The Real Legacy of Alan Greenspan
Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, by Frederick Sheehan, 2010, McGraw Hill
For those of us who were mere economics undergraduates in the 1990’s, Alan Greenspan was rather like a god. Admittedly, the vision of Greenspan handed down to the undergrads by the faculty wasn’t one of vulgar hero-worship. Greenspan’s mumblings and evasions were, after all, treated with bemusement by the faculty. But, there was the feeling that Greenspan, for all his lack of clarity, seemed to understand things that the rest of humanity didn’t understand, and there was indeed faith in the idea that he must possess almost supernatural powers in fine-tuning the economy to ensure economic prosperity indefinitely.
Later, some of us were cured of the Greenspan religion by Austrian economics, but for most, the image of Greenspan as The Maestro (to use the term popularized by Bob Woodward) continued right up until even the fall of 2008 when The Panic set in.
Greenspan’s reputation has suffered since then, although many still pay him six-figures for 45 minutes of his wisdom. And, while Greenspan himself may be having trouble portraying himself as a mere innocent bystander in the current economic collapse, Greenspan’s policies are alive and well in his successor. Ben Bernanke has shown that Greenspanism at the fed is in no danger of going away. Easy money in the form of subterranean interest rates, microscopic reserve requirements, and endless praise of debt was Greenspan’s eternally favorite strategy, and Bernanke clearly plans to continue the binge indefinitely.
Frederick Sheehan’s Panderer to Power documents Greenspan’s rise to power, his skill at playing the political game, and his ability to convince virtually all the world that he was perhaps the greatest economist of the age. He accomplished all of this, Sheehan notes, in spite of a record as one of worst forecasters of economic trends at every stage of his career.
While there are many books about Greenspan, Panderer to Power is perhaps the only book (other than Fleckenstein’s Greenspan’s Bubbles) that looks in depth at Greenspan’s work leading up to the 2008 financial panic and its aftermath. And as a result, the book has a completely different story arc from the other Greenspan books. While the pre-bust books feature a story of a meteoric rise of a brilliant economist ending in apotheosis, Panderer to Power is the story of an economist whose primary skill was self-promotion, and who in the end became increasingly divorced from economic reality. Even as early as April 2008 (before the bust was obvious to all), the L.A. Times, observing Greenspan’s post-retirement speaking tour, noted that “the unseemly, globe-trotting, money-grabbing, legacy-spinning, responsibility-denying tour of Alan Greenspan continues, as relentless as a bad toothache.”
Alan the God had become Alan the Mere Mortal.
Sheehan’s overall thought on Federal Reserve Chairmen in general is that the good ones resist political pressure, and thus resist inflating the money supply to please the elected politicians. Receiving favorable treatment by Sheehan are the term of William McChesney Martin and the early years of Paul Volcker’s term. Sheehan contrasts these Chairmen, who warned about inflation and clashed with Congress and the White House over the matter, against Greenspan who, always the political opportunist, consistently provided the politicians with what they wanted: easy money, inflation, and at least the appearance of a booming economy. The politicians also wanted an economist willing to always say that everything was going to be all right. Greenspan was the perfect man for the job.
Sheehan takes the reader through Greenspan’s work advising Nixon, his term on Ford’s Council of Economic Advisors, and his time advising Carter. Over the years Greenspan became a constant fixture in Washington, omnipresent at the cocktail parties and making himself ever-present to those who might be able to help his career.
Indeed, well before Greenspan had managed to make it into the upper circles of the Washington social scene, Ayn Rand had asked Nathaniel Branden: “Do you think Alan might basically be a social climber?”
It is Greenspan’s relationship with Rand that even today drives the myth that Alan Greenspan is or was a doctrinaire free-marketeer. Sheehan disputes this version of history, noting that “Rand and Branden were instinctively suspicious of Greenspan’s motivations" and that “Branden recalls a man without philosophical inclinations.”
In the end, Greenspan’s association with the Rand circle paid off (by Greenspan’s standards) when Martin Anderson, a Randian who later was a member of the Reagan Administration “would prove instrumental in Greenspan’s rise.”
Nevertheless, one of Greenspan’s very few actual contributions to the field of free market economics is his 1966 essay “Gold and Economic Freedom” which provides an eloquent defense of gold and sound money. The fact that Greenspan spent the entirety of his career at The Fed working against sound money illustrates the sort of philosophical conviction possessed by Alan Greenspan. Greenspan was so at home with cognitive dissonance, in fact, that years later, when Congressman Ron Paul gave Greenspan a copy of “Gold and Economic Freedom” and asked the Chairman if he’d like to add a disclaimer, Greenspan responded “No…I wouldn’t change a single word.”
