The Greenspan Legacy

2/15/06


"Although I doubt that the U.S. dollar will lose its status as the world's reserve currency any time soon, there are in my judgment lessons to be learned from the experience of (Britain's currency) as it faded as the world's dominant currency.” Alan Greenspan January 14, 2006


As the end of his reign approached, Alan Greenspan made a few remarks attempting to hedge the historical record. Lecturing Americans they'd have a few lessons to learn from the experiences of post-war Britain wasn't exactly one of his more optimistic pronouncements, especially coming after two decades of Captain Greenspan at the monetary helm. Try and run for president telling Americans their economic future looks like 1950's Britain and see how far that gets you!

So, what is the Greenspan legacy? One thing for sure, in the era of ultra-celebrity Mr. Greenspan was certainly famous. Certainly more famous than any previous Fed Chairman, though not as infamous as his predecessor Paul Volker, but hey, hike the the prime rate to 19% and everyone will know who you are. But as we've learned in the era of ultra-celebrity, fame has little correlation with value, and no doubt more than a few economic models would show they are inversely proportional. Alan Greenspan might very well prove the rule.

Outside of his fame, Mr. Greenspan's greatest talent was his effective though not necessarily healthy political skills, which is a peculiar talent for a self-described Ayn Rand disciple. Greenspan talked a lot about the power of unfettered markets and getting rid of government, but using the power of the Fed, Mr. Greenspan continually played the role of the very visible hand. While espousing market wisdom, Mr. Greenspan relied more on his own perceived sagacity. Speaking very doctrinaire, Mr. Greenspan's actions belied orthodoxy.

Greenspan was appointed Fed Chair at the end of the Reagan presidency.
Shortly afterwords, the stock market went on one of the biggest dives in its history. Alan responded by the monetarist book, well actually he did exactly what the Fed was formed to do, and pumped up liquidity. The economy barely hiccuped. Mr. Greenspan laid the cause of the collapse on an unsustainable accounts deficit in trade and the federal budget. The Chairman told the American people these deficits had precipitated the crash and desperately needed to be fixed. So, it is with the greatest of ironies that Mr. Greenspan leaves his two decades tenure with the accounts deficits four and five times as large as when he arrived, but the stock market seemingly healthy.

The lesson Mr. Greenspan learned from the '87 crash he would use again and again, and it is for this “innovation”, Mr. Greenspan's term may be of the greatest historical interest. Mr. Greenspan has left economists a question. Can you simply hyper-inflate any given financial, equity, or take your pick of markets, create a bubble, and when it comes crashing to the ground, simply move the bubble into another area, like squeezing a long balloon in various places? Can this process be kept up indefinitely from East Asian stocks, to the NASDAQ, and now housing, without some greater structural damage? Well one thing economists and all of us now know for sure, it could be kept up long enough for the Chairman to get out of office.

Besides the Fed, Mr. Greenspan could conceive of no role for the government in the economy. He helped begin the great experiment in modern laissez-faire, lobbying for the deregulation of the Savings and Loan industry, which eventually cost taxpayers hundreds of billions of dollars in bailouts. Did the Savings and Loans disaster temper Mr. Greenspan's fundamentalism? Hardly, Mr. Greenspan would continue to be a fierce political advocate against any financial regulation. Under Mr. Greenspan's politics, financial markets have become more opaque, less accountable, and most importantly increasingly felonious.

Chairman Greenspan's was a bare knuckles political player. While advocating market fundamentalism, in practice he centralized economic power in mega-corporations. In most ways, Mr. Greenspan represented a Fed traditionalist. From it's inception(see William Greider's magnificent “Secrets of the Temple” for the best Fed history), the Fed has been one of the least democratic institutions of the republic's history. It was formed not for the whole economy, but to help private centralized economic power. Throughout his chairmanship, Mr. Greenspan led the band for the corporate globalization effort, insuring us all in his papal-like pronouncements that a pot of gold lay at the end of all our rainbows, as long as we allowed unfettered corporate control. Mr. Greenspan's unqualified support for corporate globalization may historically be his greatest legacy. The dismantling of the American industrial infrastructure and its whole scale transfer to cheaper labor markets gave Mr. Greenspan much of the monetary freedom he enjoyed, but the sustainability of America as giant consumer to the rest of the world's producer is extremely doubtful.

