Greenspan’s
Fraud
by
David
Gracey
AlanGreenspan has served as Chairman of the Federal Reserve since 1987, and was reappointed in 2004. The media has accorded him “star” status; his every word is treated with reverence.
As the title would suggest, Batra has a very different take on Greenspan. Whereas the mainstream media gives him credit for managing crises and avoiding financial meltdowns, Batra sees his policies as responsible for many of the problems that beset us. To wit, he blames Greenspan for the “prolonged stagnation” of the US economy, for the “pooring” (sic) of America and much of the world in order to enrich a small minority – a class of which Greenspan is a member.
Batra cites Greenspan for hypocrisy and opportunism in his never ending quest to be reappointed as Federal chair by disparate presidents. Once an outspoken opponent of deficits, he reversed himself to placate Reagan, Bush senior and Bush junior. He did a similar reversal on the trade deficit. His mantra throughout has been deference to power whether presidents, or Wall Street, or bankers, and it has served him well.
The case against Greenspan begins before he was appointed Fed chair. Despite his adamant opposition to deficits, as a key economic advisor to Reagan, he helped engineer the massive 1981 tax cut. As the deficit soared he became a key player in what Batra calls the “Social Security Fraud.” He was appointed chair of a commission to recommend reforms to the social security system. Even though the problems in the system were minor and easily rectified, the public was told the system was in crisis and going broke (reminiscent of George Bush’s campaign for private accounts).
The real agenda was to increase contribution rates, so the surplus could be used to reduce the overall deficit. This device is similar to the one used by the Liberals in Canada, when, under the guise of “reforming” UI, they cut benefits and used the contributions to create a surplus in the overall budget.
The strategy succeeded. Along with increases in the medicare tax, the lower income workers faced a contribution increase to over $1000 annually. Thus, the lower taxes for the wealthy were paid for by higher taxes on the poor. Batra attributes the stagnation in the US economy primarily to this transfer of wealth. Since the poor spend all their incomes, reducing them causes demand to fall. The rich, according to supply side theory, are supposed to invest their additional income, but Batra shows, like Keynes before him, that in the absence of demand, it doesn’t happen.
Greenspan was a strong advocate of the market – and non-interference by government. He has always opposed the minimum wage, claiming it costs jobs. Batra shows the opposite is the case. Greenspan’s advocacy of deregulation has led to problems in the financial industry. His campaign for lower taxes is, according to Batra, really intended to enrich the wealthy and has resulted in a massive rise in inequality. The supply side mantra that lower taxes for the wealthy stimulate growth is shown to be false. The historical record shows that a progressive tax system – higher taxes for the wealthy and lower taxes for workers – produces high growth rates. Greenspan’s passion for the “free market” has subsided whenever the financial system is in crisis. As Fed chair he helped engineer several bailouts to rescue investors and banks from their folly and transfer the costs to workers in foreign countries like Mexico.
Batra’s main argument against Greenspan is the latter’s excessive reliance on pumping up the money supply to solve problems In the October ‘87 stock market crash, for example, Greenspan won the devotion of Wall Street for injecting massive liquidity into the system. The bailout of Long Term Capital Management in 1998 led directly to the tech bubble which burst in 2000. The bailout of Mexico and the Asian “tigers” transferred billions to the western investors and banks who had played the market, while adding billions to the debts of those countries.
According to Batra this is Greenspan’s key legacy – a vast buildup of debt in the US and abroad which must lead to problems in the future. Greenspan’s other legacy Batra calls the “wage gap” – the falling wages and spending power of workers. He also blames Greenspan for the decline in US manufacturing ad the huge and growing trade deficit.
There is, of course, little that is new here. He does demonstrate the tremendous impact that monetary policy has on the economy, but that will come as no surprise to readers of ER. In the last chapter, he offers some solutions, such as economic democracy, which are highly attractive, but it is difficult to envisage a political shift in the US which would make it possible. It is more likely that, at some point, we will have to pay the piper – and it won’t be a lot of fun.