Chairman Greenspan: A Fiat Mind for a Fiat Age

0:00I'd like to introduce our next speaker, Frederic Sheehan, who is a graduate of Columbia Business School and the author of Panderer to Power, a title that I'm sure appeals to this wonderful crowd. He's also co-author of Greenspan's Bubbles, The Age of Ignorance and the Federal Reserve, continuing on with many of the themes you've heard today already. He's a frequent contributor to financial websites and currently serves as an advisor to an investment firm in a non-profit corporation. So, Frederic Sheehan. Okay, okay. Thank you. First thing I have to say is I take exception to Chris Whelan's characterization this morning of John Maynard Keynes as the evil one.

0:49Alan Greenspan was the right Federal Reserve Chairman for his times. His reputation was a creation of inflation, and this was a century of inflation. His knowledge was superficial when America tended to its superficiality. He was a creation of publicity in an age that craved celebrities. He was inarticulate at a time when minds were growing confused. He took shortcuts to the top when Americans more readily took the easy route. It takes at least $20 to buy what cost $1 back in 1913 when the Federal Reserve was formed. Those are government numbers. I think it's probably about $2,000. But inflation of money was integrated into the 20th Century inflation of words, constant distractions, and media promotion.

1:52Thus, the worship of celebrities simply because they are celebrities and the success of one pandering politician and clever opportunist, Alan Greenspan. The shortcuts taken in the 1950s set the course to the present. We bargained for wages and benefits that could not be paid for in constant dollars. Americans worked fewer hours. We We were buying more from abroad than we were selling. The government was spending more than its revenues by the 1960s. In 1971, we stopped settling our balances in gold. Governments, and this was true around the world, found deficit financing and opium to the masses. Government programs abounded. The masses grew accustomed to inflation and borrowing in currencies Debtors paid back less real money than they had borrowed. Bankers could lend more after the link to gold was severed, since there was no final settlement.

2:55For this subterfuge of honesty and common sense, the United States employed celebrity economists who would make up new theories on the fly. This was dishonest, and it follows that our dealings in dollars became dishonest. The corruption by the government, by economists who satisfied their interests, was matched by the corruption of those who trafficked in money. Since honesty was the enemy of our dealings, dishonesty held an advantage. In the end, credit and government policy has gravitated towards fewer hands, those willing to participate in a swindle of the public, saving and its trust. At the center is an institution, the Federal Reserve, which was a willing accomplice. It employs dishonest economists. In 1987 it elected as its chairman a man of no merit but who could be counted upon to cut whatever corner was needed to maintain the facade of national solvency. And that man was Alan Greenspan. Now stepping back, when Alan Greenspan was When he was 26 years old, he made a far-sighted and characteristic decision. He started to smoke the pipe.

4:07That was in 1950. He had just entered Columbia University, where he was studying for a doctorate in economics. He signed up for a class under Professor Arthur Burns. Burns was a very well-known figure at the time. He was co-author of a well-known book, Measuring Business Cycles. Whatever he learned in Burns' class, Greenspan did the important thing. And this was Burns' trademark, and some will remember from the 1970s when he sat as Federal Reserve Chairman reinventing economics of Burns sitting there with the pipe. By the way, when Mark Faber mentioned earlier about getting rid of food and energy, it was Arthur Burns who did that when he was Fed Chairman.

4:52In 1953, Burns left Columbia to head President Eisenhower's Council of Economic Advisers, the CEA. Greenspan left Columbia at the same time without receiving his doctorate. In 1977, he did receive his doctorate from NYU, and this was a few articles and a couple, he only wrote a couple of academic papers that had been stapled together. Alan Greenspan made a habit of choosing the easy route, no matter what he did. The media drones on about Greenspan's ideology, sometimes it's his libertarianism, or it might be his free market beliefs. Whatever the case, these are simple labels, and simple labels are about all we're going to get from the press.

5:42Alan Greenspan has cared about one and only one thing for his entire life. Every nerve ending in his body and every moment has been devoted to the promotion of Alan Greenspan. Greenspan never had an ideology. He probably never understood what he and Rand was talking about. Nathaniel Brandon, Rand's number one acolyte in the 1950s and also the Randian closest to Greenspan, wrote years later, Now looking at Alan, he wondered how much he understood Ian's beliefs. And Brandon continued, talking about typical evening at Rand's apartment, that she would read something that she had written, and quoting Brandon, that Greenspan, complimenting Ian on some passage, Greenspan might say, On reading this, one tends to feel exhilarated, and platitudes and assurances also mesmerize the nation fifty years later.

