Now He Tells Us! Alan Greenspan Writes a Typical Beltway Memoir

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the Bush administration comes corkscrewing back to earth, like one
of the early V-2 test shots that nearly obliterated its own launch
team, the trickle of self-justifying memoirs from the perpetrators
is widening into a flood. For sheer three-hanky mawkishness, nothing
will probably be able to match the forthcoming cri de coeur
of that noble martyr, Colin Powell. And Douglas Feith's impending
autobiography will doubtless win the championship for impudent effrontery.
But until then, we can satisfy ourselves with Alan Greenspan's The
Age of Turbulence
, now on sale at your local bookstore.

and Hypocrites

The media takeaway
from this stock “present at the creation” Washington saga is that
Mr. Greenspan, the Chairman of the Federal Reserve Board between
1987 and 2006, is highly critical of President Bush, his former
patron. “My biggest frustration remained the president's unwillingness
to wield his veto against out-of-control spending,” he writes. How
flinty-eyed and prudent of him, just like a Buick-driving Midwestern
small town banker of yore.

Yet the former
Fed chairman conveniently forgets his own record of tacitly endorsing
such spending. The largest single portion of the increase in Federal
discretionary spending since 2001 came from the huge boost in Pentagon
expenditures, both in its war supplementals and in the regular DOD
budget. If there is an example of Mr. Greenspan's denouncing these
increases in any of his statements to the Congressional banking
and budget committees over the last several years, we have yet to
see it.

As befitted
the former Chairman of the 1982 commission to reform Social Security,
Mr. Greenspan constantly fretted in his testimony and speeches about
the long-term costs of Federal entitlement programs, at least when
he was addressing entitlements as an abstraction rather than as
specific programs. We are aware of no such jeremiad from him against
the enactment of Medicare Part D (the prescription drug benefit)
in 2003. This new entitlement added $1 trillion to Federal spending
over the succeeding 10 years, and is now a massive unfunded liability
over the next 50 years.

Perhaps Mr.
Greenspan’s defense against hypocrisy is the obvious fact that the
president would never have vetoed Medicare Part D just as he would
never have vetoed the increases in Pentagon spending, because neither
originated with what Mr. Greenspan condemns as a profligate Congress.
Both were actually hobbyhorses of the president he served as a de
facto appointee.1

Mr. Greenspan
shows somewhat less hypocrisy regarding his advocacy of income tax
cuts, although here, too, there are inconsistencies. While he acknowledges
he advocated the 2001 tax cut that contributed mightily to the $5-trillion
swing from surplus to deficit in the 10-year budget outlook, his
explanation as to why it was not an economic panacea is unsatisfactory.
He observes that when the surpluses dried up a mere nine months
after passage of the cuts, the spending policies of the administration
“were no longer entirely appropriate.” Well, then, why did he not
say so plainly at the time, particularly in reference to Medicare
Part D and the Pentagon spending binge? If just a handful of members
of Congress, seeking cover to vote against Part D, would have heard
publicly from Alan Greenspan, the bill would have failed in the

Mr. Greenspan has written in public life suggests he thinks tax
cuts at the top marginal rate are a sovereign remedy for all that
ails the economy. Yet he goes out of his way to praise President
Clinton's 1993 deficit reduction measure as an act of political
courage. This measure included an increase in the top marginal rate.
One could say in Mr. Greenspan's defense that this law took effect
in a period of high deficits, whereas the 2001 rate cuts were enacted
at a time of surplus. But he did not change his tune as the surpluses
swung to deficit.

One can conclude
that this seeming inconsistency was trumped by a higher consistency:
the need to serve the administration of the day. President Clinton
favored the tax increase, therefore the oracular Fed chairman would
too. Thus the Bush tax cuts found similar favor.

Free Money,
and Other Republican Fairy Tales

The chief indictment
against Mr. Greenspan lies not in fiscal policy, where he had no
statutory responsibility (even though he could influence presidents
and congressmen if he chose). In his own legal bailiwick, the setting
of interest rates, we see the former Fed chairman at his worst.

