September 18, 2007

As the Bush administration comes corkscrewing back to earth, like one of the early V-2 test shots that nearly obliterated its own launch team, the trickle of self-justifying memoirs from the perpetrators is widening into a flood. For sheer three-hanky mawkishness, nothing will probably be able to match the forthcoming cri de coeur of that noble martyr, Colin Powell. And Douglas Feith’s impending auto-hagiography will doubtless win the championship for impudent effrontery. But until then, we can satisfy ourselves with Alan Greenspan’s The Age of Turbulence, now on sale at your local bookstore.


Spendthrifts and Hypocrites


The media takeaway from this stock “present at the creation” Washington saga is that Mr. Greenspan, the Chairman of the Federal Reserve Board between 1987 and 2006, is highly critical of President Bush, his former patron. “My biggest frustration remained the president’s unwillingness to wield his veto against out-of-control spending,” he writes. How flinty-eyed and prudent of him, just like a Buick-driving Midwestern small town banker of yore.


Yet the former Fed chairman conveniently forgets his own record of tacitly endorsing such spending. The largest single portion of the increase in Federal discretionary spending since 2001 came from the huge boost in Pentagon expenditures, both in its war supplementals and in the regular DOD budget. If there is an example of Mr. Greenspan’s denouncing these increases in any of his statements to the Congressional banking and budget committees over the last several years, we have yet to see it.


As befitted the former Chairman of the 1982 commission to reform Social Security, Mr. Greenspan constantly fretted in his testimony and speeches about the long-term costs of Federal entitlement programs, at least when he was addressing entitlements as an abstraction rather than as specific programs. We are aware of no such jeremiad from him against the enactment of Medicare Part D (the prescription drug benefit) in 2003. This new entitlement added $1 trillion to Federal spending over the succeeding 10 years, and is now a massive unfunded liability over the next 50 years.


Perhaps Mr. Greenspan’s defense against hypocrisy is the obvious fact that the president would never have vetoed Medicare Part D just as he would never have vetoed the increases in Pentagon spending, because neither originated with what Mr. Greenspan condemns as a profligate Congress. Both were actually hobbyhorses of the president he served as a de facto appointee.[1]


Mr. Greenspan shows somewhat less hypocrisy regarding his advocacy of income tax cuts, although here, too, there are inconsistencies. While he acknowledges he advocated the 2001 tax cut that contributed mightily to the $5-trillion swing from surplus to deficit in the 10-year budget outlook, his explanation as to why it was not an economic panacea is unsatisfactory. He observes that when the surpluses dried up a mere nine months after passage of the cuts, the spending policies of the administration “were no longer entirely appropriate.” Well, then, why did he not say so plainly at the time, particularly in reference to Medicare Part D and the Pentagon spending binge? If just a handful of members of Congress, seeking cover to vote against Part D, would have heard publicly from Alan Greenspan, the bill would have failed in the House. [2]


Everything Mr. Greenspan has written in public life suggests he thinks tax cuts at the top marginal rate are a sovereign remedy for all that ails the economy. Yet he goes out of his way to praise President Clinton’s 1993 deficit reduction measure as an act of political courage. This measure included an increase in the top marginal rate. One could say in Mr. Greenspan’s defense that this law took effect in a period of high deficits, whereas the 2001 rate cuts were enacted at a time of surplus. But he did not change his tune as the surpluses swung to deficit.


One can conclude that this seeming inconsistency was trumped by a higher consistency: the need to serve the administration of the day. President Clinton favored the tax increase, therefore the oracular Fed chairman would too. Thus the Bush tax cuts found similar favor.


Free Money, and Other Republican Fairy Tales


The chief indictment against Mr. Greenspan lies not in fiscal policy, where he had no statutory responsibility (even though he could influence presidents and congressmen if he chose). In his own legal bailiwick, the setting of interest rates, we see the former Fed chairman at his worst.


