than a policy of
stable money, he spent his career at the FED looking into a government-built
rear-view mirror. He got out as Chairman just in time for the day
of reckoning to arrive. Bernanke will get to ride the tiger that
Greenspan left for him, just as Paul Volcker left Greenspan the
tiger — smaller and weaker — in 1987.

MORE
INFLATION

Greenspan
argued that FED policy in his era did not face the problem of price
inflation that Bernanke faces today.
We
were dealing in an environment back there where inflation was easing.
We could have acted without the fear of stoking inflationary pressures.
You can’t do that any more. And therefore it’s a different world.

If he were Pinocchio,
his nose would have grown six inches. Greenspan spent his entire career
at the FED warning against price inflation, which was just around
the corner. Only once do I recall that he warned against deflation,
and he refused even to use the word. That was in his October, 1998
testimony after the New York FED had called together New York banks
that had lent billions to Long Term Capital Management, Ltd., which
was about to go bankrupt. He warned against cascading cross defaults.
But he did not call this what it would have been: mass deflation.
Over and over in his career, he warned that inflation was the economy’s
main threat. Year after year, the FED inflated. Inflation is always
the problem because the Federal Reserve System exists.

He thinks
we are at long last entering the age of inflation — not the
mamby-pamby inflation that the FED has engineered ever since 1982,
but the real thing. The present credit crunch is not the main problem.

“We’re
going to get through this particular credit crunch. We always do.
This is a human behavior phenomenon, and it will pass. The fever
will break and euphoria will start to come back again,” Greenspan
says.
This is utter
nonsense, and if he does not know that it is nonsense, then he has
become an amateur psychologist rather than a professional economist.
Credit crunches are not human behavior problems. They are fractional
reserve banking problems. They are the inevitable result of prior
monetary expansion.

In the very
next paragraph, he admitted as much. He predicted rising price inflation.

But
he does see clouds on the horizon. “Over the long run, this is not
going to be what our problem is. Our problem over the long run is
the re-emergence of inflation,” he says.

“This is
interesting because in your book, your outlook on the broad future
is pretty gloomy. Interest rates going up, you say. Inflation
going up,” Stahl says.

“Yes. Indeed
I have a line in the book, ‘It looks pretty gloomy,'” Greenspan
agrees.

But why is price
inflation inevitable? Stahl did not pursue this on-screen. Inflation
is inevitable because the FED will create new fiat money in order
to overcome the existing credit crunch, as it always does, and as
it surely did under Greenspan in 1987, 1990, and 2001.

The coming
inflation is no more a problem of human behavior than today’s credit
crunch is — and no less. Humans behave in terms of signals
provided by the external world, and the crucial signals known as
prices are deliberately, self-consciously distorted by central bankers.

I am not arguing
against Greenspan’s prediction of rising prices in general. I merely
point out that he refused to blame price inflation on its source:
the Federal Reserve System.

THE
HOUSING BUBBLE

There is one
exception to his prediction of rising prices: real estate.
Asked
if he thinks this is going to have a deep lasting effect throughout
the economy, in jobs, consumer and spending, Greenspan says, “It’s
not clear yet. And it will not be clear for quite a while. This
is fundamentally, originally caused by the flattening out of home
prices. And that is only now just beginning.”

“Prices
are going to fall further,” Greenspan
predicts
.

So, what are
we to make of all this? He says:

  1. The FED
    did not cause a housing bubble. The mortgage issuers did.
  2. The present
    credit crunch is a human behavior matter.
  3. Home prices
    will fall further.
  4. This, too,
    shall pass.
  5. We are
    facing long-term inflation.

Here is my assessment:

  1. The FED
    did cause a housing bubble. The mortgage issuers acted the way
    they did because the FED had lowered interest rates.
  2. The present
    credit crunch is a human behavior matter — behavior in response
    to monetary tightening by the FED, beginning the month Greenspan
    departed: February, 2006.
  3. Home prices
    will fall further.
  4. This, too,
    shall pass.
  5. We are
    facing long-term inflation.

On “60 Minutes,”
he said housing prices will fall further. He was more specific in
his interview in the London Financial Times.
Mr.
Greenspan said he would expect “as a minimum, large single-digit”
percentage declines in US house prices from peak to trough and added
that he would not be surprised if the fall was “in double digits."

The author of
the article reminded readers that Greenspan had refused as Chairman
to call this market a bubble.
As
Fed chairman, Mr. Greenspan had talked about “froth” in the housing
sector, but never said there was a bubble in the market as a whole.
His successor Ben Bernanke has also avoided the word “bubble."

But Mr.
Greenspan told the FT that froth “was a euphemism for a bubble."

He said
he still thought froth — a collection of bubbles — was
a better description, because of the variation in house price
appreciation in different local housing markets. But he said “all
the froth bubbles add up to an aggregate bubble."

THE CREDIT
CRUNCH

His description
of the credit crunch in the Financial Times was far less
rosy than on “60 Minutes.”
The
former Fed chairman said the current turmoil in financial markets
was “an accident waiting to happen."

He said
the price of risk had fallen to unsustainably low levels beforehand,
with investors addicted to asset-backed securities that offered
some additional yield over Treasury bonds as if they were “cocaine."
Mr. Greenspan said this demand induced the big increase in the
origination of subprime mortgages by mortgage brokers.

His audience on
“60 Minutes,” as well as the interviewer, was not ready for a discussion
of asset-backed securities. The issue is risk. The market had failed
to assess the level of risk.

Yes, it had.
But why? Why should entrepreneurs make such a mistake? The business
cycle theory offered by Ludwig von Mises in 1912 gave the answer:
the central bank’s inflation sent out false signals to entrepreneurs.
Low short-term interest rates persuaded them that there was more
capital available than there really was. When entrepreneurs at last
discover this, there is a credit crunch. This is now happening.

The
rise in defaults on subprime mortgages was only the trigger that
set off a broad re-evaluation of risk, he argued.

Mr. Greenspan
said the off-balance sheet investment vehicles that issued much
of the asset-backed commercial paper represented a “savings and
loans disaster waiting to happen” because of the mismatch between
their assets and liabilities. Mr. Greenspan thought the issuance
of asset-backed commercial paper “is probably not going to get
back to where it was.”

They had
“five-year maturity assets financed with 30-day commercial paper,"
he said.

There it is, in
plain English: the capital markets have borrowed short and lent long.
Greenspan’s
comparison was correct.
This practice was also the cause of the
S&L crisis of the 1980’s.
The
former Fed chairman said collateralised debt obligations — securities
that slice up and repackage loans to meet the risk-appetite of different
investors — “will never get back to the levels and structures
that they were, because now everybody knows you cannot price them."

CONCLUSION

Alan Greenspan
has not come clean. He has not come close to admitting that he presided
over the FED as a joint agent of the commercial banking system,
Wall Street, and the Federal government. He does not admit that
the FED has not attempted to deliver stable money since about 1933.
He has never admitted that the FED under his administration constantly
returned to monetary inflation as a way to forestall recession.
He did not mention that prices doubled under his era as Chairman,
and nobody asked him.

He gets softball
interviews which help sell his book. He has dropped FedSpeak, but
he has not abandoned convenient memory loss. The Establishment media,
which are also dependent on commercial banking, the stock market,
and the Federal government, play ball with him.

His
general assessment is accurate, however. Housing prices will continue
to fall, probably in the double digits. The credit crunch will subside,
due to FED intervention. Finally, the economy’s long-term threat
is more inflation, just as it has been since 1914.

September
21, 2007

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 19-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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