Greenspan Re-evaluated
by
William Krehm

Chairman Alan Greenspan is a man of few words, and those he speaks are wondrously convoluted. Time was when he openly espoused monetarism, the dogma that the price level in the long run reflects the amount of money in existence and little else.

Believe that and you will accept as a minor swallow that all that is needed to lick “inflation” is to turn the screws on the money supply, by driving up interest rates. Of course, the resulting scarcity of credit does push firms over the cliff, and send workers to the food banks. But you will consider that just a passing discomfort, that will eventually benefit everybody including the broken families, those who lost their homes and the suicides.

In 1987, as newly baked chairman of the Fed, Mr. Greenspan helped bring on the greatest crash since 1929 by shoving up interest rates as monetarism dictated. After that, Mr. Greenspan started riding the learning curve on the job a striking example of education at the public expense. Rarely if ever since has he mentioned the money supply the equivalent of Taliban not allowing the Prophets name to cross its lips. Instead, he has concentrated on such miscellaneities as productivity, carloadings, inventories, delivery times.

That was shrewd because in our deregulated economy nobody has a clue what the money supply might be. For our banks are free to engage in just about every aspect of gambling, and their winnings are money supply, while their losses are money destroyed and missing. The only clear rule today in banking is that the central bank must not lend money to the government, because if it did, over 95% of the interest charged on the loan would find its way back to the government and that would be unfair competition with the private lenders.

When banks are bailed out from their gambling losses that is seen as just a law of nature. In Canada and the UK this recovery of interest paid on federal debt held by the central bank occurs because the state is its sole shareholder. However, in the United States the Fed., though owned by private banks, remits about the same proportion of its profits to the federal government. That is an extension of the sovereign states traditional monopoly of coining precious metals, seigniorage.

What Mr. Greenspan fell back on, when his monetarist faith was gone, was a swap deal with Wall St.
They declared him the prophet with 20-20 foresight, and he abided by the immensely complicated needs of the deregulated banks. These had acquired brokerage houses, underwriters, merchant bankers, derivative boutiques, credit cards and other risky Wall St. ventures, and that ruled out high-interest rates as a panacea for the economys ills. However, in the inspired prophecy business, there is more than a single risk and as early as 1996 Mr. Greenspan warned publicly about the “irrational exuberance” of the stock market.

At once he was told in no uncertain terms by Wall St. types to concern himself only with commodity inflation and leave stock prices alone. He got the point. Only when it was far too late did he start delivering discount rate cuts as though by machine-gun. And with crash of Wall St. Mr. Greenspan was brought down from Mt. Olympus and reclaimed for the human race.

Dissent within Fed.

And in that capacity he is meeting a growing degree of harassment within the Fed itself. The story is told in The Wall Street Journal (28/12/01, “Did Greenspan Push High Tech Optimism on Growth too Far?” by Greg Ip and Jacob M. Schlesinger):

“Today, Fed policy makers are debating whether they went too far. The answer could help determine whether the current recession marks a temporary aberration in an era of growth, or whether the rapid growth of the late 1990s itself was the aberration.

“Mr. Greenspan hasn't lost the faith. New capital investment, especially the high tech type, will continue where it left off, he declared in a speech last Monday at Rice University in Houston. He ignored the collapse of so many symbols of the 1990 boom, including Enron Corp., the sponsor of the distinguished public service award he was receiving that evening. 'The long-term outlook for productivity growth, as far as I'm concerned, remains substantially undiminished,' the Fed Chairman asserted.

“But others in the central bank have now re-embraced a less sanguine view. During 2001, the Feds research staff has steadily marked down its estimate of the rate at which the economy can grow during the next two years without sparking inflation. The economic aftermath of Sept. 11 has only darkened the picture further, as companies shift the sources away from boosting efficiency and toward improving security” [our emphasis]. “Fed Gov. Laurence Meyer, in a relatively downbeat speech in St. Louis just two weeks after Mr. Greenspans sunny comments in Houston, stressed the frenzied pace of investment in high-tech equipment [in the later 1990s]. That now appears to have been unsustainable.

These quotations give us a birds eye view of the confusion of the model that leads the world by the nose. How could the efficiency of the economy increase without looking after its security? Could an increasingly insecure economy possibly be more efficient? Especially since the spread of the deregulated market is undermining the traditional social systems across the world, and congesting supply lines. Modern technology has unleashed a population explosion with damaging consequences for both our political systems and the environment. Right there you have an indictment not only of the official model but of the accountancy supposed to keep track of its “efficiency.”

The media have been full of the boldness of the accountancy scams that contributed so greatly to the recent boom. From the WSJ article it is that the model itself is excessively cooked to deprive it of any serious relevance. You need only glance at your war news out of Afghanistan alongside speculations about which country will be next for the USs anti-terror campaign, the default of the Argentine debt, with its inevitable consequences throughout the world, the menace of a nuclear encounter between India and Pakistan. The very dependence on military expenditures for the revival of the world economy, speaks to the mindlessness of rating the economys efficiency without considering the growing danger of the whole boodle blowing up.

“The Fed staff forecast prepared for the December 2000 policy meeting predicted that consumer spending would slow because of falling stock-market wealth. But businesses fixed investment, notably, outlays for equipment and software, was projected to remain relatively robust, according to the minutes.

Mr. Greenspan himself was taken aback in October 2000 by a chart in WSJ showing a huge gap between the rapid growth of fiber-optic capacity and the much slower growth of demand for the technology, a discrepancy that soon led to the collapse of a raft of start-up broadband companies.

Essentially, the Fed moved with the deregulated banks in espousing the stock market as part of the holy family. As long as it continued soaring everything was assumed fine with the world.