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Source link: http://archive.mises.org/4480/the-mess-greenspan-leaves/

The Mess Greenspan Leaves

December 26, 2005 by

Greenspan is responsible for today’s biggest economic messes, writes Stefan Karlsson, and not just as a passive observer. His has been highly active in pushing the rest of the board into the various bail-out operations. His policy of inflating bubbles to counter the negative effects of the bursting of previous ones is like someone who remains on a sinking ship because he doesn’t like to swim. FULL ARTICLE


Dennis Sperduto December 26, 2005 at 10:50 am

Stefan noted: “Instead of falling as a result of increased production, the consumer price index rose nearly 74% between August 1987 and November 2005, an average annual increase of 3.1%.” Unless Mr. Greenspan and his supporters can document that there was a significant decline in the demand for money during this period, the bankruptcy of the policies he pursued while Fed Chairman are starkly illustrated by this large decline in the purchasing power of the U.S. dollar. If anything, the worldwide demand for the dollar likely increased (not decreased) during this time frame due to the increased propensity of foreign, particularly Asian, central banks to hold dollar reserves. When one acknowledges another significant statistic perceptively quoted by Stefan, namely that the monetary base, which the Fed has excellent control of, increased by 235% during Greenspan’s tenure, we are led to the conclusion that a deliberate and large increase in the money supply was the causative factor of this economically distorting and destabilizing and morally reprehensible price inflation.

Paul Marks December 26, 2005 at 1:07 pm

There is an old story that Greenspan first started to come out with his dishonest statism at a meeting with Ayn Rand at a restaurant – and that the lady replied by emptying here plate over his head.

I do not know whether the story is true – and, yes of course, such behaviour by Rand would violate the nonaggression principle. But I still hope the story is true.

As for the bubble economy:

Of course it is not the price inflation that is the real problem – it is the general inflation. Whether it comes out in “prices in the shops” or in asset prices (such as stock market or real estate bubbles).

The root of the problem (as economists have been saying all the way back to David Hume) is the effort to get “low interest rates” and to finace investment without real savings (real savings being human beings deciding not to consume now – but to invest the money instead).

The whole capital structure is distorted (malinvestments all over the place) and most people are in no state to deal with hard times (due to there low savings).

Even semiresponible people are tempted to try and keep the credit orgy going – for fear that the crash will lead to widespread demands for yet more statism.

After all – for every decent economist there are a thousand Paul Krugman’s. And for every decent journalist there a thousand “School of Journalism” types. So the public is hardly well informed.

However, efforts to keep the credit bubble going just make the crash worse in the end.

What needs to be done is to remove various restrictions so that wages and prices can respond to the crash as quickly as possible (it is failure to respond quickly that leads to long term mass unemployment).

The United States (and the other nations of the Western world – most of whom have followed similar monetary policies) does not have the option of “not having a crash”.

The choice is between a crash like 1921 (a quick adjustment of wages and prices – leading to a return to economic growth in six months), or a crash like 1929 (government efforts under Presidents Hoover and Roosevelt to prevent wages and prices adjusting – leading to the Great Depression).

R.P. McCosker December 26, 2005 at 3:02 pm

Karlsson writes:

“Given Greenspan’s obvious familiarity with Austrian economics, we can only conclude that he is consciously dishonest.”

Hmm. Well, bending over backward to be fair, I wouldn’t put it quite that way. The issue, it’d seem, isn’t whether Greenspan knows about Austrianism. Conceivably he could be familiar with it yet disagree with it anyway.

The point is that Greenspan refused to drop Austrian concepts. E.g. he could’ve told Paul that he’d been wrong earlier about the desirability of the gold standard. Instead he contended that he was “mimic”-king the gold standard, which he obviously wasn’t.

It appears Greenspan wanted it both ways: To posture as a hard-money, tough-credit, small government, free enterprising quasi-Austrian, while operating as a corporatist quasi-Keynesian. Of course, that’s pretty much the story of the modern Republican Party.

Did Greenspan believe in one thing and do another to cater to his political masters? Or did he *say* one thing and do another to advance his own beliefs or to advance his career?

One thing we do know: By actually pursuing Austrian-consonant policies, Greenspan would never’ve become Fed Chairman, or held on to the office once in place.

Too bad he didn’t just stay on Wall Street. He would’ve been left much richer personally. But the seduction of political status was too great to resist, I suppose.

David White December 26, 2005 at 3:11 pm

Paul Marks,

I don’t believe that the government has any such choice and, in desperation, will end up doing precisely what incoming Fed Chairman Ben Bernanke has already proposed as one of his “unconventional measures” — i.e., “money rains” whereby the Fed would “give money away either through directly disbursing currency to the public or by disbursing it through the banking system.”

