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The Dark Side of Alan Greenspan

Todd Stein & Steven McIntyre
The Texas Hedge Report
September 28, 2004
Courtesy of www.texashedge.com

Who is Alan Greenspan?  Any student of recent financial history knows that Alan Greenspan is, above all other things, a political animal.  Greenspan, who has for years been able to lobby Capitol Hill as effectively as anyone, is frequently spotted at Washington's and New York's most exclusive cocktail parties.  Former colleagues have spoken about how the chairman always likes to have his finger on the pulse of every market and can get obsessed with being kept in the loop on every major issue.  While these character traits may fit his 'information synthesizer' job description, we suspect they are signs of an egotistical and insecure personality.  We find it discomforting that Greenspan's official biography (on a US Government website) boasts about his status of honorary Knight Commander of the British Empire.  

A half a century before he became "Sir Alan," Greenspan was known as an Ayn Rand Libertarian often writing in defense of the gold standard.  In 1966, Greenspan published an essay titled Gold and Economic Freedom where he labeled deficit spending as "simply a scheme for the confiscation of wealth."  He went on to say that "gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."  

Shortly after publishing his famous essay, Greenspan's political career began to take off. Ironically, Greenspan started to move away from his Libertarian principles about the time he began working for the Gerald Ford administration. John Ridpath of the Ayn Rand Institute was once quoted saying "Alan Greenspan, whatever his rationalization, has abandoned any philosophically principled stance and compromised himself and what he learned from Ayn Rand over and over."  

Richard Russell of Dow Theory Letters has written, "Alan Greenspan... of all people knows all about the Federal Reserve and money and gold. For this reason, I consider him one of the great 'sell-outs' of today. Not only has Greenspan headed the Fed but he turned out to be the greatest inflationist in American history."  

It is quite obvious that some time during the 1970s, Greenspan was seduced by the power of New York and Washington. Greenspan began to date women such as Kay Bailey Hutchison, Barbara Streisand, Andrea Mitchell (whom he later married) and other high-profile celebrities.  Ayn Rand was once quoted saying "Oh, Alan is so brilliant, but he's such a social climber."  Greenspan became addicted to the attention he was receiving from the highest levels in the White House and on Wall Street.  Selling out his sound money principles in exchange for a lifestyle of private jets and fancy limousines didn't seem to bother Greenspan.  

By the time Greenspan became chairman of the Federal Reserve; he had fully removed himself from his sound money principles and turned to running the printing presses at full capacity. The final straw was broken in 1995 when Greenspan sold out to Bill Clinton's artificially strong dollar policy in exchange for an appointment to a third term. Greenspan's sell-out, which contributed to the bubble in the late 1990s, helped re-elect President Clinton. Greenspan, in addition to getting a third term, became a supernatural being to those on Wall Street and a cult hero to millions around the world. Such godlike status can be quite addicting, and create a self-fulfilling prophecy that one's policies are actually working no matter how warped they are.  

Greenspan's solution to every economic crisis has been to print more money - often by cutting rates which has the effect of increasing credit.  The Fed cut interest rates in 1998 partly due to the blowup of hedge fund Long Term Capital Management. When fears of Y2K hit the American populace in 1999, the chairman put his foot on the monetary pedal and increased liquidity to extreme levels.  A significant amount of that newly created money found its way into internet and other technology stocks fueling the greatest stock market bubble in history.  As the NASDAQ bubble deflated in 2000-2002, Greenspan should have let the detoxification process take its course.  Instead, he poured Americans another drink and cut rates again to the lowest levels since the Eisenhower administration.  Such a low rate monetary policy has spawned a dangerous credit and housing bubble which still exists today.  

Most members of congress and the media remain utterly clueless about the effects of monetary policy.  The market rises, Greenspan is a hero. The market falls, he is a goat. Until recently the market has mainly been going up drawing cheers of admiration from the investing public.  Apart from Bernie Sanders (I-VT) and Ron Paul (R-TX), most congressmen fail to make good use of Greenspan's appearances on Capitol Hill.  Republicans and Democrats will either ask elementary school level questions or try to get the chairman to endorse (or reject) a particular policy position.  The members of the financial press will spend their time pondering the Fed's next interest rate move and trot out all the usual prognosticators for their predictions.  Instead, they should pay more attention to the concerns of Reps Sanders and Paul and a few other congressmen who question the behavior and existence of the Federal Reserve.  Regrettably, this ignorance displayed by the media and general public plays right into Greenspan's hand.  With the general public treating his each and every word as Holy Scripture, he has been able to conveniently shift the blame for his mistakes to others.

For example, Greenspan often cites budget deficits and energy prices as reasons why the economy may turn south in the near future.  Since both of those macroeconomic variables are very important, the press goes along and ignores the real reason why we find ourselves in today's dire monetary situation ­ easy credit.  When trying to explain job losses, the press blames corporate CEOs who outsource labor from China rather than the real culprit - Alan Greenspan and his policy of keeping interest rates artificially low.  Greenspan frequently blames corporate corruption for the economic slowdown of 2001-2002 while he knows that such dishonest practices have been going on for years and continue to go on today.  Corporate dishonesty was a symptom of the disease and not the disease itself.  The insidious disease was cheap and easy credit which spawned spell-binding asset inflation and earned Greenspan a much deserved moniker "Easy Al."  

A few very interesting questions have popped up in circles around Wall Street and Washington over the last few months: If he had to do it all over again, would Greenspan have gotten out of the game (with Bob Rubin) at a time when he could've exited with his reputation unscathed?   Does Greenspan realize that his fate as a "modern day John Law" awaits him in the history books?  Will the White House name a new Fed Chairman immediately after the election since the law forces Greenspan to retire after 2005?  

Greenspan is primarily concerned with how he will be viewed by future generations.  As far as the long-term health of the American economy, well, this is a trivial matter.  We suspect Greenspan has been plotting for months about how to find the best way to abandon ship without scaring the markets or hurting his reputation.  This may be the reason why he has repeatedly warned about high energy prices, the viability of social security, protectionism and spiraling fiscal deficits.  If any one of these forces takes hold of the American economy over the next few months, Greenspan will try to slip out with his reputation unharmed.  If the market suddenly shoots higher, the chairman may be able to get out in a manner similar to Bob Rubin.  We also would not be surprised if Greenspan suddenly decides to resign due to 'health problems'.  These rumors have hit trading floors over the last few months and the reaction hasn't been too devastating.  Whatever the case may be, we advise readers to ignore the rate-guessing game and pay more attention to Greenspan's actions as well as any signs of a deteriorating relationship with the administration.    

September 27, 2004
Todd Stein & Steven McIntyre
Texas Hedge Report
email: info@texashedge.com

For more information, go to http://www.texashedge.com

Todd Stein & Steven McIntyre are internationally known analysts and editors of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities in the equity, bond, currency, and commodity markets.
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