Alan Greenspan is in the news a lot currently because of the release of his new book. I haven’t read the book. Nor will I read it if it means that I have to buy it or if reading it means that Alan Greenspan in any other way will financially benefit from it. Enriching a hypocritical fraud like Greenspan goes against my principles.
To see why he is a hypocritical fraud, just see his denial of his guilt in creating first the tech stock bubble and then the housing bubble. First he claims that he tried to prevent the tech stock bubble by raising interest rates, but failed to do so. The truth is that the late 1990s stock rally started in 1995 after the Fed signaled that the wave of rate increases in 1994 was over and might be partially reversed. And partially reverse it did, cutting it from 6% in June 1995 to 5.25% in January 1996. While they did raise to 5.5% in April 1997, they then in the autumn of 1998 started a series of rate cuts, from 5.5% to 4.75%.
And more importantly, the Fed’s role in fueling stock bubbles doesn’t necessarily come through direct rate cuts, but in its direct and indirect role in preventing the increase in interest rates that a free money market would automatically push through in the case of any increase in relative preference for stocks. The double digit growth rates of the MZM and M3 measures of money supply during the late 1990s indicates a strong role of the Fed sponsored monetary system in suppressing interest rates.
He similarly denies his role in the housing bubble by pointing to how long term interest rates did not rise after the rate increases in 2004-2005. This is dishonest for more than one reason. First of all, the housing bubble started already in 2001, when he pushed through rate cuts of an unprecedented magnitude, from 6.5% to 1.75% in a mere year. Secondly, because of the increased popularity of adjustable rate mortgages, short-term interest rates were just as important as long-term interest rates. Thirdly, movements in market interest rates always tend to precede movements in the fed funds rate as market interest rates is really the future average fed funds rate during the duration of the bond.
If really long-term interest rates were determined only by global liquidity, then how come long-term interest rates are only about 1.5% in Japan and 6% in Australia? This is all the more telling given the fact that Japan has a very high budget deficit and a huge public debt, while Australia has a budget surplus and a very small public debt. Clearly, the interest rate differential between Australia and Japan is a result of different expected future central bank interest rates.
And long-term interest rates did in fact rise from 3.3% in June 2003, when the deflation scare made everyone believe interest rates would stay low for long, to 4.7% in June 2004 when the Fed had already signaled the start of a series of rate increases. That long-term interest rates didn’t rise further after that merely reflected that the series of rate increases after that was priced in by the markets.
Why doesn’t any journalist confront Greenspan with these facts? Are they really all that clueless? And why doesn’t anyone confront Greenspan with what he himself wrote about the origin of asset price bubbles back in 1966? Quote from Greenspan’s “Gold and Economic Freedom”:
“When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom.”
{ 18 comments }
i love that essay. i wonder if greenspan read mises or rothbard… I know rothbard & rand were pals at one point… i suspect he did read Austrian economics in the 50s / 60s.
Believe it or not, Eric, the inflationist Greenspan was advocating for the gold standard back in the 1960s. One such essay of his appears in Rand’s anthology “Capitalism: The Unknown Ideal.” But then he got cozy with state power, and he suddenly didn’t promote the gold standard so much.
So next time I’ll read the blog post all the way through before posting a comment…Stefan Karlsson already pointed out Greenspan’s former position on gold at the end of his post. Oy, I need my morning coffee to wake me up so I don’t end up posting redundant entries on blogs.
Greenspan’s essay in Ayn Rand’s book can be viewed by clicking the following link, and then clicking on the first link to Page 96.
http://www.amazon.com/gp/reader/0451147952/ref=sib_dp_srch_pop/104-1106477-6804735?v=search-inside&keywords=gold+and+economic+freedom&go.x=12&go.y=5&go=Go%21
Stefan, While I agree with your assessment of Greenspan’s regime, don’t you think “liar” and “hypocrite” are misplaced? A guy can be wrong without being a liar and a hypocrite. Greenspan used to have the right ideas about money; maybe he just changed his mind. The lure of popularity and esteem among colleagues has taken many a man astray. Greenspan is a hypocrite only if he still believes what he wrote 40 years ago. He may not.
Fundamentalist,
I remember that Greenspan had an interchange with Ron Paul over his essay in which he said that he would not change a single word. Unfortunately, none of the interviews I have seen delve into the contradictions between that essay and his accepting the job at the Fed. Of course, once having accepted he could only follow the previously-established inteventionist vector.
