Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession

by Frederick Sheehan

  The stock market rose from 1950 to 1966. The rise was validated by the booming economy, but around the time Greenspan spoke to Fortune, fancy finance was playing an expanding role. The conglomerate craze, technology stock bubbles, and the huge growth of institutional money management (mutual funds and hedge funds) would end in tears, but fortunes were made. By 1969, Greenspan was a millionaire.13 Greenspan described his specialty to Martin Mayer as “statistical espionage.”14 Mayer would later discuss Greenspan’s technique at greater length: “the book on him in that capacity was that you could order the opinion you needed.”15

  Richard Nixon was introduced to Greenspan during the 1968 campaign. The candidate’s evaluation: “That’s a very intelligent man.”16 Greenspan was nominated by Nixon as Council of Economic Advisers chairman in 1973. Gerald Ford was president when Greenspan passed his confirmation hearing in 1974.

  9 William McChesney Martin, Statement, Before the Committee on Finance, U.S. Senate,

  August 13, 1957, pp. 9–10.

  10 Ibid., p. 15.

  11 Ibid., p. 23.

  12 Gilbert Burck, “A New Kind of Stock Market,” Fortune, March 1959, p. 201. 13 Justin Martin, Greenspan: The Man behind Money (Cambridge, Mass.:

  Perseus, 2000), p. 65.

  14 Martin Mayer, New Breed on Wall Street: The Young Men Who Make the Money Go

  (New York: Macmillan, 1969), p. 82.

  15Martin Mayer, The Greatest-Ever Bank Robbery: The Collapse of the Savings and

  Loan Industry (New York: Charles Scribner’s Sons, 1990), p. 140.

  16 Martin, Greenspan, p. 69.

  This was an ideal time for a publicity-minded economist to enter government. It was the same year that Time introduced People magazine. Greenspan, who had cultivated the press for years, maneuvered his portrait on to the front cover of Newsweek—the first economist to garner such attention.17 Greenspan set an example that flattery could get one anywhere.

  The United States had been buying more than it produced since the 1950s. The dollars piled up overseas, and creditor nations demanded that the United States redeem dollars with its gold reserves. The U.S. government abandoned its promise to buy dollars for gold in 1971, when it dropped the gold standard. The dollar then traded at whatever people believed it to be worth, which wasn’t much.

  By the late 1970s, doubters prevailed. The period was plagued with higher inflation and a bewildered society. Many kept up by trading jewelry or houses. In 1980, the New York Times spoke to the economist: “Alan Greenspan, the economist, has asserted that the translation of homeownership equity into cash available for consumer spending is perhaps the most significant reason why the economy in 1975–1978 was consistently stronger than expected.”18 When the Nasdaq crashed in 2000, the Federal Reserve chairman remembered this lesson.

  After Ford left office, in January 1977, Greenspan was a celebrity back in New York. He ran TownsendGreenspan, but he seemed to exert his greatest efforts outside the office. He dated Barbara Walters, a television personality. He was a regular in the Times’s “Evening Hours” and “Notes on Fashion” columns.

  Greenspan is classified as a Republican. In practice, however, his flattery was nonpartisan. When Ted Kennedy ran for the Democratic nomination in 1980, Greenspan hosted a breakfast for the Massachusetts senator in New York with “key Wall Street figures.”19 At the 1980 Republican convention, Greenspan almost corralled Ronald Reagan into offering him the position of treasury secretary.

  17 Ibid., p. 127.

  18 John H. Allan, “Thrift Adrift: Why Nobody Saves,” New York Times, February 17, 1980.

  19Steven Rattner, “The Candidates’ Economists,” New York Times, November 18, 1979, p. F1.

