Greenspan the Great!! (Or Why He Should Go)

When I tuned in Tuesday morning to catch Fed Chairman Alan Greenspan's testimony before Senate Banking, right off the bat I watched you gurgling about how he was the greatest central banker in the history of civilization!! The reason you chose this moment to smother him with wet kisses on his nether body parts, you said, was because you were leaving the Senate this year and probably would not have the privilege of genuflecting before him again. I turned green and looked around for a bucket.

What really bothered me, Phil, is when you reminded the committee you were in a perfect position to make this evaluation because you specialized in monetary theory when you were getting your PhD in economics. As I recall, you even wrote a paper on the monetary deflation of the 1870's, when the United States came back to the gold standard in a way that caused great hardship to the American people. With all that background and expertise, surely you should see that Greenspan has made a mess of the U.S. economy and a mess of the world by failing to learn those lessons.

Except for a rocky start, when he helped cause the stock market crash of October 1987 by saying he was in favor of a weaker dollar, Greenspan did a good job at the Fed in 1988, 1989, 1990, 1991, 1992, and 1993, a poor job in 1994, 1995 and 1996, and a miserable job from 1997 to the present. Like you, Phil, Alan at one time was an advocate of a gold standard as the best possible means of conducting monetary policy. In the good years, while he was continuing the practice of former Fed Chairman Paul Volcker of keeping a weather eye on the dollar price of gold for signals of incipient inflations or deflations, Greenspan never let the gold price get far from $350 per ounce. He and Fed Governor Wayne Angell would tilt policy toward that point, making it easier for American businesses to make financial decisions without worrying about inflations or deflations. The dollar stability also became the envy of the world, and governments everywhere found their own economies flourishing by linking their currencies to the dollar. It was in late 1993 when Greenspan began running into trouble, and in 1994 began raising interest rates to pinch off inflation when he saw gold rising above $350, and the higher rates did nothing to halt the increase. I'd explained to him that only reducing dollar liquidity would halt the process, but he did not have a mechanism to do so, and said nothing about it, as the economy seemed healthy with a mild inflation that took gold to $385, where it stayed until late 1996.

That's when you folks in the Senate pushed through tax cuts, which increased the demand for liquidity. When Greenspan did not supply it, the gold price began its long slide. In the process it caused the Asian Crisis and Russia's insolvency and a mess of problems throughout Latin America and Africa. In September 1997 I begged Greenspan to halt the decline, but he asked that I not bother him any more. We are still in a mess, Phil, as the problems the deflation created have contributed mightily to the accounting difficulties which the business community is now wrestling with. So you see, Greenspan has his good points and his bad points, and lately there has been nothing much to cheer about. Here is a letter I wrote last week to the Financial Times that will give you a clear picture of the problem. We really do need to get back to a gold standard, which is much better than a Greenspan standard:

The simple reason for the accounting miseries now surfacing with Enron and Worldcom et al is that we are not on a gold standard -- and for the last 30 years have been struggling through inflations and deflations. The U.S. Savings&Loan crisis of the 1980's was the result of the inflation, which made it impossible for creditors to recover their assets. An S&L needs a gold footing so it can borrow short and lend long. When those who made the worst loans faced bankruptcy, they made riskier and riskier loans, trying to make up for the losses. Those who were caught went to jail. Those who survived then benefitted from the deflation that followed, where customers were required to give the S&Ls more in real terms than they had borrowed.

This is what has happened in the current monetary deflation, which has transpired over the last five years, with gold falling from $383 to as low as $253, now at $310. For the economy to recover, gold would have to be at $350, and it cannot get there as long as the Federal Reserve is not (and has no means) to target gold. At the margin, those debtors who could not pay their debts juggled the books, hoping for economic recovery that was promised by the Bush tax cuts and the Greenspan interest rate cuts, neither of which can solve the monetary deflation. When the recovery did not come, the jugglers at Enron and Worldcom, etc., had to come clean. It is something like the otherwise honest bank teller promising to return the cash as soon as his luck improves at the race track.