Brian, Good points. Of course, had Greenspan been a true Austrian, he could not have accepted the job. Once in the job, everyone expects him to intervene. That’s the job.
Fundamentalist
Greenspan is a hypocrite only if he still believes what he wrote 40 years ago.
Greenspan is responsible of massive transfers of property in a fraudulent manner – that’s what fiat money does – but, he’s not an hypocrite – So, he has principles ? I wonder what his principles are ?
“Brian, Good points. Of course, had Greenspan been a true Austrian, he could not have accepted the job. Once in the job, everyone expects him to intervene. That’s the job.”
Could he have halted the creation of any new money?
We all know how to fight against inflation. It is real hard against deflation. It is not quiet easy to keep economy with a high productivity, a reasonable level of employment, with such expenditure in war.
“We all know how to fight against inflation. It is real hard against deflation. ……”
Not so. It is the fractional reserve nature of the
banking system that creates both inflation and deflation.
With a true 100% reserve (non-fiat) banking system, neither inflation nor deflation would be an issue.
The only inflation would be the natural growth in the money supply (as in new gold, silver, other commodities being mined an entering the market)
I was just astonished at Greenspan’s appearance on Jon Stewart’s Daily Show. Stewart’s far more savvy than most would give him credit for; in his off-hand, nonchalant manner, he had Greenspan completely on the ropes, making him admit that the US economy was centrally planned instead of free-market and pointing out that playing with interest rates simply favours big investors over workers and savers.
Stewart ended with one of his “explain this to me if you will” that he often reserves for politicians when he already knows the answer, and that the person answering the question will be put on the spot.
Stewart basically exposed the fraud of the Federal Reserve on national TV over a 5-minute interview, and it probably went over the heads of 99% of his viewers.
Too bad Ron Paul wasn’t up there too!
I find criticism of Greenspan’s involvement in the housing bubble odd, in a website devoted to the concept of individual liberty.
Making it possible to buy a $500,000 house on a $50,000 salary may have been unwise. But actually purchasing a $500,000 house on a $50,000 salary was stupid. It was also entirely voluntary.
To suggest “Easy Al” was fraudulent sounds dangerously close to an argument that says Somebody ought to have protected them from their own greed and stupidity.
I watched Greenspan on the John Stewart show and heard him state that ‘had the U.S. stayed with the gold standard there would be no need for a Federal Reserve.’
That was a very powerful statement because of what he didn’t outright say. That is; your government officals not only let us rob you blind they played a key role in assisting us commit the fruad. Now ain’t that something.
I also heard him refer to the Federal Reserve as a Central Bank several times. Something I know to be unconstitutional.
One thing I’m unclear on is the limitation of money supply under a gold standard. It seems that growth of the money supply (required for GDP growth) is restricted by the growth in available gold supplies, thereby putting unnatural restrictions on economic growth. Our GDP has grown, in CPI-adjusted terms, threefold since the abandonment of Bretton Woods in 1971. Unless gold reserves had also grown a similar amount, that growth would have been impossible.
What am I missing?
John, you assume that on a gold standardard the value of gold must remain the same, but supply and demand would cause the value of a fixed supply of gold to increase, thereby automatically increasing money supply based on pure market forces. Of course, in Fed-speak, this would be inflation! but in the real world merely an increase in VALUE.
Gold supply grows at about a rate of 4-5% a year if my figures are correct. Unlike most other goods, gold is not depleted after being used. The total gold stock does not diminish much. A good thing about the gold standard is that if a new supply of gold is found, all inflation is also localized.
My understanding is that (the unconsumed portion of) new gold finds each year serve(s) to increase the total supply by about 2%.
There are many arguments for how the supply of gold does not track the growth of the economy perfectly: lack of gold finds in the late 1800s, general growth can be faster than the increase in gold supply, and so on. However, the worst mismatch of supply with growth led to perhaps a factor of three change in prices (i.e., a 66% devaluation) during an entire century when the Spanish vacuumed out the New World and in the absence of contemporary understanding of monetary phenomena.
The FED hasn’t been even close, devaluing by 97-98% since 1913, and most of that since the late 60s. I’d rather have a system with modest imperfections that is transparent and apolitical than one that promises perfection and so obviously doesn’t reach it–a state of affairs that cannot be anything but purposeful.
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