  Greenspan remained in the public eye during the early Reagan years. He was called a “superstar” (New York Times) on the speaking circuit, making 80 speeches a year for up to $40,000 a speech.20 He joined corporate boards. He spent most of his time in Washington. Martin Anderson, who both worked in the Reagan White House and had introduced Greenspan to politics back in the 1960s, remembered: “I don’t think I was in the White House once where I didn’t see him sitting in the lobby or working the offices. I was astounded by his omnipresence.… He was always huddling in the corner with someone.”21

  His record as an economic forecaster was unimpressive. Senator William Proxmire castigated the nominee at Greenspan’s Federal Reserve confirmation hearing in 1987. Proxmire recited Greenspan’s economic predictions as CEA chairman. His Treasury bill and inflation forecasts were the worst of any CEA director.22

  There was little left of TownsendGreenspan when he became Federal Reserve chairman.23

  Proxmire had another concern with Greenspan’s nomination. The senator thought that the growing concentration of financial power and solvency of the financial system was heading down a dark road, toward “increased concentration of banking.” 24 Proxmire’s fears proved correct. Two decades later, the highly concentrated financial system is semi-insolvent.

  Nobody contributed more to the concentration of finance than Alan Greenspan. As Federal Reserve chairman, Greenspan, who had recently resigned as a director of J. P. Morgan to take the post, permitted Morgan to underwrite debt, then equity—the first time either had been permitted by a commercial bank since 1933.

  Luckily for Greenspan, his nomination preceded the public denouement of Lincoln Savings and Loan and of Charles Keating. Greenspan had been hired by Keating to persuade the Federal Home Loan Bank of San Francisco that Lincoln was in good shape. Greenspan succeeded even though Lincoln was one of Michael Milken’s top three junkbond customers among savings and loans (S&Ls).25

  The rise of Milken—and of Greenspan—was attuned to the hectic financialization of America in the 1980s. “Maximizing shareholder value” turned out to be a veil for loading corporate balance sheets with debt, a much cheaper and faster route to growth than from retained profits. The market would not have accommodated such indiscretions 30 years earlier.

  The capital foundations were growing unstable. Greenspan could (and would) salute the economy’s flexibility. The economy was, in fact, vulnerable to collapse and needed constant infusions of money and credit to sustain it. Hands trembled at the word “recession,” and rightfully so: balance sheets—government, corporate, and personal—were no longer constructed to weather a storm. This was capitalism with little respect for capital.

  An error-prone but malleable Federal Reserve chairman was a predictable choice for the most influential financial position in the world.

  20 Martin, Greenspan, pp. 139, 276.

  21 Jerome Tuccille, Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker (Hoboken, N.J.: Wiley, 2002, pp. 157–158.

  22 Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 41.

  23 Tuccille, Alan Shrugged, p. 154.

  24 Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 60.

  25 Barrie A. Wigmore, Securities Markets in the 1980s, Vol. 1 (New York: Oxford University Press, 1997), p. 286.

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  1

  Early Years: The Education of Alan Greenspan

  1926–1958

  Do you think Alan might basically be a social climber? —Ayn Rand1

  Alan Greenspan was born in 1926. He grew up in New York City. Alan’s parents, Herbert and Rose, divorced when he was young. His father had been a stockbroker in the 1920s, but suffered financially after the Crash. Alan and his mother moved to her parents’ small apartment at the corner of Broadway and 163rd Street, in Washington Heights. Alan’s father remained distant. Described by one of Alan’s biographers as “something of a dreamer, given to aloofness and abstraction,” his son gravitated toward an occupation that perpetuated such tendencies: economics.2

  Herbert was rarely seen. A cousin recalled, “I do remember the ecstasy that Alan exhibited on those rare occasions when his father visited.”3 On one of these
visits in 1935, Herbert gave his son a copy of a book he had written, Recovery Ahead! His father’s inscription betrays a rhetorical similarity: “at your maturity you may look back and endeavor to

  1 Nathaniel Branden, My Years with Ayn Rand, (San Francisco: Jossey-Bass, 1999) p. 212. 2 Justin Martin, Greenspan: The Man behind Money (Cambridge, Mass: Perseus, 2000), p. 3.