Note the gold price has been in decline these last few weeks. This, I believe, is the result of the lower risks of political terrorism, as there has been progress toward diplomatic solutions in the Middle East and on the subcontinent. When there is increased risk of doing business, there is less demand for dollar liquidity, and if the Fed does not drain it off, the gold price rises. When the risk declines, there is more demand for liquidity and if the Fed does not supply it, the gold price falls.

This is a nonsensical way to manage a domestic monetary regime, let alone a global capitalist system. No amount of new rules and accounting procedures can keep pace with such monetary turbulence in the unit of account. Unless the United States takes the lead in re-establishing a dollar/gold foundation to the world economy, it will have to be done elsewhere. Either Europe or Greater China have the economic mass required to anchor the world monetary system to their currencies, as the United Kingdom once did.

This is an article written three years ago (Aug 99) by JW titled Greenspan: The Last Straw. I believe it answers some of the criticisms to firing AG.

"Fifteen or sixteen years ago, I remember having dinner with Fed Chairman Paul Volcker at his favorite spaghetti restaurant on Pennsylvania Avenue. We had such dinners annually from 1982 until he left in 1987, to talk politics and economics, a practice I continued with Alan Greenspan from about 1989 until 1997, when he could no long abide my criticism of his monetary deflation and broke off all contact with me. That specific dinner with Volcker came to mind last Friday when I read Greenspan's stunning remarks to the Fed summer gathering at Jackson Hole. I'd told Volcker that I didn't think I could live with the power he had, where every small error he would make on monetary policy would be magnified, causing damage in some part of the world. Only a market link to gold would reduce to liveable proportions the human error that might cause such damage. Volcker had enormous power back then, but nothing like Greenspan has now, as he exhibited at Jackson Hole. I'm sure he doesn't realize it, but he surely is drunk with power, dizzy with power, the Master of the Universe, as Robert Novak put it in his column today:

For five decades, I have witnessed Fed chairmen elevated in prestige beyond all reason: William McChesney Martin, Arthur Burns, Paul Volcker. But none has approached Greenspan's invulnerability. Although the Fed has made mistakes of judgment in the last seven years, this central bank is improbably credited with U.S. prosperity. Its last two rate increases are viewed as mindless by many administration economic officials, but a gag order has been placed on any criticism. GOP presidential campaigners, noting farm price deflation, were impolite enough in their Iowa campaigning to say the "Master of the Universe" wears no clothes. But front-runner George W. Bush's support for Greenspan is unconditional.

What we have surely is the inevitable result of a managed currency. Either the market signals the central bank how much liquidity it needs by adding or subtracting from the gold price, which was the practice until the Nixon administration broke that link. Or, the Fed will be bound by Congress to hit an alternative target, as Volcker was when the Humphrey-Hawkins Act was in full swing and monetarists dominated the Treasury and congressional banking committees. In other words, Volcker's freedom of maneuver was constrained by the M targets. At Jackson Hole, Greenspan advised the universe that He must now be free of all constraints in order to manage the national economy AND the stock market! This was my immediate reaction when queried by former Vice President Dan Quayle's headquarters in Phoenix. I'd been discussing the "Greenspan Standard" with Quayle since he first asked for my advice last January, and he was among those GOP presidential campaigners "impolite" toward Greenspan in Iowa, where the farm communities have been crushed by the deflation. Still, I was pleasantly astonished when this statement from Quayle was e-mailed to me on Saturday afternoon:

PHOENIX, AZ - GOP presidential candidate Dan Quayle issued the following statement today on remarks delivered in Jackson Hole, Wyoming by Federal Reserve Chairman Alan Greenspan:

"The chairman's speech at the Fed's annual gathering in Jackson Hole is the straw that breaks the camel's back, as far as I am concerned. I can no longer understand how the entire Political Establishment can sit back in a state of paralysis while Alan Greenspan lectures the nation on the need to not only subdue economic growth, but also to rein in the stock market. As far as I know, there is nothing in the Federal Reserve Act of 1913 that empowers the Fed to both manage our national economy and regulate the values of equities on our stock exchanges. There is no sign of inflation with the highest-powered telescopes available, yet Mr. Greenspan continues to threaten even higher interest rates later this year, where instead he should be ending the commodity deflation he has induced.

