Inside Greenspan’s Fed: The Yesterday Today Came From


greenspanBob Woodward’s Maestro, a history of Alan Greenspan’s regime at the Fed through the turbulent 90’s, was written 10 full years ago, yet reading it today, it is startlingly familiar territory. All the issues, arguments, and solutions which we think are new to the financial market since the collapse were actually rehearsed – over and over again – during various Financial crises while Greenspan was the Fed’s Chair. It’s all there – bailouts, “too big to fail”, threats to the vulnerable global economy, taxpayer rescues – everything except any mention of derivatives.

From the morning in August 1987 when Greenspan chaired his first FOMC meeting (the Fed board’s actual name is, significantly, the Federal Open Market Committee) he seemed to be dealing with one crisis after another. When he took over the economy was in the dumper brought about by the first Bush; when he was finally replaced by Ben Bernanke 3 years ago, he left having watched over the second Bush while he flushed the vibrant Clinton economy down the toilet, an economy that Greenspan – according to himself as reported by Woodward, at least – did a great deal to help create. And in each of those instances – from the savings & loan crisis to the currency crises of Mexico, Asia, and Russia to the LTCM crisis – there was a single cause: exceedingly dangerous financial speculation, not by fly-by-night hucksters and shady traders but by the biggest financial instutions in the world.

In 1987, the economy was already off the rails, and it’s no surprise why. Though Woodward clearly doesn’t mean to (in fact he tries hard to do the opposite) a picture of these men emerges that is less than flattering. Not that they are stupid or incompetent, far from it. But they are men who know about nothing except profits. Money. Rounded individuals they are not. Connected to the real world outside the money markets they are not.

To show you what I mean, in 1993 Daniel Patrick Moynihan, the complicated, iconoclastic NY Senator and a trained economist, wrote an article for the Washington Post explaining – and praising – “Baumol’s disease”, a radical economic theory. Greenspan loved the piece, calling it the most interesting he’d read on economics since he’d been made Fed Chair.

This is “Bumol’s disease”:

Jobs in which productivity does not increase substantially over time tend to wind up as part of government.

Moynihan used police, firemen, the postal service, sanitation workers and the performing arts as examples. His interpretation of Baumol was somewhat different, too:

As socially useful enterprises cease to become more productive and lose out in the marketplace, the government takes them on in order to keep them going, thus increasing its obligations.

The communal aspects of the decisions that govt should run “socially useful enterprises” that benefit all of us, despite the historic fact that those aspects were central to those decisions in many countries at many times, including the US, was not unknown to the two, but they weren’t interested. “Useful social functions” that are no longer profitable due to stagnant productivity are mere drains on the body economic. Fuck em.

greenspan1Again and again and again, you run up against a jaw-dropping tunnel vision, the vision of men who literally cannot (and do not want to) see beyond their bank accounts. Woodward makes Greenspan a hero for noticing in the mid 90’s that profits were high and unemployment low and yet inflation didn’t seem to be developing when standard economic models said it should. What was wrong? Greenspan went looking to the numbers and discovered that businesses were investing in a great deal of technological improvements. Computers & shit, to you. He leaped to the imaginative conclusion that the only solution must be that productivity was rising.

But he still wasn’t happy. Even if productivity was rising, there was low unemployment. The classic model said that when employment was high workers would start demanding more money and inflation would raise its ugly head. Yet it wasn’t because wages were flat and had been for almost 15 years. Inflation was running at an unbelievable 3%. Any lower and it would be dangerously close to sliding into deflation – just as bad. In a near-full-employment environment, why weren’t workers agitating for higher wages?

I don’t have to explain this to anyone who lived through them and so I am, I think, going to startle you now. Woodward takes us through the steps Greenspan takes to pin down the productivity question. At NO point in the proceedings are the words “immigration”, “globalization”, “outsourcing”, or “off-shoring” mentioned, even though the early to mid 90’s was a time when most of us talked of nothing else. There is no mention of Jack “The Axe” Welch and his scheme to “raise productivity” by firing a lot of people and making the ones who were left work 3 jobs instead of one while cutting their pay.

And I know I don’t have to tell you that the heavy levels of intimidation of unions and workers by management, the threats to move their jobs to Sri Lanka, the brutal steps taken to keep wages down, the co-ordination between the Labor Dept and corporations to keep unions out of as many comopanbies as possible, etc etc, not only aren’t mentioned, they aren’t even shadows on the wall. In Greenspan’s closeted universe, they don’t exist. They don’t happen. They aren’t a “factor” and he’s stumped.