Mr. Greenspan's tenure very much feels like the end of an era, but one much older than Mr. Greenspan's chairmanship. The Greenspan ideology, actions, and institutions seem older and more tired than even his person. We seem to be beginning a new era, one that has more in common with the end of the 19th century. As Lawrence Goodwyn recorded in his sublimely important work, “The Populist Moment”, our fundamental understandings and agreements about money were forged at the end of the 19th century. It was at the end of this era that the Fed was birthed. The questions we now face run much deeper than those concerning Mr Greenspan's relatively short chairmanship, as Mr. Goodwyn concluded in 1978, "It remained clear, however, that unresolved questions about the inherited financial system might well make a sudden and unexpected reappearance if, at any time in the second half of the twentieth century, shifts in world trade and the cost of imported materials place severe forms of competitive pressure on the American economy and on the international monetary system. At such a moment the cultural consolidation fashioned in the Gilded Age would undergo its first sustained re-evaluation, as the "financial question" once again intruded into the nation's politics and issues of Populism again penetrated the American consciousness." As Mr. Greenspan's exits, the “financial question” is once again inching front and center.

The Populists have long been considered history's losers. They are little known and unjustly written-off as simple Luddites. The Populists Movement was a widespread bottom-up political force comprised mostly of small farm America attempting to influence the forces of industrialization. Far from being Luddites, the Populists were some of the first practitioners of the politics of technology. They well understood many of the forces, such as the growing power of the industrial corporation, that were changing their lives and over which they had no control. In order to gain control of the present, they looked to the past and the republic's founding principles of self-government, and then demanded a say in helping create the future.

While in the short term, the Populists won little, they did sprout some of the ideas that evolved into Progressive era politics. However, most interesting about the Populists is that the foundation of the movement was based on the incredibly metaphysical question of what is money. The Populists correctly thought the gold standard ridiculous. They argued money and finance could be much more democratically based. It would be another four decades before Lord Keynes would agree with the populists about the value of gold and almost a century later that Richard Nixon himself would announce the political death of gold. Just as important to the question of what medium money would take, was how it was to be controlled. The Populists lost completely on that. Instead of a more democratic infrastructure, the Populists lost to the centralized power of the burgeoning industrial corporation and Wall Street finance, the power of both were to become politically institutionalized with the creation of the Federal Reserve in 1913.

Much of the world created at the end of the 19th century, which the Populists sought a voice in shaping, became the world of the 20th century we know. It was industrial, unduly influenced by mega-corporations, and money was undemocratically controlled. Despite all of his talk about free-markets, Mr. Greenspan was one of the last of the industrial corporatists. He did his earnest best to free them from the limited American government reforms of the early and mid-20th century. He helped enable the mega-corporations to straddle the globe as colossi, seeking cheap labor and natural resources on one continent and high product prices on another. The Fed's central control of money helped paved the way, creating some of the most powerful centralized economic institutions history has known.

Mr. Greenspan's tenure ended with not much fanfare, and with much uneasiness. The last Greenspan bubble, this one in housing, seems to be losing air, and the post-war social contract between mega-corporate America and the American people has been unilaterally shattered with the corporations refusing to pay taxes and continuing to relieve themselves of any responsibility for pensions and health care. From a classical economic viewpoint, the world's ledgers are completely awry and unsustainable, while the dream promoted by the corporate globalists, that 6.5 billion people can live like Americans hits into the reality of $60 a barrel oil and increasing commodity prices.

As Mr. Greenspan relinquishes the helm, our global economic ship is sailing off all known economic maps, blown by powerful forces into what was labeled by map makers of another era as “tierra inconginto”. Instead of recognizing the economy's new uncharted position, the industrial Left and Right feverishly search old unhelpful outdated charts for their positions. We know several things about these seas we sail or are adrift in: from a global environment perspective, our present economics are unsustainable; information is not properly valued; the economy is less democratic; and the centralization of wealth is as extraordinary as any previous period of civilization. We are at the end of industrial economics. Our challenge is to chart a new economic course that is global, environmentally sustainable, democratic, and just. It is extremely unlikely Chairman Greenspan's legacy will be a long or particularly wise one.