Let us stipulate
that every tangible and intangible thing has its cost, particularly
money. “Conservatism,” if it means anything at all, means prudence,
caution, planning for the worst case, building a nest egg. Mr. Greenspan,
the self-described “libertarian conservative,” presided over the
greatest binge of money creation in American history through his
setting of the artificially low interest rates he knew would politically
protect his boss at 1600 Pennsylvania Avenue. Just as free bread
would be an impossible economic model for a baker, so would free
money prove to be for a central banker.

One of the
emerging stealth policies of the Republican Party has been the substitution
of free money for social welfare policies. The constituencies benefiting
from the two policies may be somewhat different, but the political
intention is, at bottom, the same. Moreover, the distortionary effect
of free money (that is, artificially low interests rates) may be
greater, since it ripples through the entire economy as it gives
false valuations to entire classes of assets, whether or not individual
units of these assets were even purchased with free money to begin

One can see
the free money ideology in full bloom simply by listening to any
of the orthodox Republican political and economic commentators.
Even Mr. Greenspan's pegging of interest rates at an artificially
low rate was not enough for these people. Robert Novak, when he
is not too busy leaking the names of covert CIA agents, frequently
inveighs against the Fed's interest rate policies on the grounds
that they are too high. One hears the same sort of diatribe from
Larry Kudlow on CNBC: apparently, if real interest rates are not
zero, it will be an intolerable burden on millions of ordinary,
hardworking middle-class Americans (a coded phrase meaning Mr. Kudlow's
millionaire CEO pals and hedge fund manager buddies). The fact that
Japan had what were effectively negative real interest rates for
long stretches of the 1990s did not alleviate Japan's economic stagnation;
low interest rates cannot “fix” the economy if other fundamentals
are unfavorable. But this experience makes no impression on the
free-money GOP.

There may be
an impression that profligacy in monetary policy is a relatively
recent development for the Republican Party, and that the old Republicans
were sound-money advocates. But Murray Rothbard, a classic hard-money
libertarian economist, argues in his History
of Money and Banking in the United States
that the GOP provided
the fuel for previous economic crises through its fondness for free
money policies.

According to
Rothbard's telling, during the 1920s, Benjamin Strong, Governor
of the New York Federal Reserve Bank, and Treasury Secretary Andrew
Mellon colluded to keep interest rates unrealistically low in order
to keep the stock market rising and benefit Republican electoral
prospects. The 20s market boom, like the tech boom and real estate
boom more recently, was a bubble whose volatility was fed by a politically-driven
low interest rate policy.3

The difficulty
with the administration's strategy of dismantling Social Security
was that it was not particularly popular, even among Republican
members of Congress. One possible palliative for the electorate
was President Bush's notion of the “ownership society”: that the
public could gradually be weaned off (Democratic) social insurance
programs through Republican programs that would make them think
they “owned” assets.

Thus it is
plausible that the subprime mortgage bubble, however it started,
was nurtured and sustained by a Republican administration that wanted
increasing numbers of the voting public to think they were land-owning
gentry. Given the obsessive secrecy of the administration, we may
never know what the precise deliberations were at the Treasury,
the Federal Home Loan Bank Board, the Comptroller of the Currency,
the West Wing of the White House, and the Federal Reserve itself.
But these institutions had, at minimum, abandoned the notion of
due diligence in overseeing housing finance.

Now, it is
complete bosh to think a new homeowner ensnared in a “no doc” loan,
or an interest-only loan, or a no down payment loan, has a stake
in anything. But for creating the illusion of ownership (as well
as the illusion of a booming economy as reflected by housing sales),
the artifice would suffice. President Bush — or at least his economic
Svengalis — were counting on the psychology of the Wealth Effect
to push a large segment of the voting public into the conservative
column. These voters would, as the old saying about land-owners
goes, “have a stake in the country.”