"As much as I appreciate the job he has done in keeping inflation under control since his appointment by President Reagan in 1987 and his reappointments by Presidents Bush and Clinton, I believe he has in the last few years strayed further and further from his authority. The speech in Jackson Hole, in which he advises the American people that he will now assume even greater powers, demonstrates the need for term limits for Fed chairmen. I not only disagree with those Republicans who say Mr. Greenspan should be deified with a fourth term. I believe he should consider taking early retirement. Where is George Bush on this issue? He has taken the lead in announcing unequivocal support for Greenspan, even as the President of the Dallas Fed, Robert McTeer, has courageously voted in opposition to the Fed's wrong-headed policy. This is not just a question of a quarter point on the federal funds rate. We are talking about the power of the Fed and its chairman in assuming powers placed by the Constitution in the hands of the people and their elected representatives."

This is exactly the right criticism -- not that the Fed is too tight or too easy, but that Greenspan has placed himself above the rule of law and out of the realm of accountability and nobody seems to care. As long as his ratings are high, he can do as he pleases. How low must the Dow Jones Industrial Average go to satisfy him? The S&P 500? NASDAQ? And what guidelines has he imposed on himself? This is all we can find in his speech: "One of the most enduring is that interest rates, as far back as we can measure, appear trendless, despite vast changes in technology, life expectancy, and economic organization. British long-term government interest rates, for example, mostly ranged between three percent and six percent from the early eighteenth century to the early twentieth century, and are around five percent today. Indeed, scattered evidence dating back to ancient Rome and before reflects the same order of interest rate magnitude, not a one percent interest rate nor 200 percent." Between 3% and 6%, don't bother him. And if it is above 6%, well, the stock market is too high or the unemployment rate is too low. Don't bother him.

This is the atmosphere as we await the return of the Republican Congress next week, where the primary focus will be on taxes. There are hopeful reports that a bipartisan package with the Coverdell/Torricelli provisions can be sold as soon as President Clinton gets his veto out of the way. But hovering over the deliberations throughout will be the Master of the Universe, who will do what needs to be done to keep people from spending their money on (a) stocks, which will make them feel richer, so they will buy more and drive up prices; or on (b) goods and services, which will cause inflation directly by driving up wages. I could not believe my ears when I heard Abby Joseph Cohen, the otherwise estimable chief economist at Goldman Sachs, give Greenspan her blessing for his Jackson Hole speech, including points (a) and (b). After all these years, Greenspan is back to his cash-flow model of Townsend-Greenspan. Why not? He can do whatever makes him happy. He's at the top of the heap.

[Greenspan] sounds like a FReeper to me.

The problem is he often says the right thing but acts quite differently. At other times, he is purposely deceitful in what he says. Here's Ron Paul's question on wednesday, Greenspan's duplicitous answer, and Jay Tsaylor's commentary:

HOUSE FINANCIAL SERVICES COMMITTEE
Wednesday, July 17, 2002

PAUL: Welcome, Chairman Greenspan. I've listened carefully to your testimony but I get the sense I may be listening to the Chairman of the Board of Central Economic planning rather than the chairman of a board that has been entrusted with protecting the value of the dollar.

I have for quite a few years now expressed concern about the value of the dollar, which I think we neglect here in the Congress, here in the committee, and I do not think that the Federal Reserve has done a good job in protecting the value of the dollar. And it seems that maybe others are coming around to this viewpoint because I see that the head of the IMF this week, Mr. Koehler, has expressed a concern and made a suggestion that all the central bankers of the world need to lay plans in the near future to possiblY prop up the dollar. So others have this same concern.

You have in your testimony expressed concern about the greed factor, which obviously is there. And you implied that this has come out from the excessive capitalization/excessive valuations, which may be true. But I believe where you have come up short is in failing to explain why we have financial bubbles. I think when you have fiat money and excessive credit you create financial bubbles and you also undermine the value of the dollar and now we are facing that consequence.

We see the disintegration of some of these markets. At the same time we have potential real depreciation of the value of our dollar. And we have pursued rampant inflation of the money supply. Since you have been Chairman of the Federal Reserve we have literally created $4.7 trillion of new money in M-3. Even in this last year with this tremendous burst of inflation of the money supply has gone up since last January over $1 trillion. You can't have anything but lower value of that unit of account if you keep creating new money.