6:43By then, that's about all we were going to get from any public figures, but we weren't asking any more either. Anne Rand seems to have understood why Alan clung to her apron strings, if she wore an apron, it was probably her husband, but she asked Brandon, do you think Alan might basically be a social climber? It was about this same time that a young writer asked Gore Vidal if he had any advice. Vidal replied, yes, get on TV as often as possible. Now at the time, this was back in the mid-50s, there was a blazing debate in Washington about inflation. Some were for it and some were against it. In the mid-50s, academic economists were angling for their presence in the media.

7:29One was Harvard University Professor Sumner Schlichter. Fortune Magazine gave him the name the father of inflation. This might not sound complimentary, but it was publicity. And Schlichter told the Senate that the Fed would have to accept inflation to generate sufficient jobs. Schlichter argued that costs for materials and labor were rising because unions were pushing up wages and fringe benefits faster than the gains from productivity of labor. The result is a continuation of the slow rise in prices. He was correct, but the correct answer was not to inflate, but to either work harder or drop the benefits. But the senators loved what he had to say. And in the opposite corner to Schlichter was William McChesney Martin Jr., who was the Federal Reserve Chairman. And he took on Schlichter and gave one of the One of the finest speeches by a Federal Reserve chairman or a central banker, probably ever, which might not be a lot of competition, but it was a very fine speech.

8:31It was on August 13th, 1957, and he spoke before the U.S. Senate Committee on Finance. And he told the assembled, there is no validity whatever in the idea that any inflation once accepted can be confined to moderate proportions. Martin responded to some segments of the community, probably economists, who were arguing for are a gradual rise in prices, perhaps 2% a year. Martin warned that such a prospect would work incalculable hardship. Losses would be inflicted upon millions of people. Now, Chairman Ben Bernanke has also said that we should have a minimum of 2% inflation each year, which isn't necessarily a contradiction since Ben Bernanke doesn't really seem to care if he's inflicting hardship on hundreds of millions of people, if he knows what he's doing at all.

9:22Martin believed the fears of inflation would cause people to spend more and more of their incomes and save less. Martin told the politicians, again this is the same speech, that the composition of savings would change. It would tend towards speculative commitments. In the pattern of investments in other spending, the decisions on what kinds of things to buy will change in a way that threaten balanced growth. Martin warned that a spiral of mounting prices and Inflation wages seeks more and more financing, with a considerable volume of the expenditure financed at all times out of borrowed funds. Finally, Martin said, we should not overlook the way that inflation could damage our social and political structure. Those who would turn to have savings in their own age would tend to be the slick and the clever rather than and the hard working and the thrifty. Fundamental faith in the fairness of our institutions and our government would deteriorate. Speaking of the slick and the clever, by 1970, Alan

10:31Greenspan was a millionaire. By then, he owned an apartment at United Nations Plaza, which is a very fashionable address, which he shared with other famous people. Actually, he wasn't famous at this point, but Walter Cronkite, Truman Capote, Johnny Carson. But what he He had done, that is, as an economist, to live up to living with such company. It really isn't clear. He wasn't important. Those who respected him said he was a whiz with numbers, but a larger group remembers that he was full of numbers, but he was also always wrong. In the words of biographer Justin Martin, the general impression among people who knew Greenspan in those days was that he wasn't exactly marked for greatness. His old friends were destined to watch his career unfold. Nixon advisor, Ford advisor, five-time Fed chief in stunned amazement.

11:24Another to witness the curious elevation of Alan Greenspan was Mark Farber when he arrived in Wall Street with White Weld in 1970. His job was to attend the monthly economic presentations by Greenspan and interpret the comments for the overseas offices. And now I'm quoting from Mark. This was in the Gloom, Boom and Doom report a couple of years ago. Looking back, I had no idea what Mr. Greenspan was talking about. But I may not have been the exception. When Mr. Greenspan first came on board at Whitewell as a consultant, 30 or 40 people from the firm's various departments would attend the meetings. Within a few months, however, attendance had dropped to just a handful. to just a handful. By then I had also learned that the easiest way for me to communicate to me incomprehensible remarks was simply to summarize the previous day's news from the front page of the Wall Street Journal. And then Mark noted that one of the best investment decisions Whitewell ever made was to get rid of Mr. Greenspan in late 1972 when he hired