There will be no “adjustment,” in other words, unless you would call what happened in South Asia one year ago today in an adjustment.

Vince Daliessio December 26, 2005 at 3:34 pm

Never before have so many wished so fervently for consequeces to rain down on one who so richly deserves them! Unfortunately, Greenspan will be reposing on a yacht off the French Riviera when the end comes, and will probably miss out…

Dave Franklin December 26, 2005 at 5:46 pm

It is NOT true that the Fed controls US domestic monetary policy. It has not been true since 1947.

Kindly permit me to state historical facts with absolute certainty
1. The Money Power for the Federal Congress is found in Article I, Section 8, which states in relevant part:
“Congress shall have power….to coin money and reculate the value thereof.”
2. No where in the Supreme Law did the Founding Fathers give Congress the power to delegate or give away any of their granted powers.
3. On December 23rd, 1913, the Congress placed the Great Seal upon the Charter of the Federal Reserve Bank Corporation, AND IN SO DOING TRANSFERRED THEIR MONEY POWER TO THE FED, the Constitution not withstanding.
4. In 1947 at Bretton Woods, the FED transferred their acquired Article I, sec. 8 US money powers to the IMF and World bank.
5. Since 1947 it is the IMF that has been deteremining US monetary policy, exchange rates, interest rates etc., NOT THE FED.
5. The FED is an empty, hollow institution only doing what it is told to do by the IMF.
For any true Austrian Economist anchored in the Real World, these cold, hard facts are the Real Deal. I have done my homework here bigtime.
Sorry Professor Karrlson, your erudite article does not quite fit these facts.

Respectfully and Kindly submitted,

Dave Franklin

Paul Edwards December 26, 2005 at 7:42 pm


I don’t think there is any question that in 1966, Greenspan was strongly promoting an extreme and pretty Rothbardian position on the question of gold and central banking and the role they played in government activity.

Reread Greenspan’s “Gold and Economic Freedom” and save yourself a back injury. :)

SteamshipTime December 26, 2005 at 11:07 pm

“Too bad he didn’t just stay on Wall Street. He would’ve been left much richer personally.”

Here’s the great man’s official bio: http://www.federalreserve.gov/bios/greenspan.htm

Apparently, his private sector employment was restricted to Townsend-Greenspan, an “economic consulting firm,” whatever that is, and directorships for publicly traded companies.

Granted, he’s done better than me, but by Wall Street standards and, for that matter, by the standards of the business community of any major urban area, he’s just a well-connected schlep.

Paul Edwards December 27, 2005 at 12:25 am

The reference to Townsend-Greenspan reminded me of this Rothbard article from “Making Economic Sense”, where Greenspan’s prowess in the private sector is briefly mentioned:

“I found particularly remarkable the recent statements in the press that Greenspan’s economic consulting firm of Townsend-Greenspan might go under, because it turns out that what the firm really sells is not its econometric forecasting models, or its famous numbers, but Greenspan himself, and his gift for saying absolutely nothing at great length and in rococo syntax with no clearcut position of any kind.

“As to his eminence as a forecaster, he ruefully admitted that a pension-fund managing firm he founded a few years ago just folded for lack of ability to apply the forecasting where it counted: when investment funds were on the line.”

Paul Edwards December 27, 2005 at 12:50 am

I agree with Paul Marks. The choices have always been the same. Let the correction happen quickly, or drag out the agony for several years. An inflation demands a recession. Malinvestments demand liquidations. Futile attempts at avoiding the consequences of foolish inflationary banking policy only leads to further impoverishment of the nation. It seems apparent which way the good folks in the federal reserve will go in the near future, but there shouldn’t be any confusion about it: it is a choice they’ll make.

R.P. McCosker December 27, 2005 at 1:05 am

Paul Edwards:

Apparently I wasn’t clear for you about something. In any case, I’ve never doubted that Greenspan was sincere (in a weak-willed way, perhaps) when he wrote “Gold and Economic Freedom”.

However, within a decade of doing so he’d been bitten by the bug of political ambition, egomania, and/or whatever — and his previous principles dropped by the wayside. Nothing unusual about that, of course.

But he didn’t just convert. He clung, albeit equivocatingly, to many of his previous free market talking points — at least when pressed by journalists and others. It’s kind of funny, actually: He won’t ever come out and disavow the old ideas. Instead he wants, or poses as though he wants, to reconcile opposed economic philosophies and practices.

His gift for doubletalk and for boring listeners to distraction has stood him well in this regard.

