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http://www.thenation.com/doc/20050919/greider
The One-Eyed King
by WILLIAM
GREIDER
[from the September 19, 2005 issue]
[ emphasis
and minor changes (only in indentation) by blogger ]
When
Alan Greenspan retires as Federal Reserve chairman early
next year, we can expect waves of adulation for his
extraordinary eighteen-year reign over the American
economy.
The
financial press is already offering nostalgic
retrospectives on the highlights: the crash of '87
and rapid rebound, the chairman's total victory over
price inflation, his swift interventions to avoid
financial panics and to reverse the stock market's
massive meltdown of 2000-01.
In
tempestuous times, this Fed chairman acquired a
godlike aura—the inscrutable wizard with a
nerdish charisma, his wisdom cloaked in financial
doubletalk.
How will the nation get along
without him?
A
different assessment was expressed last winter by the
Senate minority leader, Harry Reid. "I'm not a big
Greenspan fan," the Nevada Democrat allowed. "I
think he's one of the biggest political hacks we have in
Washington." His harsh comment was politely
overlooked in governing circles, like an off-color joke
told at a Washington dinner party.
When the adulation fades and people begin to understand
the full weight of Greenspan's legacy, however, they
should be able to see that Reid had it right. Indeed, the
Senator's critique did not go far enough. The central
banker is a hack, yes, but also a man of conviction.
Alan
Greenspan is the most ideological Fed chairman since
the 1930s. Without ever acknowledging his intentions,
he enlisted himself and the awesome governing powers
of the central bank in advancing the
"reform" agenda of the Republican right.
The
chairman thus became an important actor in achieving the
profound transformations that occurred during the last
generation:
- the retreat of
government,
- the rise of market
ideology and
- the financialization
of American economic life.
The
"money guys" gained hegemony over the
"real economy" of production and
work—the people and businesses who make things.
The consequences imposed on
society are often described as "the tyranny
of the bottom line."
In
numerous ways, the Greenspan Fed helped make it
happen. However, the chairman did not produce what
conservative doctrine promises— stable
and secure prosperity.
Greenspan
crossed a line previous Fed chairmen had always gingerly
honored: the appearance of political neutrality. That's
what angered Reid—this chairman made himself a
player on highly partisan matters, using his status as
the influential arbiter of "sound economics" to
prod Congress and the public to accept the right's larger
goals.
After
years of hectoring Democrats to cut spending and
eliminate federal budget deficits, the chairman turned
around and endorsed George W. Bush's massive, regressive
tax cuts. Democrats fumed, since they had been snookered
by Bill Clinton and his Treasury Secretary Robert Rubin
into accepting the Fed's agenda, with never a complaining
word.
But
Wall Street loved the wizard, who had gratuitously
embraced the GOP plan to deform Social
Security by turning over its trillions to the
private investment houses.
Trespassing in party politics is not a trivial offense.
The so-called "independent" Federal Reserve,
from its origins in 1913, has in theory been a
cloistered, technocratic institution that has stayed
above the fray, making "scientific" decisions
on money and credit, acting like a "governor"
that regulates the engine of economic growth for
long-term stability. The notion of a depoliticized
central bank is illusory, of course, since banking
interests have always hovered intimately around the Fed's
policy decisions.
But
the myth is useful cover and necessary to sustain the
Fed's privileged status as a government agency
exempted from normal scrutiny and criticism,
deliberately shielded from accountability to the
voters--that is, shielded from
democracy.
But if
the Fed chairman is acting as an errand boy for special
interests—in this case for concentrated financial
power and wealth—why should the central bank
continue to be granted its protected status? Why not
bring the institution out into full sunlight, scrub away
the pseudo-scientific mystique, make it accountable to
elected officials and let Americans learn how to engage
with the political-economic issues that govern their
lives?
Like other good questions prompted by Greenspan's
distinctive performance, this debate is
unlikely to be heard, not yet anyway. The bipartisan deference
to the central bank remains too strong. Reform-minded
politicians have dwindled to a handful. Someday, however,
the partisan question might come back to haunt the
Federal Reserve and the right-wing Republicans, too.