We could have told him – and did; he wouldn’t listen – that a vicious class war was being waged by the rich and powerful aginst the poor and weak, against workers, even against the middle class in order to keep wages stuck so profits could increase. The “full employment” numbers Greenspan (and everybody else, including Clinton) wanted so badly to believe were real were actually largely bogus, statistical tricks. We were more employed than we had been under Bush but we were underpaid and in many cases working more than one job. If we worked part-time, we were off the unemployment’s charts. Many of us had had our pensions stolen, our benefits cut or eliminated altogether. We were holding onto our low-paying jobs if we got health insurance through them. And we couldn’t threaten to leave because there was nowhere to go. Jobs were being sent overseas by the million and if Greenspan didn’t, we knew they were never coming back.

When Alan Blinder, Clinton’s appointee as Vice Chair of the FOMC and a Democratic economist (a somewhat unusual animal), brought onto the Board his concerns that the Fed include unemployment in its calculations and bringing it down as part of the Fed’s mandate (which it is by law), most of the other members of the FMOC and the Board of Governors reacted as if a Catholic Bishop had turned up at a pro-choice rally. Didn’t Blinder understand that the only thing that mattered was stopping inflation?

The unity of Fed decision-making was rarely broken by dissent, not because Greenspan ran such a tight ship – he didn’t – but because with very very few exceptions the movers-and-shakers making them were all working from the same script: inflation Baaaad, high unemployment Goood. Wall Street was the constituency, not Main Street. Corporate stocks and bond market traders drove the agenda, not truck drivers or computer programmers. The fact that Greenspan was considered a giant in the financial community for figuring out in the mid-90’s that technology was changing the old rules, something a lot of us on the ground floor were painfully aware of at least 5 years earlier, is clear evidence of just how out of touch the bubble banking community is.

But it doesn’t just live in a protected bubble. It lives in that bubble with the same people who have always lived in it. Read the sections behind the Mexico bail-out and the LTCM (Long Term Capital management, one of the earliest of the Big Time hedge funds) debacle and the same names pop up again and again: Mullins, Merriwether, Goldman Sachs. Of the 16 international banks who damn near lost their shirts when LTCM threatened to go belly-up, 9 are on the current list of bailees.

Even though each of these crises could have presaged a global economic meltdown according to the participants, no one involved at any point suggested that maybe there should be consequences for the irresponsible speculation that had brought them to this point, or that maybe some regulations which had been loosened (allowing the S&L speculation to go ballistic, for instance) ought to be tightened.

No one.

As each of these speculation-driven crises arose, the Bubble Community saw them as “inevitable”. They were no one’s fault. The markets were supposed to behave and didn’t, that’s all. It was nothing they could have foreseen, nothing they could have prevented. Not once does Woodward write the obvious: If these banks hadn’t been playing high-risk games in the hope of raking off extreme wealth for themselves in the certainty that their asses would be saved by taxpayer money if their out-of-control gambling didn’t turn out to pay off, these crises would never have happened.

Neither does anyone else. Greenspan comes the closest when the S&L bail-out is proposed by being hesitant because he still has some vestiges of the old economic model left: Failure is one of the market forces. It’s bad to “save” a failing industry because then you send the signal that there are no consequences and everyone will feel freer to speculate because they expect to be bailed out. Having expressed that, however, he then arranged the bail-outs.

Of course that is exactly what happened over the life of Bush’s laissez-faire, get-it-while-you-can presidency, and we are paying the price today with an economy that is near implosion and a deficit made up of over $3TR (and counting), most of it given to “stabilize” the banking system after it had all but wiped itself out with – what? Right: risky, highly speculative financial maneuvering. Even Greenspan, by 2001 (a little late, I grant you), thought it had gone way too far. He joked that “someone ought to see if activity in the casinos has gone down because the players have moved to the stock market”.

The reasons were known, the warnings everywhere all during the 90’s. They were ignored by the biggest players, the most knowledgable minds in the financial world because $$$ waas being made by themselves and their friends. Who cares about tomorrow? Get what you can today.

Is this any way to run an economy, let alone a democratic government? Clearly not.

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One response to “Inside Greenspan’s Fed: The Yesterday Today Came From

  1. Good blog! I

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