Seventy years
ago George Orwell noted the political implications of this meretricious
Wealth Effect. In Coming
Up For Air
, the fictional protagonist, George Bowling, a
technical member of the English middle class who thinks like the
proletarian of his origins, muses about his suburban London housing

Merely because
of the illusion that we own our houses and have what’s called
“a stake in the country,” we poor saps in the Hesperides, and
all such places, are turned into Crum's [the developer and mortgage
holder's] devoted slaves for ever. We're all respectable householders
— that's to say Tories, yes-men, and bumsuckers. Daren't kill
the goose that lays the gilded eggs! And the fact that actually
we aren’t householders, that we're all in the middle of paying
for our houses and eaten up with the ghastly fear that something
might happen before we've made the last payment, merely increases
the effect. . . . every one of those poor suckers would die on
the field of battle to save his country from Bolshevism.

Such, in the
calculation of the Bush administration, would be the blessings of
the expansion of home ownership. And Alan Greenspan would provide
the priming for the pump. Not only did he keep interest rates lower
than true market forces would have dictated, but he talked up the
novel types of loans the mortgage industry was offering. According
to Business Week in 2004:

No less an
expert than Federal Reserve Chairman Alan Greenspan has sung the
praises of ARMs. In February, he told credit union executives
that such loans could have saved many homeowners tens of thousands
of dollars over the past decade. He noted that Arms are much more
common in other countries, and he encouraged the mortgage industry
to create more options. “The traditional fixed-rate mortgage may
be an expensive method of financing a home,” Greenspan said.

The writers
at Business Week noted the risks inherent in adjustable rate
mortgages and other exotic financing packages more than three years
ago. But Mr. Greenspan admits now that he “really didn’t get it”
about the danger to the mortgage market.4

Mr. Greenspan's
talent for missing trends in the real estate market is particularly
mystifying given his experience with an earlier crisis: his first
appointment as Fed chairman in 1987 was immediately followed by
the largest percentage drop in the stock market since the crash
of 1929. The October 1987 meltdown was caused in part by the successive
collapses of savings and loan institutions which financed their
own real estate bubble, mainly in commercial real estate in the
Oil Patch.

He also apparently
didn’t “get it” about the tech bubble in the late 1990s. Indeed,
one heard frequent suggestions from the then-Fed chairman — suitably
hedged, of course — that the “new economy” of the 1990s was so fundamentally
different from what had gone before that the business cycle may
have been banished and that an era of perpetual growth was at hand.

Oil on Troubled
Persian Gulf Waters

One feature
of Mr. Greenspan's memoirs that has caused Beltway politicos to
contract a case of the vapors is his statement that the invasion
of Iraq was “largely about oil.” In only one day, he issued one
of Washington's usual non-denial denials that trips itself up in
its own contradictions. Through Bob Woodward, the imperial capital's
amanuensis of record, he
now says that oil “was not the administration's motive.”
which is it? — if no less a figure than the then-chairman of the
Federal Reserve board believed securing Middle East oil supplies
against Saddam Hussein's potential depredations was a legitimate
and defensible motive, why was he so quick to issue an anxious dementi
saying it was the furthest thing from the administration's mind?
One expects that Mr. Greenspan, now a private citizen, received
a testy phone call from either President Bush or Vice President
Cheney. Note that he did not see the need to issue a denial of his
statements about overspending; its alleged fiscal conservatism to
the contrary notwithstanding, the administration is truly sensitive
about only one issue: its false justifications for igniting a war.

Even Mr. Greenspan's
corrected version of the oil quote shows an almost laughable amount
of geopolitical ignorance from this supposedly brilliant polymath.
Greenspan says that it was his own prediction at the time in his
capacity as Fed chairman, that Saddam remaining in power would somehow
cause oil to increase to over $100 per barrel. On what evidentiary
basis did he believe that? Did he think that Saddam, under crushing
sanctions, with a dilapidated army, and with half his country a
no fly zone, could successfully invade Kuwait or Saudi Arabia? That
is sheer fantasy.

He gives the
game away by stating “My view is that Saddam, looking over his 30-year
history, very clearly was giving evidence of moving towards controlling
the Straits of Hormuz, where there are 17, 18, 19 million barrels
a day passing through.” But Iraq's narrow outlet to the Gulf is
nowhere near the straits. Second, Iraq had no navy or other long-range
systems capable of closing and/or controlling the straits. Third,
the Persian Gulf was and is essentially an American lake.