Now I would like to bring us back to sound money. And I would like to quote an eminent economist by the name of Alan Greenspan who gives me some credibility on what I am interested in. A time ago you said, "In the absence of the gold standard there is no way to protect savings from the confiscation through inflation. There is no safe store of value without gold. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process that stands as a protector of property rights.

[Representative Paul then added the he strongly believed this statement by Greenspan, taken from a 1966 article that was included in an article he had written, titled "Gold and Economic Freedom," was true. Paul continued:]

But gold has always had to be undermined if fiat money is to work and there has to be an illusion of trust for paper to work. And I think this has been happening for thousands of years. At one time the kings clipped coins. Then they debased the metals. Then we learned how to print money. Even as recently as the 1960s, for us to perpetuate a myth about our monetary system, we dumped two-thirds of our gold, or 500 million ounces of gold at $35 per ounce, in order to try to convince people to trust the money. And even today there is a fair amount of trading by central banks, the dumping of hundreds of tonnes of gold, loaning of gold for the sole purpose that this indicator of gold does not discredit the paper money and I think there is a definite concerted effort to do that.

My questions are two-fold relating to gold. One, I have been trying to desperately to find out the total amount of gold either dumped or sold on to the markets by all the central banks of the world or loaned by the central banks of the world. And this is in hundreds of hundreds of tons. But those figures are not available to me. Maybe you can help me find this. I think it would be important to know, since all central banks still deal with and hold gold whether they are dumping, or loaning, or buying, for that matter.

But along this line, I have a bill that would say that our government, our Treasury could not deal in gold and could not be involved in the gold market unless the Congress knows about it. Now that to me seems like such a reasonable approach and reasonable request. But they say they don't use it (gold) so they don't need the bill. But if they are not trading in gold, what would be the harm in the Congress knowing about handling and dealing about this asset, gold?

GREENSPAN: Well, first of all, neither we nor the Treasury trade gold. And my impression is that were we to do so, we would announce it. It is certain the case that others do. There are data published monthly or quarterly which shows the reported gold holdings of central banks throughout the world, so you do know who holds what. The actual trading data I don't think is available, though the London gold exchange does show what its volume numbers are. And periodically, individual central banks do indicate when they are planning to sell gold. But they all report what they own. So it may well be the case that you can't find specific transactions. I think what you can find is the net result of those transactions and they are published. But so far as the United States is concerned, we don't do it.

GREENSPAN'S DECEPTIVE RESPONSE
By Jay Taylor

Before Mr. Greenspan could answer the second of Representative Paul's questions, the one having to do with his proposed legislation forcing accountability on the U.S. Treasury, the committee chairman cut off the exchange by saying, "The gentlemen's time has expired."

But Greenspan was wrong even in the one question he did answer. It is not true that you can tell how much gold has been sold by the balance sheets of central banks.

For starters, the central banks lie about their assets. They report gold that is lent out as if it was still on their balance sheets. So there is no way of knowing how much gold has hit the market. And so there is no way of knowing how much gold must ultimately purchased off the market by borrowers like Goldman Sachs, J.P. Morgan Chase, et al., so that it can be returned to the central bank balance sheets, where the central banks say it still exists.

The whole Federal Reserve and accounting schemes of most central banks are fraudulent and misleading. So while the politicians are so concerned about accounting at Enron and WorldCom, they seem not to notice how misleading their own accounting policies are.

This kind of Enron-like behavior from our ruling elite is exactly what I meant in my June issue when I said, "The fish rots from the head down."

Also, we think Mr. Greenspan was parsing out words in a most Clintonesque fashion when he talked about the Fed or the Treasury not trading in gold. It was exactly the Exchange Stabilization Fund that is in question in Representative Paul's bill.

So technically, Greenspan may have been correct in saying the Fed and the Treasury don't sell or trade in gold. But what about the Exchange Stabilization Fund?

Yes, it is true that the fish rots from the head down, and the most visible view of the head we have is Alan Greenspan.

But I guess it all depends on what the meaning of the word "is" is. There are no absolute truths. Truth is what ver you wish it to be. Or at least that's what Wall Street wants us to think. And then we wonder why there is a loss of confidence on Wall Street.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.