  3 Ibid., p. 2.

  9

  interpret the reasoning behind these logical forecasts and begin a like work of your own. Your Dad.”4 The book was a defense of the New Deal, a description of how government funding could end the Depression.5

  It is not clear that Alan drew any lessons for life from this episodic parent. (Greenspan did not read Recovery Ahead! until years later.6) That he was drawn to the same occupation may have been in imitation of his father. Despite the book’s losing battle against an economy that was resistant to government funding, Herbert earned a living. Accurate predictions have never mattered much in the field of economics; to forecast is the thing—publicity is essential; competence is occasional.

  Alan was an obedient and well-mannered son. However, in what seems an inconsistency, he refused his bar mitzvah, even though his grandfather, whom he lived with, was cantor at a synagogue.7

  Alan received top grades and was a “joiner” at George Washington High School. He was president of his homeroom and member of the “lunch squad,” a group that broke up fights at a crowded and pugnacious school. He studied the clarinet and saxophone. He made friends with Stan Getz, a jazz musician one year his junior. He played clarinet in the school orchestra and in the school dance band. He graduated as a member of Arista, an honor society composed of top students.8

  After High School: Juilliard School, Road

  Musician, and College

  Alan next attended the illustrious Juilliard School, attesting to his musical talent. But he was only an average student, so he departed. He joined Henry Jerome and His Orchestra. Saxophonist or clarinetist as duty called, he earned $62 a week, riding buses between engagements in Memphis, Tennessee; Covington, Kentucky; and New Orleans.9 Alan had little to complain about, since his classmates were strewn around the world in such exotic though unhygienic spots as Iwo Jima and Mandalay. He explained to friends that he hadn’t gone to war as a consequence of a medical problem: he had a spot on his lung discovered in an x-ray. One biographer wrote: “This later turned out to be nothing.”10

  4 Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin, 2007), p. 21.

  5 Martin, Greenspan, p. 4.

  6 Ibid.

  7 Jerome Tuccille, Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker (Hoboken, N.J.: Wiley, 2002), p. 14; Martin, Greenspan, p. 6.

  8 Martin, Greenspan, pp. 7–10.

  Alan decided to go back to school. He enrolled in New York University’s School of Commerce, Accounts and Finance in 1945.11 He escaped shellfire, but he was indoctrinated into the behemoth inclinations of postwar America that his high school classmates had grown accustomed to since boot camp. In Greenspan’s division of NYU, known as “the factory,” 9,000 students competed in business specialties, particularly real estate, sales, insurance, and public utilities management. Studies were practical; students learned a trade. Greenspan followed the less trodden and more cerebral route of economics.

  Not intimidated by the anonymity of such an assembly line of students, he played clarinet in the orchestra, sang in the glee club, was chosen as president of the Symphonic Society, and was president of the Economics Society.12 Greenspan graduated summa cum laude in 1948 with a bachelor of science degree in economics. In 1950, Greenspan earned his master’s degree in economics from NYU.

  Acquaintances thought Greenspan was introverted. Did he view his extracurricular activities as a way to boost his career? Whether or not that was his intention, his friendships paid dividends. Robert Kavesh was probably his best friend at NYU, and they remained close. Kavesh worked on Wall Street in the 1950s before returning to NYU to teach economics. Professor Kavesh aided Greenspan when Alan sought (and received) his doctorate in the 1970s.

  To stake his future in the field was a gamble. Whether or not Greenspan had a particular insight, his talents were aligned with the direction in which economic study was moving: he could calculate. By the end of the twentieth century, economics would be consumed in mathematics. Without such talent, a budding genius stood not a chance of a degree.

  10 Ibid., p. 19. 11 Ibid., p. 23.

  There was a great urge among economists to define economics as a “science”: it was a matter of respectability and legitimacy. Humanity needed a discreetly annotated and mathematically proven means to avoid another such calamity as the Great Depression.