From
Active Government to Laissez-Faire
The ideological shift executed by the Greenspan Fed is
more extreme than generally recognized. There has been
nothing like it since the New Deal years, when Marriner
Eccles was Fed chairman and collaborated closely with FDR
to reform the central bank and convert it to the economic
understandings grounded in Keynesian liberalism. Eccles and Greenspan are
like historic bookends on the long, gradual
transition in economic thinking from left to right, from
active government intervention to the current faith in
laissez-faire markets.
Eccles was a Republican Mormon banker from Utah who
became a leading architect of New Deal reforms (including
issues beyond monetary policy). In the crisis of the
Great Depression such odd political convergences
occurred. The self-taught Eccles (he never went to
college) personally intuited what John Maynard Keynes
developed as a formal theory: The national government,
including the Fed, must become the intervening
balance
wheel in a modern industrial economy—the stabilizing
force that, when necessary, stimulates the economy to
encourage faster growth and full employment, while at
other times it puts the brakes on economic activity to
avoid inflation.
Eccles
essentially invented the modern Federal Reserve,
liberating the central bank from the 1920s
hard-money orthodoxy of banking and finance, an
inflexible doctrine that gravely worsened the
Depression.
Greenspan, one might say,
devoted his tenure to eliminating vestiges of Eccles and
FDR. He
resurrected the financier's lost religion, now dignified
by conservative economists as the new theory of
"efficient markets."
Keynesian demand-side
stimulus, they contended, produces no lasting effects
for the economy, so nothing will be gained by
worrying about wage incomes and the consuming power
of workers. Wages should be determined by the
marketplace and are none of the government's
business, except when it wants to squelch price
inflation.
The
best government can do for the economy, conservatives
argued, is to boost the "supply side"—that
is, favor wealth holders so they will have more capital
to invest in new factories and production. This logic led
to huge tax cuts for high-end citizens and for business.
It meant liberating and protecting financial markets to
do their thing:
distributing
capital for productive uses in the most efficient
(and often ruthless) manner. It convinced Greenspan's
Federal Reserve, though a principal
regulator of banking and finance, to
no longer believe in regulation.
In
that sense, Greenspan was the perfect chairman for this
era. His monetary policy directly supported all of the
various doctrinal strands of the right's ascendant
ideology. He deliberately restrained economic growth for
many years, effectively suppressing
employment and wages.
The
economy, he argued, cannot grow faster than 2-2.5
percent without igniting price inflation, so the Fed
was duty bound to prevent it. (That's not exactly
laissez-faire policy, but never mind the
contradictions.) Capital gained in value as a result.
Labor took it in the
neck.
Economic ideologies are
often elaborate rationales to justify taking care of
some folks and neglecting others.
Meanwhile,
protecting the supply side of the economy, the chairman
came to the rescue of the financial system and financial
firms again and again, whenever they encountered serious
peril or the stock market seriously wilted. The 1998
collapse of Long Term Capital Management was interpreted
as threatening the safety of the financial system so the
Fed stepped in (what happened to the therapeutic effects
of market discipline?).
Likewise,
the Fed reacted aggressively to the Russian debt crisis
that year and the jitters over the "Y2K crisis"
of 2000, and Greenspan provided quick liquidity or
interest-rate cuts to calm other financial-market upsets.
Greenspan
did not formally try to deregulate the banking system,
but simply declined to use the Fed's regulatory powers to
enforce regular order or discipline fraudulent behavior.
In the name of greater efficiency he engineered legal
approval for new megabanks like Citigroup even before
Congress changed the law. These "too big to
fail" financial conglomerates promptly rewarded the
chairman's faith by engineering their own massive
scandals—the Enron-style corporate frauds and
dishonest balance-sheet maneuvers that bilked investors.
Bubbles
and Meltdowns
Greenspan's
finance-friendly passivity was demonstrated most
fatefully when the stock market developed its infamous
"price bubble." The chairman refused to take
preventive action. Some $6 trillion was lost by investors
in the meltdown, but Greenspan treated it like an
unfortunate act of nature. Government does not
know enough, he insisted, to intervene in such
situations. All it can do is clean up the mess afterward.
Greenspan was frequently compelled to do so.
The governing culture at the Fed was also changed
dramatically under Greenspan's tutelage. Libertarian
clones were appointed to various top
positions—officials who take principled pride in
their refusal to act as vigilant regulators. The
president of the Richmond Federal Reserve Bank warns of
the danger of policing the banking industry's
"predatory lending" practices too stringently.
