Alan Greenspan and the D-Word

In late January, Howard Dean foolishly suggested that it was time for Alan Greenspan to step down. "If he lacks the political courage to criticize the (budget) deficits, if he was foolish enough -- and he's not a foolish man -- to support the outrageous tax cuts that George Bush put through, then he has become too political and we need a new chairman of the Federal Reserve," said Dean at a town hall meeting in New Hampshire.

The response from Wall Street was swift and unequivocal. Greg Valliere, the chief strategist at Charles Schwab Washington Research Group, accused Dean of "stepping into very dangerous waters here." He told CNN, "The financial markets often get uneasy when they sense friction between a possible president and the Fed chairman. Greenspan's not perfect but I think the financial markets hold him in very high regard." In other words, stay away from our man in the Federal Reserve.

The truth is that Dean was too kind. The man whose chance remark can send the market into a tailspin said very little when the economy stalled and the stock market bubble collapsed in 2001. His silence was especially remarkable given the number of times he publicly took credit for the so-called dot com boom.

In fact, apart from one much-quoted warning about "irrational exuberance," Greenspan did nothing to put the brakes on the stock market bubble, even though he had in his hands the possibility of increasing margins. By reducing the credit available to traders playing the market, he would have prevented them from speculating on borrowed money. But he was more than willing to speak against increasing the minimum wage, which he claimed would be inflationary -- a danger that mysteriously did not seem to apply to the huge salaries and stock options of corporate bosses.

But now the economy is "booming" again, at least if you are a CEO or shareholder, Greenspan has reappeared. He has achieved the difficult task of staying in the public eye, even as he remains obstinately mute on the deficit, which this week has shot up nearly another 20 percent.

The truth is that deficit is much higher even than the figures bandied about in the media. Last year, the Center for Economic and Policy Research pointed out that the numbers made public understate the shortfall because the Bush administration is busily raiding the Social Security surplus and using it balance the books in the general budget. At the time, CEPR estimated that the real deficit is nearly 50 percent larger, equivalent to a whopping 56.6 percent of the government's tax revenue. It can only be much worse now. Yet, Greenspan, the intellectual champion of fiscal discipline and hard money, continues to keep his peace.

Indeed, even as the White House raids social security, Greenspan is busy praising the administration's plans to privatize it. Even the guys at the Cato Institute admit that this means trouble. After privatization, for the foreseeable future, the level of payments to retirees will remain the same as new batches apply for their entitlements, but payments made into the program will decline since the contributions will be diverted to private funds. Of course, in the age of Enron and MCI and Tyco, relying on the financial markets for your pension is not exactly the safest way to provide for your retirement. But it is indisputable that privatization will increase the already ballooning deficit.

Greenspan also stays silent while unemployment stays stubbornly high. One would never guess that under the Humphrey-Hawkins Act, the Federal Reserve's charter is not just to control inflation but also unemployment! Indeed it has to aim for a target of keeping unemployment below four percent. Greenspan, however, has consistently ignored his duties in favor of the voodoo economics favored by Wall Street.