  Moving up—From NYU to Columbia University

  Alan Greenspan resisted any particular school of thought. Instead, he sought and captured the good graces of influential figures. Greenspan pursued his doctorate at Columbia University, which, along with Harvard and Princeton, buzzed with innovative studies.13 In time, these theories would calcify into a dogma, the language of the trade would retreat into a catechism of symbolism, and the prescriptions of the arbiters in Washington were genuflections to the orthodoxy of the academy. Eventually, the mandates for government expansion would receive authoritative rationalizations from the universities, and the loop was closed. Anyone seeking tenure in economics inhabited the monastery garden. They bred and nurtured younger seedlings, who also blessed government policies and programs that were too entrenched to reform. The younger generation would mature and grow old, calculating ever more fantastic rationalizations of the impossible.

  Columbia was only a subway ride uptown from NYU. Arthur Burns was the most prominent member of the Columbia economics faculty. Burns was coauthor of Measuring Business Cycles (1946), a respected text.14 On the first day of Alan Greenspan’s doctoral training, the professor asked his students, “What causes inflation?” Silence followed. This seems to have often been the case in Burns’s presence. The pipe-smoking Burns enlightened the class: “Excess government spending causes inflation.”15

  Greenspan did not entirely agree with Arthur Burns’s economic beliefs, but he did the important thing: he took up the pipe—Burns’s trademark. Arthur Burns’s own political aptitude was of the first order.

  13 Ibid., p. 27.

  14Burns was coauthor of Measuring Business Cycles (New York: National Bureau of Economic Research, 1946) with Wesley C. Mitchell. Mitchell also wrote Business Cycles (1913), which was highly regarded.

  15 Martin, Greenspan, p. 29.

  The professor moved to Washington to head President Eisenhower’s Council of Economic Advisers in 1953. Burns was later appointed chairman of the Federal Reserve Board under Richard Nixon. Greenspan would also serve in both positions, rising to head the former institution at the same time Burns’s reputation was sledding downhill at the latter.

  The Conference Board and Ayn Rand

  When Burns left for Washington, Greenspan took a job at the Conference Board (which was then called the National Industrial Conference Board). He did not wait to earn his doctorate. The degree may have been secondary to his friendship with Burns. He may also have been worn out. Greenspan had worked full time at the Conference Board since 1948 while attending school at night.

  The Conference Board was a private institution funded by corporations to pursue research. Greenspan immersed himself in detail about a slew of industries, including steel and railroads. He worked alongside Sandy Parker, who later became Fortune magazine’s chief economics writer. Parker introduced economic forecasting to the magazine’s readers. Greenspan’s prophecies were often published, an excellent avenue for self-promotion (although many of them did not carry his signature) and an introduction to managing his personal relations with the press.

  Greenspan married in 1952. He was encouraged by a friend to call Joan Mitchell for a date. They married 10 months later in the Pierre Hotel, familie
s only. She recalled that Greenspan was not a romantic but a pleasant companion. In Mitchell’s words: “He was an interesting man to talk to.”16 This seems an approximate description of his relationship with Congress 40 years later—always the gentleman, but lacking in ardor. They separated 10 months later, and their marriage was annulled.17

  Ayn Rand would now enter Greenspan’s life. More popularly known today as a novelist (The Fountainhead and Atlas Shrugged), Rand was, and still is, regaled for her philosophy of Objectivism. To simplify this system of though, the pursuit of self-interest is moral, government interference with individual rights is evil. Her coterie, “the Collective” (meant as an ironic reference to the mass culture, but the joke was on them), met at her apartment from early evening until the cock crowed. Rand defined and corralled good and evil. (“She abhorred facial hair and regarded anyone with a beard or mustache as inherently immoral.”18)

  16 Ibid., p. 31.

  Alan’s rise from bottom to top of Rand’s group was a marvel, especially since Rand wanted no part of him. Greenspan was not sure if he existed: “I think that I exist. But I don’t know for sure. Actually, I can’t say with certainty that anything exists.”19 Rand was bemused by the debates her top acolyte, Nathaniel Branden, held with Greenspan: “How’s the undertaker?” she’d sneer.20 Branden played devil’s advocate, so to speak, and pressed the future Federal Reserve chairman with such queries as, “How do you explain the fact that you’re here? Do you require anything besides the proof of your own senses?”21 Apparently, Greenspan did.