Let us stipulate that every tangible and intangible thing has its cost, particularly money. “Conservatism,” if it means anything at all, means prudence, caution, planning for the worst case, building a nest egg. Mr. Greenspan, the self-described “libertarian conservative,” presided over the greatest binge of money creation in American history through his setting of the artificially low interest rates he knew would politically protect his boss at 1600 Pennsylvania Avenue. Just as free bread would be an impossible economic model for a baker, so would free money prove to be for a central banker.


One of the emerging stealth policies of the Republican Party has been the substitution of free money for social welfare policies. The constituencies benefitting from the two policies may be somewhat different, but the political intention is, at bottom, the same. Moreover, the distortionary effect of free money (that is, artificially low interests rates) may be greater, since it ripples through the entire economy as it gives false valuations to entire classes of assets, whether or not individual units of these assets were even purchased with free money to begin with.


One can see the free money ideology in full bloom simply by listening to any of the orthodox Republican political and economic commentators. Even Mr. Greenspan’s pegging of interest rates at an artificially low rate was not enough for these people. Robert Novak, when he is not too busy leaking the names of covert CIA agents, frequently inveighs against the Fed’s interest rate policies on the grounds that they are too high. One hears the same sort of diatribe from Larry Kudlow on CNBC: apparently, if real interest rates are not zero, it will be an intolerable burden on millions of ordinary, hardworking middle-class Americans (a coded phrase meaning Mr. Kudlow’s millionaire CEO pals and hedge fund manager buddies). The fact that Japan had what were effectively negative real interest rates for long stretches of the 1990s did not alleviate Japan’s economic stagnation; low interest rates cannot “fix” the economy if other fundamentals are unfavorable. But this experience makes no impression on the free-money GOP.


There may be an impression that profligacy in monetary policy is a relatively recent development for the Republican Party, and that the old Republicans were sound-money advocates. But Murray Rothbard, a classic hard-money libertarian economist, argues in his History of Money and Banking in the United States that the GOP provided the fuel for previous economic crises through its fondness for free money policies.


According to Rothbard’s telling, during the 1920s, Benjamin Strong, Governor of the New York Federal Reserve Bank, and Treasury Secretary Andrew Mellon colluded to keep interest rates unrealistically low in order to keep the stock market rising and benefit Republican electoral prospects. The 20s market boom, like the tech boom and real estate boom more recently, was a bubble whose volatility was fed by a politically-driven low interest rate policy. [3]


The difficulty with the administration’s strategy of dismantling Social Security was that it was not particularly popular, even among Republican members of Congress. One possible palliative for the electorate was President Bush’s notion of the “ownership society:” that the public could gradually be weaned off (Democratic) social insurance programs through Republican programs that would make them think they “owned” assets.


Thus it is plausible that the subprime mortgage bubble, however it started, was nurtured and sustained by a Republican administration that wanted increasing numbers of the voting public to think they were land-owning gentry. Given the obsessive secrecy of the administration, we may never know what the precise deliberations were at the Treasury, the Federal Home Loan Bank Board, the Comptroller of the Currency, the West Wing of the White House, and the Federal Reserve itself. But these institutions had, at minimum, abandoned the notion of due diligence in overseeing housing finance.


Now, it is complete bosh to think a new homeowner ensnared in a “no doc” loan, or an interest-only loan, or a no down payment loan, has a stake in anything. But for creating the illusion of ownership (as well as the illusion of a booming economy as reflected by housing sales), the artifice would suffice. President Bush – or at least his economic Svengalis – were counting on the psychology of the Wealth Effect to push a large segment of the voting public into the conservative column. These voters would, as the old saying about land-owners goes, “have a stake in the country.”