Not surprisingly, the most engaging and dramatic part of Panderer to Power is the lead-up to the financial collapse of 2008. Sheehan meticulously documents Greenspan’s commentary through the 1990s and into the last decade. From 1987 to the end of his term, Greenspan inflated the money supply nonstop. Interest rates, while occasionally moved slightly upward by Greenspan’s Fed, fell again and again with Greenspan always claiming that there was neither a stock market bubble (as he did in 1999) nor a housing bubble (as he did in 2006).
In all this time, Greenspan virtually never considered inflation to be a serious problem, or even a potential problem. Unlike his predecessors Martin and Volcker, who at least recognized money-supply inflation as a problem, Greenspan instead created convoluted theories to explain why such inflation was not a problem, and why growth would constantly provide a fail-safe protection against price inflation.
His most famous theory of this sort was his productivity theory. For years, Greenspan waxed philosophical about how productivity due to new technologies would prevent imbalances in the economy from such massively loose monetary policy. This theory, coupled with a restructuring of the CPI to drive down the official inflation rate in the 1990’s, allowed Greenspan to claim there was hidden wealth being created behind the dour statistics. In Greenspan’s mind, corporate earnings (which were falling) were larger than they seemed due to productivity and the fact that “everyone had been wrong” by overestimating inflation.
Greenspan, before the burst of the tech and stock market bubble in 2000, had already begun claiming that it was impossible to predict or manage bubbles. Greenspan, however, never explained why the Fed bothered to employ economists and computer models since identifying trends and bubbles had become futile in his mind.
Having been shown to be utterly without insight regarding the 2000—2001 recession, Greenspan nonetheless escaped any widespread criticism. As he had done for years, Greenspan continued to gush over the benefits of derivatives and massive amounts of leveraging to finance ever more risky investments. Liquidity, with Greenspan’s help, was redefined so that the term no longer referred to cash, but now referred to potential lines of credit.
Greenspan criticized American consumers for not spending enough on consumer goods and real estate. For Greenspan, consumer spending was essential regardless of where one got the money. So, in 2001 when Greenspan, who greatly approved of cashing out home equity to buy consumer goods, observed that the “general level of consumer expenditures seems to be holding up, I suspect in large part because of capital gains in homes,” the next great bubble had already been set in motion.
As the housing bust grew ever closer, Greenspan showed true talent at giving terrible investment advice while being even worse at making predictions.
In 2004, Greenspan trashed fixed-rate mortgages, told Americans they could learn a thing or two from foreigners who supposedly used more adjustable-rate mortgages, and then declared that, compared to an adjustable-rate mortgage, a “traditional fixed-rate mortgage may be an expensive method of financing a home.”
Greenspan also had no qualms about becoming the real estate industry’s best friend in denouncing all talk of a housing bubble. In 2002, building on Greenspan’s forecast, the chief economist at the National Association of Home Builders declared that “[t]he time has come to put this issue to rest. The nation’s home builders have said it…and now Alan Greenspan has said it once again, in no uncertain terms; there is no such thing as a current or impending house price bubble.”
In 2006, Greenspan declared that “[m]ost of the negatives in housing are probably behind us” and that the fourth quarter of 2006 will “certainly be better than the third quarter.” The National Association of Realtors then launched a $40 million advertising campaign trumpeting Greenspan’s enthusiasm about the housing market.
Although Greenspan had always had a terrible record on perceiving trends in the economy, Sheehan’s story shows a Greenspan who becomes increasingly out to lunch with each passing year as he spun more and more outlandish theories about hidden profits and productivity in the economy that no one else could see. He spoke incessantly on topics like oil and technology while the bubbles grew larger and larger. And finally, in the end, he retired to the lecture circuit where he was forced to defend his tarnished record.
Sheehan excellently catalogs Greenspan’s rise to power as an affable technocratic politician who played the part of an economist with a knack for numbers and for justifying inflationary policies that made Presidents and Congressmen happy. Greenspan always told everyone what they wanted to hear. The rich and famous basked in his perceived genius.
Today, those who still defend Greenspan’s policies, if not the man himself, maintain that “no one” predicted the bubble and the crash. This isn’t true, of course. The predictions of economists and investors who predicted the crash are well documented. But, Greenspan, The Maestro, said that everything was fine, so those with actual insight were ridiculed and ignored.
Yet, even with the end of the Greenspan era, little has changed. As Sheehan shows, Bernanke has made Greenspan look almost timid in his quest for debt, bailouts and endless leveraging.
Sheehan does not condemn the Federal Reserve as an institution in Panderer to Power, although it is clear from his work that The Fed is ill-equipped to resist the political pressures to print money around the clock. Sheehan is clear that some Fed Chairmen are more responsible than others. But given the very nature of the institution and the sheer amount of power it holds in inflating the money supply, bailing out the well-connected, and building mountains of debt in the name of growth, it is clear that the Federal Reserve is one of the greatest obstacles we now face in regaining a sound economy.