Paul Edwards December 27, 2005 at 3:46 am


My comment was in reference to your “bending over backward to be fair [to Greenspan]” statement. To interpret Greenspan as anything other than “consciously dishonest” requires back-breaking flexibility. It’s just beyond plausibility (to me at any rate) that he has been anything but dishonest to have written “Gold and Economic Freedom” and then to have subsequently been a key officer at the fed.

You explain his motives well. However, it doesn’t diminish the blatant dishonesty of his words and actions. Every excuse he has ever made for fed intervention and open market activity has been a bald faced lie and deception. His 1966 article itself accuses him of the fraud and theft that he has since participated in as fed and FOMC chairman .

I guess i just find it hard to be charitable to the mob’s chief counterfeiter of almost 20 years.

Paul Edwards December 27, 2005 at 3:56 am

Or maybe you weren’t trying to assess him more charitably at all and only meant to further underscore his dishonesty. If so, we should all disregard my irrelevant rambling, and i apologize for being so obtuse.

William December 27, 2005 at 7:50 am

The issue about the Fed that really irks me is that they get credit for the good and never for the bad. This was the fault of Congress of course.

The sad part is that people have become so accustomed to the Fed that they believe that the Fed bestows economic good and the real engines for economic good foreign trade and advancing technology somehow manage to be blamed for all the bad.

Dick M. December 27, 2005 at 9:04 am

On Ben Jones’ Housing Bubble 2 blog, an under-read poster tagged Greenspan as a Libertarian. I reminded him that a central bank is anathema to a libertarian — that he had the wrong party. Whatever AG might have believed or appeared to believe prior to his move to the Fed, he seems to me quickly to have abandoned virtually all libertarian principles upon assuming office. I suppose that when one considers the phrase “assuming office,” subsequent abandonment of principles should not be a surprise.

R. G. Hill December 27, 2005 at 10:46 am

Karlsson stated: [i]“Yet between August 1987, when Greenspan became Fed Chairman, and November 2005, the monetary base rose from $233.5 billion to $782.5 billion, a 235% total increase or 6.8% at an annual rate. The M3 measure of money supply rose during the same period from $3.62 trillion to over $100 trillion, a 179% increase or 5.8% at an annual rate. Money supply growth has thus been far in excess of gold standard conditions.”[/i]

Is not the math in the second stat grossly off? $100 trillion is over 26 [i]times[/i] (2600%) $96.38 trillion ($100 trillion minus $3.62 trillion).

R.G. Hill December 27, 2005 at 10:51 am

Oops, I meant $96.38 trillion is over 26 times $3.62 t.

Peter Matias December 28, 2005 at 1:35 am

Karlsson says:
“As Mark Skousen showed in his book The Economics of a Pure Gold Standard, the global supply of gold has historically tended to grow 1-2% per year. Since gold supply would be the basis of money supply under a pure gold standard (or at least the monetary base under the weaker version with fractional reserve banking), then it follows that under a “mimic gold standard” the money supply would grow at the same low rate.”

But why would you assume that the aggregate physical production of gold worldwide over the course of a year, would match the rate of increase of the supply of gold used as money in the United States (or any place else) under any type of gold standard?

Wouldn’t monetary uses compete with nonmonetary uses for the available supply?

What if other countries or peoples were trying to buy more than their share of that 1-2% average gold supply increase in a year?

Would other metals or money forms have some monetary uses and therefore affect the changes in the supply of money as well?

Is the market for gold the same as the market for money?

R.P. McCosker December 28, 2005 at 2:44 am

Paul Edwards:

Well, I remain open to the possibility that Greenspan sincerely came to disagree with the substance of “Gold and Economic Freedom”. People do change their minds — and sometimes for the worse (e.g. J.S. Mill, Jos. Schumpeter, Ronald Radosh).

What makes Greenspan suspicious, or puzzling, is that on talking points he tries to have it both ways, as though he can reconcile these opposed views. Is he a deluded fool, or merely a prevaricating politician?

Stefan Karlsson December 28, 2005 at 11:23 am

RG Hill: That $100 trillion figure for M3 was of course a typo which have now been corrected.

Peter Matias: Your point about non-monetary demand for gold and foreign monetary demand for gold is basically valid, and this is yet another (There are more) reason why any attempt to mimick the gold standard is inferior to the real thing.

Even so, I think the 1-2% range is the best proxy for gold standard monetary growth. This is because non-monetary demand is likely to decrease if we had a global gold standard because the gold price would likely rise sharply if gold became money. With regards to foreign gold demand it would likely be roughly the same as in America. The reason is that monetary demand within a currency zone is strongly correlated with relative economic growth (If one kept money supply statistics for cities, Las Vegas would undoubtedly be found to have a much higher money supply growth than Detroit) and as America is in the middle range in this aspect (after China and India but before Europe and Japan).