12:31Gary Schilling. Now Martin Mayer, who's written a number of books about Wall Street and who who first met Greenspan in the 1960s wrote that the millionaire economist was making a specialty of statistical espionage, which were Greenspan's words. And Mayer, in a book, wrote that the book on him, the book on Greenspan, was that you could order the opinion you needed. Greenspan's girlfriend, Barbara Walters, wrote in her recent autobiography, How Alan Greenspan, A man who believed in the philosophy of little government interference and few rules or regulations could end up becoming chairman of the greatest regulatory agent in the world is beyond me. Now, here we have Alan Greenspan. This was his road to success. He would do anything and he would say anything. He worked his relations with the press much harder than he ever worked as an economist or for his clients. He went one step further than other fast-track economists.

13:29He dated the press and then finally he married it. Even though he was a minor figure in the 1960s, he was getting his name in the New York Times, making market predictions. The funny thing is that he was always the bear in the article during a decade when the market was going up. Then in the 70s he was always wrong too because he was always bullish and the market was always going down. Now William Martin's insight that a spiral of mounting prices and wages seeks more and And more financing, and a considerable volume of the expenditure financed at all times out of borrowed funds was a feature of the 1960s. That was a decade of the conglomerate. And some who built mountains from molehills in the 50s and 60s were Mechelam Rickles, Carl Lindner and Saul Steinberg. They used paper instead of cash to buy companies. And as all of these things go, it ended in a baleful scrap heap of waste with such absurdities as Mary Carter Payne

14:27Attempting to swallow Pan-American airlines, which failed and then just about everything went down the drain at the same time, although these three didn't. It's not a coincidence, the American living standards probably peaked around 1970 when capital was so badly mishandled. And then in the 70s, with inflation, it of course was even more poorly handled. On June 28, 1978, Federal Reserve Board Member Henry C. Wallach addressed the gathering seniors at Fordham University at their commencement. Inflation, he informed the graduates, is a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and the aged.

15:18Wallach explained that inflation is technically an economic problem. I mean, the breakdown of our standards of measuring economic values as a consequence of inflation. The strong are smart enough to understand that inflation introduces an element of deceit in our economic dealings. Contracts are known to be a threat to our economy. are no longer made to be kept in terms of constant values, but one party understands this better than the other. Wallach went on to emphasize that the increasing uncertainty in providing privately for the future pushes people who are seeking security towards the government.

16:06He also said, I don't have the quote here, but something like, the mark of a civilized country is that the people are able to provide for themselves Moving forward to the 1980s, we had the savings and loan free for all. We were adding mounds of debt that would have been inconceivable to Martin back in 1957. In 1980, we, the United States, borrowed $1.40 for every $1 we added to the GDP, GNP back then. By 1985, we were adding $4 for every $1 of GDP. Savings and loans were the perfect instrument operators, SNL deposits were insured by the government and the SNLs had been deregulated.

16:52In the wrong hands, the SNLs were sponges for questionable investments. Now Mechel and Rickles, Carl Lindner, Saul Steinberg used their conglomerate platforms to swap paper. Now in the 1980s, Barry Wigmore, who was a partner at Goldman Sachs at the time, wrote an excellent book, Security Markers of the 1980s, and in it he wrote of Rickles, Lindner It is tempting to conclude that they represented a cabal. They cooperated and invested with each other extensively and were old hands in the market aspect of Chinese paper from the merger wave of the 1960s. Their activities illustrate the combination of native cunning and access to leverage that made them so effective. Wigmore wrote of the three, they had a common involvement with Michael Milken's group at Drexel Burnham that probably helped to create Enough Liquidity for the Junk Bond Securities. Now, William Seidman, head of the Resolution Trust Corporation, which worked out the savings and loan problems, and of the SNL mess, Seidman wrote later that Michael Milken had rigged the market by operating a sort of daisy chain

18:05among SNLs to trade the bonds back and forth across his famous X-shaped desk in Los Angeles. By manipulating the market, he maintained the façade that the bonds were trading at genuine market prices. In 1984, Alan Greenspan was hired by the most notorious criminal in the savings and loan racket. That was Charles Keating. Keating laundered money through Lincoln Savings and Loan. He needed someone to write a letter to his regulator, the Federal Home Loan Bank of San Francisco, that stated Lincoln Savings and Loan investments were sound. In 1985, Greenspan wrote to the Federal Home Loan Bank that Lincoln's management, these are Greenspan's words now, is seasoned and expert in selecting and making direct investments.