But let us
assume instead that Saddam did nothing; why would that cause oil
to quadruple in price from its 2002 level? That would be the first
time in history that a condition of peace would spike oil more than
a condition of war — in this case, a US invasion of Iraq. And it
is ironic that most competent analysts now believe a U.S. war against
Iran would cause an increase the price of oil similar in size to
what Mr. Greenspan says would have happened if we had done nothing
about Iraq. It is odd indeed that the US government seems blithely
willing to strike Iran now even if it causes an oil price spike,
whereas the administration rationalized attacking Iraq in order
to avert an oil price spike. This is plainly irrational, and shows
what sort of delusional and dishonest people are running the government.

As it is, the
invasion and occupation of oil has contributed to the more than
doubling of the average price of crude oil since 2002. Certainly
there are other factors involved, such as China's industrialization,
but it is undeniable that present-day Iraq has not reached the average
daily flow of oil achieved even by Saddam's rickety prewar infrastructure.
Add to that the “war risk premium” of there being a shooting war
in the Middle East, and it is evident that the US invasion of Iraq
has partially achieved what Mr. Greenspan alleges the invasion was
intended to avert. Finally, it is strange that a self-described
libertarian economist believed that oil, uniquely among all items,
would not respond to market forces, and must be secured at bayonet
point. After all, Saddam could not drink the oil; he was desperate
to sell it in order to get the revenue in order to keep his vast
system of bribery and corruption intact.

Some antiwar
writers have latched onto Mr. Greenspan's statement about oil and
said in effect, “aha! I knew it! It really was all about oil!” But
this overstates the matter and in so doing, lets other factors off
the hook. We have always been critical of exclusively monocausal
explanations of huge historical events like the invasion and occupation
of Iraq, and this explanation is no exception.

Of course,
it was about oil. But it was equally about Israel and its
disproportionate influence on US Middle Eastern policy. At the same
time, Karen Kwiatkowski (Col., USAF, Ret.) has eloquently written
about DOD's parochial desire to have permanent megabases in Mesopotamia
from which it could militarily dominate the region as well as threaten
Iran. This view also has merit. And what about the alleged Bush/Rovian
desire to become a “war president” and intimidate the Democrats
so effectively that it would be electorally beneficial to Republicans?
We see no way to refute that. And finally, is there any truth in
believing that the Vice President's relentless desire to expand
executive power and secrecy via the avenue of war may have played
a role? To borrow a phrase from George Tenet, that thesis is a “slam
dunk.” It appears that just as success has a hundred fathers, so
does a fiasco.

Alan Shrugged

For all Mr.
Greenspan's supposed empirical expertise, he has shown a surprising
inability to learn from experience. Perhaps the reason is that,
far from being a seasoned Washington pragmatist, he is attracted
to abstract ideological statements about libertarian conceptions
of the so-called “free market,” and a mechanistic understanding
of “how the world works.”

properly understood, is less a mechanistic ideology than an elaboration
of the phrase, “live and let live.” If you will, it is the Sermon
on the Mount with the pious interpolations left out. But in the
minds of dogmatic adherents, libertarian economics is a scientifically
proven truth that they believe with the same certitude as the Marxist
believes in the labor theory of value.

It is probably
no accident that during his early years, Mr. Greenspan was an acolyte
of Ayn Rand, one of the most dogmatic and personally unpleasant
individuals ever to have infested the American political scene.
She bequeathed libertarianism a legacy of sectarian schism and personality
cults rivaling Trotskyism. It is highly indicative of the drift
of these types of movements that Rand's current official heirs have
out-neoconned even the neocons in their love of military aggression.

