Alan Greenspan: Party Boy
by Fred Sheehan
Recently by Fred Sheehan: Groveling
at the Fed: Greenspan and Bernanke
important to remember that equity values, stock prices, are not
just paper profits. They actually have a profoundly important impact
on economic activity. And if stock prices start continuing down,
I would get very concerned.
Reserve Chairman Alan Greenspan, Meet the Press, February
is as confused in retirement as when he ran the Fed. Most mortals,
quoted as often as Greenspan, would justifiably worry such contradictions
of past contentions would ricochet around the media. Vice President
Dan Quayle made front-page news when he misspelled potato.
This is the sort of trivial mistake the media can grasp, or, all
it thinks its audience can understand.
about-face on the Feds capacity to battle stock market bubbles
cost investors several trillion dollars, yet he remains a fixture
on the Washington party circuit (Fortune, February 5, 2010).
He can say whatever comes into his head since he is still feted
by those who matter. He talks on Meet the Press (where he
was deferentially addressed as Dr. Greenspan) and collects
large fees as a dinner speaker.
Like Ted Williams
head, Alan Greenspans reputation is frozen. The skull of the
baseball great (Williams) was set in ice when he died. It is to
come alive a century from now (or, something equally peculiar is
promised). Likewise, Alan Greenspans foibles have been frozen
into a series of clichés designed to leave the party circuit
chairmans battered legacy actually flatters the man: his errors
were idealistic. So, have another drink, Alan. Were
all idealistic in Washington. (Ayn Rand asked a half-century back:
Do you think Alan might basically be a social climber?)
The banks take
the blame. They deserve it, but financial firms are more a symptom
than a source. The bank cliché is convenient for both politicians
and the most malignant contributor to our national woes, the Federal
than the money lost in the stock market debacle, is the lost decade
(and counting). After the stock market burst, Chairman Greenspan
attempted to reflate the economy with his one-percent, adjustable-rate
mortgage bubble. The consequences need no comment.
The most scandalous
aspect of Greenspans declaration on Meet the Press last weekend
is not that he denied the link between the stock market and the
economy when he was Fed chairman (in 1999). Far worse is that long
before 1999, he had consistently emphasized the link. His contortions
can be seen in a three-act sequence:
When Greenspan knew a plunging stock market could sink an economy.
1959, in the New York Times, Alan Greenspan explained that
a break in stock market trends was not just a harbinger of boom
or recession, as is commonly held, but a crucial factor in causing
a boom or a recession.
in Fortune magazine: [O]ver-confidence finds exuberant
expression in a bull stock market
. Once stock prices reach
the point at which it is hard to value them by any logical methodology,
[Greenspan] warns, stocks will be bought, as they were in the late-1920s
not for investment but to be unloaded at a still higher price.
The ensuing break could be disastrous.
March 28, 1995,
at a Federal Reserve Open Market Committee (FOMC) meeting
GREENSPAN: I think the downside risks [to the economy] are
basically coming from the possibility of significant increases in
stock and bond prices
. Ironically, the real danger is that
things may get too good. When things get too good, human beings
By 1996, fears were rising of a stock market bubble. The Wall
Street Journal wrote on November 25, 1996: Federal Reserve
Board Chairman Greenspan isn't talking about the stock market these
days. In fact, the word among Fed officials is: don't use the word
stock and market in the same sentence. No
one wants the blame for the crash.
his famous irrational exuberance speech (regarding the
stock market) on December 5, 1996. He testified before Congress
and the Senate in early 1997, warning both bodies (in his way) of
the stock market bubble. The congressmen and the senators told him
to mind his own business. He never discussed the bubble again in
public, and even forbid the FOMC from talking about it in 1998.
hid in his own bubble.
Greenspan couldnt see bubbles and they might not matter anyway.
It was on June
17, 1999, that the Federal Reserve chairman unveiled his thesis:
that the Federal Reserve could not identify a bubble ahead of time
and it would therefore make no attempt to do so. This was entirely
new and near the peak of the greatest stock market bubble of all
FOMC meeting on September 24, 1996 GREENSPAN: I
recognize that there is a stock market bubble problem at this point....
We do have the possibility of raising major concerns by increasing
margin requirements. I guarantee that if you want to get rid of
the bubble, whatever it is, that will do it.)
In his June
1999 testimony before Congress, he told Congress dont worry,
bubbles that burst are scarcely benign, the consequences need not
be catastrophic for the economy
. while the stock market crash
of 1929 was destabilizing, most analysts attribute the Great Depression
to ensuing failures of policy. (Note: Greenspan had never
before attributed the Depression to ensuing policy failures. For
instance, see his interview with Fortune above).
contention became known as The Greenspan Doctrine in the media and
among so-called economists. With little rebuttal, he contributed
addenda to his Doctrine, such as in 2002, when he added a footnote
to a speech in Jackson Hole, Wyoming. Discussing the aftermath of
the 1987 stock-market crash: [I]n line with later episodes,
the failure of the collapse to have an economic impact seems to
have contributed to subsequent higher stock prices. According
to this wrinkle, stock market crashes are good for stock prices.
(The footnotes to Federal Reserve governor speeches contain amazing
Greenspan warns stock market bubbles can cripple an economy.
Greenspan retired from the Federal Reserve in early 2006. Among
other post-retirement warnings that the stock market and the economy
are Siamese twins:
Reuters, September 30, 2007: "[U]nless stock prices
resume their pace of increase of earlier this year, U.S. consumer
spending and GDP will be under pressure from declining household
the Press, February 7, 2010: It's important to remember
that equity values, stock prices, are not just paper profits. They
actually have a profoundly important impact on economic activity.
And if stock prices start continuing down, I would get very concerned.
Why is he
still on TV?
is appropriate to invite Greenspan on television is for the media
to decide. More of a muddle is why he still attracts an audience.
He is as consistently wrong as during his Fed chairmanship.
2006, Greenspan claimed: Most of the negatives in housing
are probably behind us. It's taking less out of the economy."
7, 2010, he told Meet the Press: I dont think
[home prices will] decline from here. In other words, they seem
to be bottoming out.
On the same
day, he also told Meet the Press: The recession is
Look out below.
[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).
© 2010 Fred Sheehan