18:52Now by that time, Lincoln was not only loaded up with deals through Milken, it was swapping them at a profit through its holding company. The American Continental Corporation, ACC, and Charles Keating, both of them, had been spun out of Carl Lindner's American Financial Corporation. Keating was known as Lindner's hatchet man. Now, Greenspan surely knew who he was dealing with. That's what everybody knew was going on at that point. He had been on Wall Street in the 1960s. He trafficked in knowing who he should be schmoozing. In the 1980s, he must have known that Lincoln was part of the Rickles-Steinberg-Lindner-Boski-Milken crowd that was trading securities back and forth and making paper profits. This was just the man to inherit the Federal Reserve chairmanship in 1987. Four years before, in 1983, a poll of Wall Street executives found that 31 percent Greenspan's hearing for Federal Reserve Chairman was in August 1987. Senator William Proxmire, a Democrat from Wisconsin, was the Chairman. He didn't like Greenspan. He had voted against

20:14Greenspan's confirmation as Chairman of the Council of Economic Advisers in 1974 because Because he thought Greenspan would pass information back to the companies with whom he had consulted. This seems like quite a suspicion, and I'm not sure why he thought that, but I suspect that he knew of Greenspan's reputation. He probably had asked around, that the book on him was that you could order the opinion you needed. More than Greenspan's habit of always being wrong, and by such a wide margin, Proxima Proxmire was probably more concerned by Greenspan's less-than-honest, full-disclosure statement he had submitted to the White House and to Congress. He had left out Lincoln Savings and Loan. Greenspan distinguished this, once Proxmire had fingered and asked, what's going on here, by saying, well, this is an advocacy project, which is the type of thing that we grew accustomed to hearing and still hear today. Proxmire was a foe of bank deregulation. He He feared big banks would squash smaller banks. He feared Alan Greenspan would be only too

21:17happy to squash them. The Senator lectured the candidate for the Fed chairmanship. As chairman of the Federal Reserve, you play the key role in approval or disapproval of massive bank mergers. I would feel much better about this appointment if there was somewhere in your record an indication of your awareness of the dangers to our economy of excessive of Financial Concentration. Well, there was no indication, and oddly for Greenspan, he didn't even offer one of his crazy excuses, which normally he would give. And after becoming Federal Reserve Chairman, Alan Greenspan could not fulfill Senator Proxmire's fear quickly enough. Proxmire had retired. In 1989, the Federal Reserve permitted JP Morgan, of which Greenspan had been a director before he became Federal Reserve Chairman to underwrite Xerox debt.

22:09This was the first such debt issue from a commercial bank since 1933, the year of the Glass-Steagall Act. In 1990, the Federal Reserve permitted J.P. Morgan to underwrite stock. Time Magazine called this the widest breach of Glass-Steagall yet. Greenspan was as permissive when it came to printing money as he was on mega-banking. He had to be. Americans were impatient, and Greenspan did not want to disappoint. So, when we had a recession in the early 1990s, he reduced the Fed funds rate from 9.75% to 3%. Banks and hedge funds leveraged up and refloated the economy. This was the carry trade. And in the recent 2004 FOMC transcripts that were released, and I just wrote about them on my blog, there was a comment by Greenspan about we created the carry trade in order to do, which I never would have suspected that a government bureaucracy would be that innovative to create the carry trade. This was the first time a recovery in the U.S. was driven by

23:15finance rather than production. Money and credit were concentrated more and more in the hands of the slick and the clever, who had nearly unlimited access to more and more financing. By now the Now the middle class was getting trounced. From that point forward, every time the economy coughed, Greenspan cut rates and pumped up the bubble. Lose money attracts characters who should never be handling money. And the economy had become badly unbalanced. In between 1993 and 1996, Federal Reserve Governor Larry Lindsay, at every meeting, gave a lecture on how the American people were falling behind. They didn't even understand what he was talking Somebody had mentioned Janet Yellen before. At one point when he gave one of these talks about how the American consumers were falling behind, spending too much, much more than their income.