To be fair
to Mr. Greenspan, it is unlikely that he holds all or even most
of the tenets of Randianism to this day. But a residue of that thinking
is detectable in his preference for abstract theory over historical
experience. Garn-St. Germain deregulated the savings and loan sector,
requiring in only a few years the largest government bailout in
history. The Securities Litigation Reform Act of 1996 reduced the
duty of due diligence and honest disclosure by executives of public
companies. It also, not coincidentally, greatly limited legal recourse
by aggrieved shareholders. Overvaluation of stocks resulted, contributing
at least in part to the bubble bursting in 2001, not to mention
the outright fraud committed by Enron, Tyco, and MCI Worldcom.

It is possible
to see the same problems in hedge funds, many of which through financial
alchemy transform debt into asset. It is telling that Mr. Greenspan
“didn't get” the subprime mortgage risk; these subprime mortgages
are invariably sold, ending up in many cases in the form of highly
leveraged hedge funds. Yet he adamantly maintains to this day that
hedge funds must not be regulated. The deregulations of the 1980s
and 1990s should have taught us that government regulation is not
merely some namby-pamby stuff about protecting ignoramuses from
themselves that ends up making markets “inefficient” (a favorite
pejorative of the Greenspan crowd). Sometimes, it is about protecting
the economy itself. What is crucial is having elected and appointed
officials with the sound judgment necessary to distinguish when
regulation is prudent, and when it is overkill. The former Fed chairman
was so enamored of theory that he often lacked that judgment.

The Age
of Turbulence reminds one in some ways of those tedious memoirs
by German generals after the Second World War. Our overall military
theory was sound, they would imply, it's just that the idiot at
the top executed it so badly that the whole affair came a cropper.
But we are unable to recount an instance when they had rejected
a field marshal's baton or refused an East Prussian estate when
these trinkets were proffered by the very same idiot. In the same
vein, President Bush has subtly become a retrospective alibi for
an entire political class that had once served him so eagerly.


  1. We are
    well aware of the rhetorical flummery to the effect that the Federal
    Reserve Board is “independent.” But this is like saying that Congress
    is independent of lobbyists, simply because there happen to be
    ethics statutes in effect. In reality, Mr. Greenspan was the culmination
    of a long line of Fed chairmen who essentially served as executors
    of the monetary policies of the administration of the day. There
    is a tradition in Washington almost as hallowed as the springtime
    blossoming of cherry trees at the Tidal Basin, whereby interest
    rates begin to fall six months before a presidential election.
  2. One of
    the persistent falsehoods of Republican propaganda is the insistence
    that “9/11 caused the deficits,” thus placing the onus on Osama
    rather than Republicans' own fiscal imbecility. In terms of the
    effect on the economy, 9/11 was minor and transitory: the stock
    market had already fallen further between January 2001 and September
    11, 2001 than it would fall subsequently. As for the military
    spending spree after 9/11, the vast majority of the war spending
    was devoted to invading and occupying Iraq, a country that had
    nothing whatsoever to do with 9/11. The increases in the Pentagon's
    regular budget were simply crass political opportunism occasioned
    by the war. The ballooning budgets bought things like Littoral
    Combat Ships, which have about as much utility in warfare against
    al Qaeda as Spanish galleons.
  3. Rothbard
    points out that this was not the only reason for Strong's and
    Mellon's policy. Both men, being early-20th century American financiers
    in good standing, were Anglomaniacs dedicated to doing Perdifious
    Albion's bidding in the manner established by J.P. Morgan. When
    the United Kingdom decided it would reestablish the pound on the
    gold standard at the old pre-World War I parity, Strong and Mellon
    did everything they could to assist. The problem was that the
    war had destroyed Britain's prewar position as the preeminent
    financial power in the world. Achieving the old parity was completely
    unrealistic, but once H.M. Government decided to do it (another
    disastrous decision in which Winston Churchill played a significant
    role), the American banking establishment fell all over itself
    to help by agitating for a cheap money policy which would depress
    the dollar in world exchange markets relative to the pound. As
    a result, Britain got an overvalued pound leading to massive unemployment,
    and America got a stock market bubble — leading a few years later
    to massive unemployment.
  4. 60 Minutes.
    Interview with Leslie Stahl, 16 September 2007.

19, 2007

is the pen name of a Northern Virginia-based defense analyst.

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