Anyone But Greenspan in 2004

Though nearly everything George Bush Jr. does-ranging from environmental policy to labor practices to religious zealotry-is wreaking havoc on the United States, he does not yet deserve full responsibility for its economic collapse. For one thing, the types of fiscal policies that he’s practiced will not have their full impact for at least another year. More than 90 percent of the dividend tax cut would not take effect until after 2003 when the economy is expected to have recovered from the current downturn. The malaise at hand owes much to Federal Reserve Chairman Alan Greenspan.

Observed with objectivity, there are few brief moments when he betrayed his laissez faire leanings, and intervened somewhat successfully in the US economy. The most successful of these has to be his monetary interventions after “black Monday”, the 1987 stock crash. A short-term liquidity infusion did much to save the wealthy and a few pensioners.

The second most successful move he made was another relatively short-term liquidity infusion that helped protect the US from the racistly-named “Asian flu”.

The third most important intervention-though not perhaps the third most successful–was his cutting rates after September 11, 2003, Although much of that action benefit was psychological, he also engineered a $50 billion currency swap with the European Central Bank to provide dollars for European commercial banks that ran low on dollars in the wake of the attacks. This didn’t prevent the drop in global markets, but perhaps it staved off a much less orderly wave of panic selling.

The panic that did ensue was a much Bush’s fault as Bin Laden’s. The economy was headed downward and the first Bush tax cut-which was never truly meant as a stimulus-had already had time to prove not much of a stimulus. It was the Bush administration, however, that first suggested that the US economy could be hurt by an act of terrorism, itself not all that expensive in terms of the overall economy.

Since that time, the dollar has headed lower. This is, in part, due to the artificially low interest rates which make US T-bills unattractive, especially to foreign investors on whose shoulders the economy rests. When dollars that are banked abroad do not flow in to buy T-bills, the US cannot pay down its debts or fund its wars. If the United States were run by reasonable people, this would be only a major problem, signaling potentially higher taxes, perhaps on the corporations. Fortunately, the United States is run by what Gore Vidal has called The U.S. Property Party. This assures that it will not due the reasonable thing and raise taxes or interest rates or probably anything else.

Instead, it artificially lowers rates further which only further reinforces in the mind of foreign investors that the US dollar, the US economy is vulnerable. Worse still, it does so in part to defend against the so far mythical deflation. It is not necessary to understand this argument fully to see that it is full of holes, to know off the top of one’s head all the items excluded from the inflation figures: notice, if you will, what movies now cost or cars.

Nevertheless, Greenspan continues to lower interest rates and does so without tightening bank lending standards for consumer loans, especially home loans, where he has now created a second bubble. Here, of course, his follies will be exacerbated by Bush Jr’s. because lower (or no) long term capital gains taxes will make it more tempting for people to trade their homes for more expensive ones. But it is too early yet to blame Bush. It is not, however, too early to blame Greenspan because with rates so low, people perceive that they can afford higher mortgages.

But what Greenspan misses, and what will always likely be overlooked by any Fed, is that the Bush administration has declared war on the middle class, on the very people who pay these mortgage and who are ill-informed about their financial prospects.
Part of Greenspan’s dilemma is that he has to pretend to not know what the executive branch is doing. He has to pretend, for example, that he doesn’t know what Bush’s recent decision to effectively ban overtime pay will do to the average mortgage payer.
Just take the proposed redefinition of who is qualified for overtime pay, for example. Any mortgage application will ask you to refill it out if you are an hourly worker and don’t breakdown exactly how much you make in overtime. This is because often 25% to 30% of a worker’s yearly income is made beyond the forty-hour work week. Needless to say, the new cuts in overtime pay-themselves a scandal-will wreak havoc when interest rates finally rise. Foreclosures will be rampant and consumer spending, which is more than 70% of the economy, will be severely threatened. It is already in a bubble of its own because low mortgages mean people spend more, often to fix up their house, and do so thinking they can afford the extra debt.

Greenspan doesn’t even believe that there is a real estate bubble. “While the stock market turnover is more than 100% annually, the turnover of home ownership is less than 10% annually – scarcely tinder for speculative conflagration,” Chairman Greenspan has said. He has said as much over and over without at all acknowledging that the housing bubble is not merely a consequence of transference of home ownership, but a consequence of refinancing. In refinancing, the homeowner leverages up his or her asset and creates a higher cost basis. Higher cost bases encourage further trading of homes because there is capital gain savings.