24:07And then the next thing she said was, well, I'm afraid that the savings rate has gone up too high, so that could put a damper on the recovery. Mr. Lindsay, our luck is about to run out in the financial markets because of what I would consider a gambler's curse. We have won this long, let us keep the money on the But the long-term costs of a bubble to the economy and society are potentially great. They include a reduction in the long-term savings rate, a seemingly random redistribution of wealth, and the diversion of scarce capital into the acquisition of wealth.

24:59I think it is far better that we burst the stock market bubble while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights. Heights. Whenever we do it, it is going to be painful, however. If the oftenness is wrong, then indeed not only our luck, but that of the markets and of the economy has run out. Thank you, Chairman Greenspan. On that note, we can all go for coffee. And so, for the next 10 years, Greenspan sat there and drank his coffee and blew up bubbles in the stock and the stock market and the credit markets and housing markets and every market. And the sorts of characters who were taking charge were more and more of a persuasion that you wouldn't want to have this sort of person fill your gas tank.

25:52Now, in 2001, David Tice, before the House Finance Services Committee said, The most reckless fund managers, the most reckless auditors, the most reckless investment bankers, the most reckless corporate officers made the most money. So you had greater and greater incentives to promote the most reckless guys, and that was in 2001. And I wonder why this crowd who ran us over the cliff in 2008 was another generation after that. But the worst racketeers in the country had gravitated the Federal Reserve Board. To prevent the economy from collapsing, they rig more markets than the Politburo. And this is clear in the 2004 FOMC transcripts. And I'll quote one, which is Federal Reserve Governor Donald Cohn.

26:40And in the March meeting he said, Policy accommodation and the expectation that it will persist is distorting asset prices. Most of the distortion is deliberate and a desirable effect of the stance of our policy. We have attempted to lower interest rates below long-term equilibrium rates and to boost asset prices. In other words, the Federal Reserve policy was to distort asset prices. He also said this was deliberate and that it was desirable. In other words, this wasn't just a side effect of such-and-such Fed policy. This was the policy. Cohn went on, Moving on, it's hard to escape the suspicion that at least around the margin some prices and price relationships have gone beyond an economically justified response to easy money.

27:28House prices fall into this category. So note, the Fed was deliberately driving up the prices of houses above what would be the proper market price. Now I wrote about this as I say about the 2004 transcripts recently on my blog and the The character of these transcripts is completely different than, I've read them all the way back to 1994. Now they were managing the carry trade. They were trying to keep it at a certain size to be able to manage the level of long-term interest rates. And if you remember, Greenspan has been going on and on about how he didn't, he couldn't do anything with the housing bubble because he had no, he didn't have any influence over long-term rates. I can tell you that they were at least attempting, and they did a pretty good job, in every meeting talking about tactics to manage the 10-year treasury rate in order to keep it at a certain point.

28:20Then we read about Greenspan asking one of the Fed staffers whether the hedge funds are properly delta hedging the extension of the mortgages because of a change in interest rates. This is not the Federal Reserve Board of even a couple of years before where they just went on about their macro statistics and you can see what happened with trying to manage all of these markets in 2004 and what happened and then consider now what they're trying to manage and what will happen. So what is Fed policy today? Recently, the improvement in risk appetites in financial conditions, in part responding to actions by the Federal Reserve and other authorities, has been a critical factor in allowing the economy to begin to move higher after a deep recession.

29:14Low market interest rates should continue to induce savers to diversify into riskier assets, which would contribute to a further reversal in the flight to liquidity and safety that has characterized the past few years. So again, they are trying to get people out of safe categories and into riskier assets. One reason for the Fed's zero-ray policy, and I can put this in the words of Henry C. Wallach, is a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and aged. The old cannot live on zero percent, so the Fed has chased them into riskier assets.

30:01In conclusion, Chairman Greenspan was a fiat chairman for a fiat age. His credentials were inflated to serve a position of responsibility where he would justify that special confidence that Wall Street executives vouched for in 1983. Americans were beguiled by this fixture on television who gained credibility simply because he was on television. Americans were also taken in by corrupt economists who were advertised as experts. They propelled a system that needed constant infusions of propaganda convincing Americans they were getting richer even though they were getting poorer. By 2001, the slick and clever had to be the most reckless auditors and the most reckless investment bankers since the dealings were divorced from any real economic benefit.

30:50Thus, the fundamental faith in the fairness of our institutions and of our government has deteriorated.