Groveling at the Fed: Greenspan and Bernanke

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Federal Reserve
Chairman Ben S. Bernanke gave a speech on January 3, 2010 that was
incomprehensible. The address itself will be discussed later. It
is important first to consider the precedent of Federal Reserve
chairmen making absurd claims – and getting away with it.

A place to
start is Alan Greenspan’s 2002 speech in Jackson Hole, Wyoming.
The then Federal Reserve chairman explained that central banks could
not identify bubbles because "only history books and musty
archives gave us clues to the appropriate stance for the policy."
There are several problems with this excuse, not to mention his
even less credible fiddle-faddle. More important though, is that
the chairman’s address was disseminated with very little opposition
along channels of communication. Economists cheered or remained
silent. With a few notable exceptions, the media reported Greenspan’s
speech as if it was a press release, which it was.

More up-to-date
is Alan Greenspan’s appearance before Congress in October 2008.
He had left the Fed in January 2006. In 2008, he testified about
his contribution to the worldwide financial meltdown.

Greenspan was
"shocked" to find a "flaw" in his "ideology."
He discussed his model that impugned "40 years or more of considerable
evidence." His model miscalculated the "self-interest
of lending institutions" that he believed protected shareholder
interests. Greenspan explained his navet was the reason he had
not regulated banks properly.

Greenspan’s
mistake was so often repeated that it acquired an official status.
There are (at least) three official bodies that profit from this
hallucination. First, the politicians. Since the Federal Reserve
is the nation’s leading bank regulator, the politicians who inflated
the credit bubble (e.g., through Fannie Mae, Freddie Mac, Countrywide
Credit, banks that securitized mortgages, the National Association
of Homebuilders) have not been held to account. The politicians
are free to toy with petty financial regulation, while Fannie, Freddie
and lethal derivatives are compounding as before.

The second
body is the Federal Reserve. In a more mature world, after such
a display of catastrophic incompetence, the Fed would be disbanded.
Instead, since Greenspan’s mistake was due to his model’s flaw (not
a fault of the former Federal Reserve chairman) and because bankers’
standards of integrity fell so far below Greenspan’s impeccable
conduct that he could not comprehend such behavior, the Federal
Reserve has been handed a parking ticket.

The third body
is Alan Greenspan. He has been exempted from his responsibility
for the ongoing liquidation of America. The former chairman has
received blame, but still receives accolades. Greenspan continues
to speak for large fees. His prophecies are still quoted across
the media and the recently endowed Alan Greenspan Chair in Economics
at New York University demonstrate that groveling can get you anywhere.

Greenspan has
remained relatively unscathed because he is still useful. In this
case, to the politicians and every economist who is using Greenspan’s
error to promote more regulation. There will be many opportunities
for both politicians and economists to get rich from new legislation.

Alan Greenspan’s
self-proclaimed "ideology" is essential to his innocence,
to the Fed’s exemption from failure and to the politicians’ fevered
attempts to separate themselves from responsibility. Despite the
incessant noise about Greenspan’s ideology, he never had one. He’s
never even had an idea.

The publicity
is of a man who acquired his free-market ideology sitting at the
feet of Ayn Rand. This is reported over and over by the media. He
didn’t know what Rand was talking about.

Nathaniel Branden,
Rand’s number one acolyte in the 1950s and also the Randian closest
to Greenspan, wrote years later: "Now, looking at [Alan], I
wondered to what extent he was aware of Ayn’s opinions." Complimenting
Ayn on some passage, Greenspan might say, "On reading this…one
tends to feel…exhilarated." Platitudes and assurances also
mesmerized the nation 50 years later.

Today, for
the media to suggest Greenspan did not operate from a free-market
ideology would throw open the question of why Greenspan blew up
the banking and credit systems. It would introduce the possibility
that he was prone to act as the large financial institutions would
like him to act. It would also reveal the extent to which he –
and Bernanke – say what politicians want them to say.

On January
3, 2010, Federal Reserve Chairman Ben S. Bernanke stated low interest
rates set by the Federal Reserve from 2002 to 2006 did not play
a part in the housing bubble. Instead, he claimed, it was loose
regulation that has left a good part of the country on the cusp
of poverty. This interpretation cannot even be classified as poor
economics, but it is good politics. In January, the Senate is scheduled
to vote on a second four-year-term for Bernanke as Fed chairman.
Like Greenspan, Bernanke is useful. He will probably receive another
term.

January
16, 2010

Fred Sheehan
[send him mail] is
finishing a biography of Alan Greenspan. He writes frequently for
the Gloom, Boom & Doom Report, Whiskey & Gunpowder and the Prudent
Bear website. He has worked in the financial industry for more than
two decades. He is the author of Panderer
to Power: The Untold Story of How Alan Greenspan Enriched Wall Street
and Left a Legacy of Recession
(McGraw-Hill, November 2009).

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