Perhaps more importantly, Greenspan never discusses the flood of money into Collateralized Mortgage Obligations (CMOs), a mortgage based investment many investment firms are now promoting as an alternative to low Treasury yields. As a result, the American consumer has become doubly exposed to the housing bubble.

This is a perennial problem for the Fed: it must pretend to be primarily independent of most Washington D.C. politics. That means it must act with appearing to be anticipating the executive and thereby revealing any judgment.

Of course, Greenspan is not above politics. The man who attended Ayn Rand’s funeral, who is beholden to the fascistic thinker for publishing his first paper is constantly asked for advice in Washington. That is how he was able to lobby so effectively for the repeal of Glass Steagall, the law that erected a wall between investment banking and commercial banking. In effect, that law kept commercial banks from doing business in the stock market. That was good because commercial banking (which is based primarily on profiting from the differential between the interest paid for capital and the interest received on loans) is a long-term, low-margin business, one that requires more rigorous financial scrutiny than investment banking if it is to avoid the conflicts of interest related to quick bucks and wild stock markets. The repeal of Glass-Steagall exacerbated the stock bubble, caused a misallocation of capital resources and helped erode the objectivity of stock analysts.

But, it was an anti-regulative gesture, one that Ayn Rand would have adored, and one that cost many pensioners a chance at a secure retirement. Its repeal led to the fraudulent practices of Citibank, Merrill Lynch, and many others during the stock bubble.

But wait, wasn’t Greenspan responsible for increased productivity in the 1990s, and while we may have overshot the mark, weren’t the majority of those huge corporate profits real?

The Bureau of Economic Analysis reports reveal that US corporate profits peaked in 1997. The fell steadily into 2002, even as productivity continued to increase, and have only just recently stabilized. The much ballyhooed gains in productivity that characterized the 1990s, however, were actually surpassed during 1960s, and without any mention by the Fed Chairman at the time.

Nor did such gains eliminate the boom and bust business cycle, although that is what Greenspan argued. In fact, he argued that the boom-bust business cycle had ended during his famous “irrational exuberance” testimony. So, while the phrase was perhaps more honest than he’d intended, he had nevertheless believed in the New Economy.

Eventually, the largest stock bubble in history became so much of a problem that Greenspan raised interest rates to the highest real rate (the difference between Federal Funds rate and the rate of inflation) in 50 years. Not only did the stock market tank, but so did the general economy.

Curiously, in recent Congressional testimony Greenspan apologized for his past opposition to the reform and regulation of accounting practices. Greenspan had said, “Regulation is not only unnecessary in these markets, it is potentially damaging, because regulation presupposes disclosure, and forced disclosure of proprietary information can undercut innovations in financial markets.”

Accordingly, Greenspan lobbied for the repeal of the Security Acts of 1933 and 1934. The result was a return to the financial shoot ’em up days of the 1920s. This is exactly what occurred in the 1990s when firms like Enron, WorldCom, etc. gave the finger to accounting and banking regulations through the use of increasingly sophisticated financial derivatives.

But this apology does not mean that the bank system as a whole is no longer in danger. The US Office of the Comptroller of the Currency says that major US investment banks are said to have more than $23 trillion (greater than the combined GDP of the US and European Union) of customized and other derivatives on its books. Every other major derivatives exchange has regulations to avoid market manipulation and liquidity meltdowns. Dismissing the need for regulation in the derivatives market, Chairman Greenspan proves unfit for office: one of his principle responsibilities is to oversee the risk being taken the financial community.

Furthermore, despite the scandals at accounting firms such Arthur Andersen, Greenspan continues to believe that his laissez faire upbringing is appropriate. He should be advocating regulations that would prevent accounting firms from any form of consulting business. And if not willing to go that far, he should advocate that firms who have their consulting business outgrow their accounting business be subject to penalties for unethical work. As it is currently, those firms hide behind their Limited Liability Corporation status and risk no fees or penalties should they develop conflicts of interest.

When the fiscal policies of George W finally kick in-and wreak the damage I will address soon in another Counter Punch feature-Greenspan will have served approximately 15 years. It is possible that Corporate America will still be gleaming, (as a result of their unfettered assault on the average worker) and they will likely request a few more years of Mr. Greenspan. We must not let that get in the way of the fact that 15 years is too long for any one perspective to guide the financial system. The Federal Reserve Chairman should also have term limits, but term limits alone will not change the fundamental ideology. No regulators who actually are opposed to regulation should become regulators.

STANDARD SCHAEFER is an independent economic journalist and cultural historian. He also co-edits the New Review of Literature. He can be reached at