Seventy years ago George Orwell noted the political implications of this meretricious Wealth Effect. In Coming Up For Air, the fictional protagonist, George Bowling, a technical member of the English middle class who thinks like the proletarian of his origins, muses about his suburban London housing development:


Merely because of the illusion that we own our houses and have what’s called “a stake in the country,” we poor saps in the Hesperides, and all such places, are turned into Crum’s [the developer and mortgage holder’s] devoted slaves for ever. We’re all respectable householders – that’s to say Tories, yes-men, and bumsuckers. Daren’t kill the goose that lays the gilded eggs! And the fact that actually we aren’t householders, that we’re all in the middle of paying for our houses and eaten up with the ghastly fear that something might happen before we’ve made the last payment, merely increases the effect. . . . every one of those poor suckers would die on the field of battle to save his country from Bolshevism.


Such, in the calculation of the Bush administration, would be the blessings of the expansion of home ownership. And Alan Greenspan would provide the priming for the pump. Not only did he keep interest rates lower than true market forces would have dictated, but he talked up the novel types of loans the mortgage industry was offering. According to Business Week in 2004:


No less an expert than Federal Reserve Chairman Alan Greenspan has sung the praises of ARMs. In February, he told credit union executives that such loans could have saved many homeowners tens of thousands of dollars over the past decade. He noted that ARMs are much more common in other countries, and he encouraged the mortgage industry to create more options. “The traditional fixed-rate mortgage may be an expensive method of financing a home,” Greenspan said.[4]


The writers at Business Week noted the risks inherent in adjustable rate mortgages and other exotic financing packages more than three years ago. But Mr. Greenspan admits now that he “really didn’t get it” about the danger to the mortgage market.[5]


Mr. Greenspan’s talent for missing trends in the real estate market is particularly mystifying given his experience with an earlier crisis: his first appointment as Fed chairman in 1987 was immediately followed by the largest percentage drop in the stock market since the crash of 1929. The October 1987 meltdown was caused in part by the successive collapses of savings and loan institutions which financed their own real estate bubble, mainly in commercial real estate in the Oil Patch.


He also apparently didn’t “get it” about the tech bubble in the late 1990s. Indeed, one heard frequent suggestions from the then-Fed chairman – suitably hedged, of course – that the “new economy” of the 1990s was so fundamentally different from what had gone before that the business cycle may have been banished and that an era of perpetual growth was at hand.


Oil on Troubled Persian Gulf Waters


One feature of Mr. Greenspan’s memoirs that has caused Beltway politicos to contract a case of the vapors is his statement that the invasion of Iraq was “largely about oil.” In only one day, he issued one of Washington’s usual non-denial denials that trips itself up in its own contradictions. Through Bob Woodward, the imperial capital’s amanuensis of record, he now says that oil “was not the administration’s motive.” [5] So which is it? – if no less a figure than the then-chairman of the Federal Reserve board believed securing Middle East oil supplies against Saddam Hussein’s potential depredations was a legitimate and defensible motive, why was he so quick to issue an anxious dementi saying it was the furthest thing from the administration’s mind? One expects that Mr. Greenspan, now a private citizen, received a testy phone call from either President Bush or Vice President Cheney. Note that he did not see the need to issue a denial of his statements about overspending; its alleged fiscal conservatism to the contrary notwithstanding, the administration is truly sensitive about only one issue: its false justifications for igniting a war.


Even Mr. Greenspan’s corrected version of the oil quote shows an almost laughable amount of geopolitical ignorance from this supposedly brilliant polymath. Greenspan says that it was his own prediction at the time in his capacity as Fed chairman, that Saddam remaining in power would somehow cause oil to increase to over $100 per barrel. On what evidentiary basis did he believe that? Did he think that Saddam, under crushing sanctions, with a dilapidated army, and with half his country a no fly zone, could successfully invade Kuwait or Saudi Arabia? That is sheer fantasy.


He gives the game away by stating “My view is that Saddam, looking over his 30-year history, very clearly was giving evidence of moving towards controlling the Straits of Hormuz, where there are 17, 18, 19 million barrels a day passing through.” But Iraq’s narrow outlet to the Gulf is nowhere near the straits. Second, Iraq had no navy or other long-range systems capable of closing and/or controlling the straits. Third, the Persian Gulf was and is essentially an American lake.