The Chicago Fed president attacks public schools as a
government monopoly. A Federal Reserve governor (and
former bank lobbyist) testifies on the need for the Fed
to provide larger subsidies for the major banks.
The contrast with Greenspan's predecessor, Paul Volcker,
is instructive. Volcker was a savvy and imperious career
regulator, adept at befogging politicians and willing to
impose harsh discipline on the economy (his long, brutal
recession in 1980-82 launched the process
of disinflation that Greenspan completed).
But
Volcker also distrusted the lemming-like behavior of
bankers and the faddish enthusiasms of financial markets.
He managed his monetary policy close to the vest, hoping
to keep the "money guys" off balance and a
little intimidated by the Fed's power. Greenspan wanted
markets to trust him, even like him. If he provided ample
"information" and sprung no surprises, he
thought financial-market participants would behave in
reasoned, responsible ways. Never happened. But they did
like him. They knew he was on their side.
While
many contradictions accumulate around Greenspan's
governance, none are more obvious than this:
The
chairman ruled like a one-eyed king, who chose to see
only half of the reality before him. He applied
rigorous discipline to the real economy, always ready
to slow things down to block any price inflation in
goods and services, especially in
wages. Often he erred deliberately on
the side of pre-emptive toughness—tamping
down economic growth even when there was no price
inflation at all.
Yet
the king simultaneously ignored the truly ferocious price
inflation under way in financial markets during his long
tenure. If working-class wages rose smartly, that was a
sign of inflation threatening prosperity. If stock prices
rose explosively, that was evidence of good times ahead.
For true believers in the conservative orthodoxy, there
was no contradiction—capital was growing, unions
were being decimated.
If you
embraced "efficient markets" theory, you would
naturally be reluctant to go against the stock market's
soaring valuations. If you thought markets were
self-regulating, you could count on them to correct
themselves. In a way, they did—eventually and
violently—by succumbing to a massive
"correction"—much to the sorrow of
millions of hapless investors, pension funds and others
who had gotten no timely warnings from their government
about what was ahead.
Greenspan
could not claim ignorance. In private meetings with
Federal Reserve Board colleagues as far back as 1996, he
was repeatedly warned of the dangers posed by the growing
stock-price bubble. He declined to take any action or
even warn the public. Yale economist Robert Shiller,
whose book Irrational Exuberance impressively predicted
the coming bloodbath, was a rare critic. A public
official who fails to alert investors to such risks
"is no better than a doctor who, having diagnosed
high blood pressure in a patient, says nothing because he
thinks the patient might be lucky and show no ill
effects," Shiller wrote.
The
Price of 'Sound Money'
The lopsided focus of Greenspan's Fed—exalting
financial markets over the real economy—is perhaps his
greatest ideology-driven error, and it caused the deepest
damage to society.
Congress
by law instructs the Federal Reserve to pursue twin
goals— stable money and full
employment—and there is always a
natural tension between those two objectives.
Maintaining
low price inflation gets much more difficult when the
economy expands more vigorously, so the central bank
traditionally tried to sustain a rough balance. Greenspan
resolved the tension easily (as most conservatives
probably would) by tipping the scales in favor of sound
money.
The strategy produced very low price inflation, as close
to zero as possible, which boosted prices for financial
assets, stocks and bonds but also pumped up the financial
bubble even further. Soaring stocks encouraged "New
Economy" fantasies that the good times would last
forever. His fans call Greenspan's era "the great
moderation" because there were fewer and shorter
recessions, but that leaves out the deeper-running
consequences of his reign.
In
reality the Fed was acting as a principal
source of the growing inequalities in American society.
Greenspan's ultimate dilemma—his essential governing
failure—was that he didn't know how to handle
"success." He had pushed too far in one
direction, hardening money's value year after year, but
he couldn't push price levels any lower without igniting
a destructive deflationary spiral.
How
to turn around? Conservative orthodoxy provided no
good answers to this dilemma, since it claims that
zero inflation is a state of perfection. In fact, it
is the most dangerous terrain in capitalism.
Preventing deflationary
calamities was one of the main reasons the Federal
Reserve was created.