Peter Matias December 29, 2005 at 5:14 am

Stefan Karlsson,

Mr Greenspan’s statement that he was able to pursue policies that mimic the the gold standard is preposterous and as you’ve said, for many reasons.

I am only rejecting the notion that there would be any fixed relationship between the average yearly rate of growth of the global supply of gold over X number of years, and the growth of the money supply of any country on a gold standard over some future year time period.

The only constants in the realm of human action are historical in nature.

Alan Dunn December 29, 2005 at 12:10 pm

Great article. Things in Australia don’t appear to be much different. I guess there is a “Greenspan” in every Central Bank”.

I don’t know if the monetary financial secor operates in the USA like it does in Australia, so I’ll assume they are fundementally the same.

The Central back though legal arrangements with the government is the monopolist supplier of fiat money.

In addition, we assume that a floating exchange rate exists.

The cashrate is exogenously determined and the the Money Stock / Supply is endogenously determined.

The governments role through Fiscal policy is to transfer goods and services from the private to public sphere.

To do this the government issues a cheque with the central bank and the central bank credits the account of the private sector firm whom sold the good or service to the public sector.

The Commercial Banks each have Exchange Settlement Accounts with the Central Bank. It is through reserve maintainence operations that the central bank buys or sells to maitain its target cash rate.

Thus in this example the exchange settlement accounts will be in surplus. This surplus in the exchange settlement accounts places downward pressure on the cash rate.

The central bank will sell the commercial bank an interest bearing alternative (we can call it a bond) to remove the excess from the account and maintain its target cash rate.

Were the central bank not to remove the excess (call them reserves) from the accounts then the interest rate would tend towards zero.

Thus the bond is simply used to maintain the target cash rate.

In the case of a government running a surplus budgetary position the exact opposite holds true.

The exchange settlement accounts will be in deficit and the cash rate will rise above the targeted rate.

Hence the Central bank will increase liguidity by buying back bonds from the private sector using its own high-powered fiat money. Don’t think of it as printing money, it’s merely an accounting entry.

Therefore,we can assume an identity whereby the government deficit [surplus] by definition is equal to the private sector surplus [defict]- at any given interest rate.

Also, the private sector can only meet its tax obligations to the government using the very money the government spent in the first place.

What we find is that all government spending in the current system is via money creation.

Thus, the actions of the Central bank is influenced by the fiscal polices of the government.

In the situation where a government seeks Fiscal consolidation via budget surpluses the only way the private sector can maintain its consumption is too run down their savings.

Whn these savings have run sufficiently low the private sector has no choice other than to spend via credit to maintain or increase its consumption.

Thus, given what I remember of the Clinton Years (Surplus Budgets – I think) the private sector would have funded consumption via credit. This would no doubt have placed the private sector in deficit, as the above identity states. If private sector savings didnt decrease when the government budget was in surplus I would be most suprised.

If the Central Bank (FED) didn’t increase liquidity then consumption would have decreased, and the cash rate would have exceeded the target rate, and production would have been reduced – and job losses would have resulted.

A housing boom/bust would also be an obvious consequence as investors would have been seeking an interest bearing alternative to holding money.

Eventually, the market tops out, and the fire sale begins…. and so on.

Not saying Greenspan isnt to blame, just think he had plenty of help from the governments policies of the time.

John Fuller December 31, 2005 at 1:54 pm

I think the one big difference between now and then is that now the Fed has developed the abiility to steer the markets by successful sectretive intervention.

Increasing the money supply, but hiding the signs of inflation;regularly injecting huge amounts of collateralised repurchase agreements into the DOW etc. and suppressing the price of gold and silver give the illusion that everything is going well.

The daily movements of the dollar are more or less exactly planned by agreement between international CBs at least weeks ahead [see http://www.interventionalanlysis.com for chart showing the almost perfectly straight regression lines tracing the MCDI's [major currencies dollar index] proprietry moving average].

The daily gold fix is also chosen as relationship between the MCDI position and another proprietry moving average of the ‘dollar index value of gold’.

You need to study these charts carefully for it to dawn that there is a new paradigm in play. Perhaps they really think they can avoid recessions this way. At least the huge debt can be gradually dissolved by the global inflation.

Perhaps the new gold standard means selling countless ETFs [supposedly gold backed] which, along with private selling and ‘swaps’ of gold, keep the POG unrealistically low…..

Stefan Karlsson December 31, 2005 at 3:42 pm

I have responded to the objections of a “misesian” Greenspan supporter here

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