But let us assume instead that Saddam did nothing; why would that cause oil to quadruple in price from its 2002 level? That would be the first time in history that a condition of peace would spike oil more than a condition of war – in this case, a US invasion of Iraq. And it is ironic that most competent analysts now believe a U.S. war against Iran would cause an increase the price of oil similar in size to what Mr. Greenspan says would have happened if we had done nothing about Iraq. It is odd indeed that the U.S. government seems blithely willing to strike Iran now even if it causes an oil price spike, whereas the administration rationalized attacking Iraq in order to avert an oil price spike. This is plainly irrational, and shows what sort of delusional and dishonest people are running the government.


As it is, the invasion and occupation of oil has contributed to the more than doubling of the average price of crude oil since 2002. Certainly there are other factors involved, such as China’s industrialization, but it is undeniable that present-day Iraq has not reached the average daily flow of oil achieved even by Saddam’s rickety pre-war infrastructure. Add to that the “war risk premium” of there being a shooting war in the Middle East, and it is evident that the U.S. invasion of Iraq has partially achieved what Mr. Greenspan alleges the invasion was intended to avert. Finally, it is strange that a self-described libertarian economist believed that oil, uniquely among all items, would not respond to market forces, and must be secured at bayonet point. After all, Saddam could not drink the oil; he was desperate to sell it in order to get the revenue in order to keep his vast system of bribery and corruption intact.


Some antiwar writers have latched onto Mr. Greenspan’s statement about oil and said in effect, “aha! I knew it! It really was all about oil!” But this overstates the matter and in so doing, lets other factors off the hook. We have always been critical of exclusively monocausal explanations of huge historical events like the invasion and occupation of Iraq, and this explanation is no exception.


Of course, it was about oil. But it was equally about Israel and its disproportionate influence on U.S. Middle Eastern policy. At the same time, Karen Kwiatkowski (Col., USAF, Ret.) has eloquently written about DOD’s parochial desire to have permanent megabases in Mesopotamia from which it could militarily dominate the region as well as threaten Iran. This view also has merit. And what about the alleged Bush/Rovian desire to become a “war president” and intimidate the Democrats so effectively that it would be electorally beneficial to Republicans? We see no way to refute that. And finally, is there any truth in believing that the Vice President’s relentless desire to expand executive power and secrecy via the avenue of war may have played a role? To borrow a phrase from George Tenet, that thesis is a “slam dunk.” It appears that just as success has a hundred fathers, so does a fiasco.


Alan Shrugged


For all Mr. Greenspan’s supposed empirical expertise, he has shown a surprising inability to learn from experience. Perhaps the reason is that, far from being a seasoned Washington pragmatist, he is attracted to abstract ideological statements about libertarian conceptions of the so-called “free market,” and a mechanistic understanding of “how the world works.”


Libertarianism, properly understood, is less a mechanistic ideology than an elaboration of the phrase, “live and let live.” If you will, it is the Sermon on the Mount with the pious interpellations left out. But in the minds of dogmatic adherents, libertarian economics is a scientifically proven truth that they believe with the same certitude as the Marxist believes in the labor theory of value.


It is probably no accident that during his early years, Mr. Greenspan was an acolyte of Ayn Rand, one of the most dogmatic and personally unpleasant individuals ever to have infested the American political scene. She bequeathed libertarianism a legacy of sectarian schism and personality cults rivaling Trotskyism. It is highly indicative of the drift of these types of movements that Rand’s current official heirs have out-neoconned even the neocons in their love of military aggression.


