Greenspan's Legacy

by Jim Grichar (aka Exx-Gman)

Rumors have been floating around recently that 75-year old Fed Chairman Alan Greenspan may retire. Given the recent less-than-stellar performance of the economy and the disastrous stock market, many are calling into question the Maestro's reputation as a monetary manipulator and economic fine tuner extraordinaire.

Well, Alan does not want to leave town with his tail between his legs, so he has embarked on a public relations campaign to con the public into believing that events were beyond his control.

The most recent round of his public relations campaign began the August 30^th weekend as he, his U.S. banking buddies, and selected central bank slugs, economists and businessmen from around the world are holding their annual conference in Jackson Hole, Wyoming. They generally meet to discuss recent economic history, credit crises and banking problems, and how to solve those problems. The whole thing is designed for central banker and financier networking, a way of helping Fed Chairmen update their monetary rolodexes so as to be able to bail out U.S. financiers who make bad loans and investments.

This time, however, Alan, as well as his cohorts in crime, are trying to cover their collective backsides by trying to bamboozle the public into thinking that there was not a thing they could do to prevent the stock market crash and that there is little they can do to help bring the U.S. economy out of its current economic malaise. (Maybe Alan and the gang have been spurred to do this because they have started to read the criticisms of their monetary malfeasance in LewRockwell.com.)

According to a Federal Reserve Board press release of Greenspan's prepared remarks to the Jackson Hole-in-the-Wall gang, the new economy had changed underlying economic conditions, expectations, the speed of business and financial market reactions to events, and the way in which individuals reacted to economic events:

A wave of innovation across a broad range of technologies, combined with considerable deregulation and a further lowering of barriers to trade, fostered a pronounced expansion of competition and creative destruction.

The result through the 1990's of all this seeming-heightened instability for individual businesses, somewhat surprisingly, was an apparent reduction in the volatility of output and in the frequency and amplitude of business cycles for the macroeconomy. While the empirical evidence on the importance of changes in the magnitude of the shocks impacting on our economy remains ambiguous, it does appear that shocks are more readily absorbed than in decades past.

Well, we know why shocks are more readily absorbed than in decades past, and that is because the Federal Reserve, in cahoots with the U.S. Treasury, the U.S. Congress, and the International Monetary Fund (IMF), bailed out U.S. investors a number of times: 1) in late 1994 with U.S. money to bail U.S. investors out of the Mexican fiasco; 2) in 1997 with numerous IMF loans and a relaxed U.S. monetary policy to bail out East Asian mal-investments; 3) in 1998 with the bailout of banks and financiers who had thrown good money into a Russian economy still run by communist thugs; and, 4) in late 1999- early 2000 by flooding the economy with money on fears of a millenium financial meltdown due to computer breakdowns and a resulting financial panic.

Annual rates of growth (end-December over end-December) for the monetary aggregate MZM (the acronym means Money Zero Maturity – any banking deposits plus cash, as long as the deposits can be withdrawn any time) were 7.2% in 1996, 8.4% in 1997, 14.8% in 1998, and 9.1% in 1999. Anyone suspicious about this monetary profligacy would suspect that Greenspan was simply bailing out the economy and the stock markets as a political payoff to Bill Clinton for reappointing him as Fed Chairman, and they would be correct (My major professor pointed this out to me in graduate school thirty years ago when I was studying monetary theory and monetary history. At that time, Fed Chairman Arthur Burns inflated the currency to keep Nixon in office. Later, I observed Fed Chairman G. William Miller flood the economy with money to make Jimmy Carter look good – this one backfired – and how Treasury Secretary James Baker and Fed Chairman Paul Volcker opened the monetary spigot in the mid-1980's, eventually precipitating the Black Monday stock market crash in October 1987 and the savings and loan crisis a few years later).

Pumping up the economy by flooding it with money had a downside, namely in that the Fed's actions subsidized borrowers at the expense of savers. In the 1990's, by making credit artificially attractive, the Federal Reserve subsidized bad investments by many dot.com'ers and other dubious businesses and in effect taxed legitimate savings. Stock markets boomed as savers dumped safe assets – savings accounts, life insurance, and other less risky forms of savings, which were now earning much lower rates of return – for what appeared to be less risky stocks which were going up, seemingly without limit. Businesses borrowed and issued lots of stock, an increasing part of which went into dubious and unsound investments. Consumers – who are also savers – believed that borrowing was the way to live, and they did so in record amounts. Every time a financial crisis occurred in the 1990's, Alan and the boys began to flood the economy with excessive amounts of money, bailing out the U.S. economy and the stock market and thus giving the impression that there was no risk in buying stocks. No wonder that the stock market exploded to the upside, particularly in the last quarter of 1999 and early 2000.

Well, after the millennium turnover, Alan and his Fed cohorts raised interest rates, an act designed to cool off the economy and prevent domestic prices from rising more rapidly (apparently Greenspan does know the connection between inflating the currency and a subsequent rise in prices). By early 2001 in the wake of an economic slowdown and the subsequent 9/11 terrorist attacks on the U.S., the Fed began to really pump up the money supply, pushing up MZM more than 21% in 2001! As the economy has remained stagnant despite Alan's monetary magic, the Bush Administration has done an about-face on its promises not to bail out badly run foreign economies (really U.S. banks and investors) with U.S. taxpayer dollars (recent IMF bailouts of Argentina and Brazil). This, too, was done supposedly to prevent foreign economic crises from causing further damage to the U.S. economy.

Well, Alan has an explanation for all of the above, and here is another ripe quote from him on the puzzle he and his cohorts would like us to think they faced:

The struggle to understand developments in the economy and financial markets since the mid-1990's has been particularly challenging for monetary policy makers. We were confronted with forces that none of us had personally experienced. Aside from the recent experience of Japan, only history books and musty archives gave us clues to the appropriate stance for policy. We at the Federal Reserve considered a number of issues related to asset bubbles – that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact- that is, when its bursting confirmed its exisitence.

And a bit further into his remarks, Greenspan babbles on about how stock prices rose even after the Fed raised interest rates on several occasions in the 1990's:

From mid-1999 through May 2000, the federal funds rate was raised 150 basis points. However, equity price increases were largely undeterred during that period despite what now, in retrospect, was the exhausted tail of a bull market.

Well, if you believe the above, then Alan has given you the bull! Maybe he did not have a father who told him how the stock market went wild in the 1920's, once again based upon an easy money, low interest rate policy by the Federal Reserve along with a technology boom (radio by RCA and other new home electrical appliances were the high tech items of the day), or how bad the subsequent depression was.

Getting the word out on Greenspan's real legacy – the dismal failure of economic fine tuning via a central socialized banking system – is the best way to puncture the biggest bubble of all, namely the Maestro's ego, and help restore a gold standard as the U.S. monetary system.

In the meantime, Alan Greenspan's monetary malfeasance continues, but there is a way to personally protect yourself from Count Inflate-ula and strike a blow for personal and financial freedom in these perilous times. In a less than two weeks (September 13–14 in San Mateo, California), Burt Blumert will be holding a private gold conference, with the proceeds going to fund LewRockwell.com. Get a fresh perspective on what's happening in the political and economic world and how to protect yourself by attending this great event!

September 3, 2002

Jim Grichar (aka Exx-Gman) [send him mail] was an economist with the federal government. He writes to "un-spin" the federal government’s attempt to con the public, whether through its own public relations organs or via the usual stooges and dupes in the mainstream media.

Copyright © 2002 by LewRockwell.com