After
years of doing the opposite, the chairman belatedly took
his foot off the brake pedal and decided to let the
economy grow faster. His shift generated full employment
and rising wages—the chairman was celebrated as an
economic genius—but booming relief for the real
economy came too late to last, given the other imbalances
Greenspan had fostered.
Faster
growth perversely expanded the stock market's
delusions, and the price mania spiraled to new
heights. Remember the predictions of Dow 35,000?
Instead
of confronting the real problem, the financial
excesses, Greenspan once again turned on the real
economy and hammered it with increased interest
rates, deceitfully claiming he was attacking
wage-price inflation. He lost his gamble on both
fronts. The financial bubble did not moderate; it
collapsed. And so did the short-lived boom. The
national economy was deeply wounded by these events
and it is still struggling to recover.
Beware
of economic policy-makers who go
to extremes in defense of ideological convictions.
Essentially,
that is the nature of Greenspan's grave failure. The real
world did not cooperate with his right-wing beliefs, but
he persisted anyway. In the hydraulics of monetary
policy, his posture set in motion deep waves of economic
extremes:
- fabulous
personal wealth alongside
- a deeply
indebted populace;
- extraordinary
corporate profits alongside
- stagnant wages
and surplus labor;
- too much
capital and
- not enough
consumer demand.
These
exaggerated waves, and some others, are still
sloshing back and forth in the US economy. They will
for years ahead, with more crises to come. Greenspan
collected much praise for his swift and daring rescue
missions—the nimble fireman rushing from blaze to
blaze, putting out fires before they destroyed the
economy.
What
many people did not understand is that it was
Greenspan who lit the match.
The great irony of the Greenspan era is that conservative
ideology turned out to be not conservative at all. It was
instead recklessly experimental, testing out its new
theories in the human laboratory and ignoring any
negative results.
- Who can still
believe in "efficient markets"? Not the
folks who lost $6 trillion in the stock market.
- Who can
seriously argue that capital investors need still
more "supply side" favors from
government, when even Bush's economic adviser
complains of a "global savings glut"?
- Who still
wants to liberate the fraud-happy bankers and
financiers from the dead hand of government
regulation?
My
point is, the market ideology is in deep
trouble—intellectually, if not politically. If
you go behind the mystique and examine Greenspan's
performance, there is abundant evidence that
demonstrates in real terms the right's economic
fallacies, never mind its moral failings.
It
is premature to talk of an ideological
crackup—the right still holds power—but it
is not too soon to develop the case for counter-
reformation.
Most academic
economists wouldn't touch it, but maybe some
young grad students will decide their right-wing
professors are full of crap and undertake the
search for alternative thinking.
That is how reigning
economic ideologies often crumble—when the
next generation sees that the old orthodoxy can
no longer cope with the facts.
The prospects for political reform are gloomier.
Democrats tossed away their populist credentials years ago, and
with few exceptions are utterly subservient to the Fed
mystique.
But
there's strong, critical material for the reform-minded
citizens and public officials who are not intimidated.
What might they say?
- That the
Federal Reserve has violated its basic
obligations to democracy and it's time to revise
its peculiar charter.
- It is wrong
for a government institution to sit by silently
and watch a slow-motion disaster unfold for
citizens, as Greenspan did.
- It is also
wrong—both politically and
economically—to ignore the legal mandate and
simply serve one realm of the economy over
everyone and everything else.
- In a
democracy, government at least owes citizens fair
notice—a timely warning of what it's doing
to them.
The
Fed never, never honors this obligation, for obvious
reasons; but then neither do many politicians. That's
the basic reason democratic discourse and
accountability are so necessary—the hope that
somebody somewhere in the government will have the
decency to tell the people.
What He Leaves Behind
Which brings us to current circumstances. The Greenspan
era, unfortunately, will not end when he departs. The
instabilities and ruptures he sowed will still be with
us, and he would be wise to get out of town before people
recognize the full depth of his destructive legacy.
The US
economy is not strong and self-confident or even
especially efficient. It is stumbling along under
subnormal conditions, losing ground and taking on
enormous debt from abroad. Nor is the United States free
of the follies and risks generated during Greenspan's
reign, including financial delusions and the threat of
deflation. His successor will presumably be a
right-winger too, but one hopes for a more supple,
flexible intellect.