To be fair to Mr. Greenspan, it is unlikely that he holds all or even most of the tenets of Randianism to this day. But a residue of that thinking is detectable in his preference for abstract theory over historical experience. Garn-St. Germain deregulated the savings and loan sector, requiring in only a few years the largest government bailout in history. The Securities Litigation Reform Act of 1996 reduced the duty of due diligence and honest disclosure by executives of public companies. It also, not coincidentally, greatly limited legal recourse by aggrieved shareholders. Overvaluation of stocks resulted, contributing at least in part to the bubble bursting in 2001, not to mention the outright fraud committed by Enron, Tyco, and MCI Worldcom.


It is possible to see the same problems in hedge funds, many of which through financial alchemy transform debt into asset. It is telling that Mr. Greenspan “didn’t get” the subprime mortgage risk; these subprime mortgages are invariably sold, ending up in many cases in the form of highly leveraged hedge funds. Yet he adamantly maintains to this day that hedge funds must not be regulated. The deregulations of the 1980s and 1990s should have taught us that government regulation is not merely some namby-pamby stuff about protecting ignoramuses from themselves that ends up making markets “inefficient” (a favorite pejorative of the Greenspan crowd). Sometimes, it is about protecting the economy itself. What is crucial is having elected and appointed officials with the sound judgment necessary to distinguish when regulation is prudent, and when it is overkill. The former Fed chairman was so enamored of theory that he often lacked that judgment.


The Age of Turbulence reminds one in some ways of those tedious memoirs by German generals after the Second World War. Our overall military theory was sound, they would imply, it’s just that the idiot at the top executed it so badly that the whole affair came a cropper. But we are unable to recount an instance when they had rejected a field marshal’s baton or refused an East Prussian estate when these trinkets were proffered by the very same idiot. In the same vein, President Bush has subtly become a retrospective alibi for an entire political class that had once served him so eagerly.


* Werther is a Northern Virginia-based defense analyst.


[1] We are well aware of the rhetorical flummery to the effect that the Federal Reserve Board is “independent.” But this is like saying that Congress is independent of lobbyists, simply because there happen to be ethics statutes in effect. In reality, Mr. Greenspan was the culmination of a long line of Fed chairmen who essentially served as executors of the monetary policies of the administration of the day. There is a tradition in Washington almost as hallowed as the springtime blossoming of cherry trees at the Tidal Basin, whereby interest rates begin to fall six months before a presidential election.


[2] One of the persistent falsehoods of Republican propaganda is the insistence that “9/11 caused the deficits,” thus placing the onus on Osama rather than Republicans’ own fiscal imbecility. In terms of the effect on the economy, 9/11 was minor and transitory: the stock market had already fallen further between January 2001 and September 11, 2001 than it would fall subsequently. As for the military spending spree after 9/11, the vast majority of the war spending was devoted to invading and occupying Iraq, a country that had nothing whatsoever to do with 9/11. The increases in the Pentagon’s regular budget were simply crass political opportunism occasioned by the war. The ballooning budgets bought things like Littoral Combat Ships, which have about as much utility in warfare against al Qaeda as Spanish galleons.


[3] Rothbard points out that this was not the only reason for the Strong’s and Mellon’s policy. Both men, being early-20th century American financiers in good standing, were Anglomaniacs dedicated to doing Perdifious Albion’s bidding in the manner established by J.P. Morgan. When the United Kingdom decided it would reestablish the pound on the gold standard at the old pre-World War I parity, Strong and Mellon did everything they could to assist. The problem was that the war had destroyed Britain’s pre-war position as the preeminent financial power in the world. Achieving the old parity was completely unrealistic, but once H.M. Government decided to do it (another disastrous decision in which Winston Churchill played a significant role), the American banking establishment fell all over itself to help by agitating for a cheap money policy which would depress the dollar in world exchange markets relative to the pound. As a result, Britain got an overvalued pound leading to massive unemployment, and America got a stock market bubble – leading a few years later to massive unemployment.




[5] 60 Minutes. Interview with Leslie Stahl, 16 September 2007.




Sign Up to Receive Our Latest Updates!