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.
Greenspan's tolerance for the ballooning Bush deficit is surprising given his ideological background. He was once an adoring acolyte of Ayn Rand, the proto-monetarist who deified strong bodice-ripping capitalists and the gold standard. Indeed, the good doctor himself, in-between editing the Ayn Rand fan club magazine, penned several paeans to Gold and hymns of hatred to inflation, which he linked directly to deficits.
He was at least consistent with his expressed principles when Bush senior was president -- to the point of costing his patron his job. After Bush Senior, who you may remember denounced Reaganism as "voodoo economics," reappointed him as chairman to the Federal Reserve, Greenspan showed his gratitude by raising interest rates and plunging the economy into recession, thus giving Bill Clinton the edge in the 1992 presidential elections.
The allegedly independent central banker then went on to hypnotize the Clinton administration with his injunctions against the perils of deficits, helped along by a background chorus from the markets bemoaning "tax-and-spend Democrats." Not that there was any good reason to follow the advice of a former lobbyist for the savings-and-loan deregulation, which was at the time the biggest financial scam in history.
It is likely, however, the Democratic Leadership Council crowd needed little persuasion to cut "entitlements" for the less deserving poor as opposed to the always-deserving corporations. But at least under Clinton's watch, the deficit did disappear, and to almost everyone's surprise, we ended up with a generous surplus.
The current president, however, has given us in its place a massive and rising deficit, stubbornly resistant unemployment, a dollar that has devalued by over a half against the gold standard and almost as much against the Euro and the Yen, and an unusually muted Alan Greenspan.
Last week, Greenspan did send the market into an instant panic with one of his opaque remarks, which was interpreted as presaging a modest rate hike later in the year. Fed sources quoted in the latest issue of Fortune magazine are predicting that he will be more openly critical of the deficit when he appears before a congressional committee to give his six-month review of monetary policy and the state of the economy on Feb. 11.
But for the most part, all the signs are that Wall Street's favorite icon is unlikely to rediscover his principles until after November. Greenspan's four-year term as chairman will end in six months. And he probably wants to anoint his place in history by being reappointed, making him the longest serving Fed Chair ever. We all know that Team Bush has no space for squeaky wheels. The White House could with impunity let the faithful retainer go into a long deserved retirement -- and incidentally reduce unemployment by at least one -- and appoint a younger replacement without exciting too much horror in the markets.
Greenspan's vulnerability could explain why his youthful dreams of gold and solid currency, nightmares about the horrors of inflation and deficits have mysteriously disappeared. He is instead uttering impenetrably Delphic statements in support of an administration that is ignoring every single precept that he forced upon its predecessors.
Ian Williams writes on the United Nations for Alternet. His work has appeared in Foreign Policy in Focus, the Nation, and Salon.