The weak-willed economy is an apt illustration of where
Greenspan's lopsided policies have led. Four years after
the 2001 recession ended, the economy is still struggling
to overcome its "jobless" recovery (or
"job-loss" recovery, as manufacturing unions
call it).
Corporate
profits have rebounded to extraordinary levels, but
companies are reluctant to invest the capital. Wages,
meanwhile, remain flat or falling, especially for
working- class occupations. Forty-six months into this
expansion cycle, the total hours worked in nonsupervisory
jobs have risen only 2 percent since the recession
ended—compared with rebounds of 9-16 percent after
the four previous recessions.
Manufacturing, once the
vital core of US prosperity, is still losing jobs
every month. Its total working hours are down 9
percent since 2001.
This
is the most sluggish recovery on record, which seems to
puzzle the Fed chairman. But it reflects the Greenspan
style of running things; he presided over a similarly
tepid recovery in the early 1990s. Tom Schlesinger,
director of the Financial Markets Center, a
monetary-policy watchdog, thinks the lopsided economy is
the most disturbing hallmark of Greenspan's governance.
"The Fed has said almost nothing about this, except
[vice chairman] Roger Ferguson says there's nothing the
Fed can do particularly," Schlesinger complains.
"The
jobless recovery appears to be a new feature of the
US business cycle. Yet the principal agent of
economic management says nothing."
In
fact, Americans seem to be confronted with the very
conditions Keynes warned against: an
economy performing, more or less permanently, far
below its potential.
That
situation proves satisfactory for the affluent and for
business enterprise, since wage pressures are muted, but
it makes life insecure or miserable for most everyone
else.
The
logical response is a fundamental policy shift in
favor of work and wages—boosting incomes and
demand—but that approach would require taboo
measures from the Keynesian past that even
most Democrats don't understand or support.
[Your blogger loved all that was
written above—but takes ecception
to everything below, (see my introductory words).]
Meanwhile,
the financial froth of speculative bubbles—and their
dangers—are another enduring legacy of the Greenspan
era. "Irrational exuberance really is still with
us," Robert Shiller wrote in the new, revised
edition of his book. Notwithstanding the earlier
meltdown, the stock market remains dangerously overvalued
by historical measures, Shiller warns, and is now
accompanied by dramatic price inflation in real estate.
These two bubbles are false valuations by markets and
will burst sooner or later. Shiller urges investors to
recognize the "risk that in 2010 or even 2015, the
stock market will be lower still in real,
inflation-corrected terms, than it was in 2005."
Why do these financial delusions keep arising among
investors? Shiller describes many causes, and they
include Alan Greenspan's Fed. The chairman's earnest
solicitude for financial markets, Shiller explains,
contributed to the "gold rush" psychology,
convincing financial players that the central bank would
always come to their rescue and never turn against them.
Their sloppy exuberance is the opposite of the manly
competitive ethos and market discipline preached by
Greenspan and the right. Worse, it is bound to injure
innocent people. "Things happen during a speculative
bubble that can ruin people's lives," Shiller noted.
"Little will be done to stop these things if public
figures consider themselves beholden to some overarching
efficient markets principle and do not even recognize
over-speculation as a real phenomenon."
The specter of deflation is, meanwhile, still hanging
over the United States. Greenspan initially took dramatic
action to avoid the same fate Japan suffered after its
financial bubble collapsed in 1990—a low-grade
depression and a decade of sputtering stagnation. Cutting
interest rates to near zero, the Fed succeeded, at least
for the short run. But unless the economy gains more
normal balance and energies in the next year or so, the
United States may yet be facing the same ditch. The
problem, explains William Gross, managing director of
PIMCO, a major bond investment house, is that long-term
rates have already fallen about as far as they can in
real terms. "The Fed may soon be running out of
fuel," Gross warns. "If the asset pumps run dry
and the kerosene cans empty, the inevitable path of the
US economy will reflect slow growth at best and recession
as a realistic alternative."
Greenspan, meanwhile, is once again targeting the real
economy, raising interest rates to gain some leverage but
also flirting with a recession of his own making. He
appears to be slyly hoping that higher rates will
moderate the speculative bubbles without crashing the
economy. Let's hope he wins the gamble this time.
The one-eyed king is in a corner and running out of
moves, yet sticking with his failed convictions. Like it
or not, we are still living in the lopsided world he
made. And this half-blind king is still scary.
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