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

by Frederick Sheehan

  Martin lashed out at Slichter’s populist appeal: “If you take [Slichter’s] view, then another bust will surely come.”26 Martin, who was not a certified economist (he was a Latin scholar from Yale), knew better than the Harvard professor how empires hoodwink themselves into decline. Economists who could spin nonsensical abstractions into accepted wisdom over the course of this deterioration were amply rewarded.

  Greenspan’s Forays into Publicity and Publishing

  Alan Greenspan had been born into the dark side of prosperity. The stock market boom of the 1950s was changing the way Americans behaved, and Greenspan did not approve. The New York Times reported Alan Greenspan’s discourse at an economic conference in December 1959:

  23 Sumner Slichter, “Five Trends Shape the Business Future,” Nation’s Business, February 1957, p. 96.

  24 Bremner, Chairman of the Fed, p. 128.

  25 Albert Jay Nock, Memoirs of a Superfluous Man (New York and London: Harper and Brothers, 1943), p. 256.

  26 Bremner, Chairman of the Fed, p. 128.

  Alan Greenspan, of Townsend, Greenspan & Co., New York financial house, presented the view that a break in stock market trends was not just a harbinger of boom or recession, as is commonly held, but a crucial factor in causing a boom or a recession.

  Mr. Greenspan declared that a rising stock market tended to put strong upward pressure on stockholder inclination to spend. If market values rise, and do not quickly fade again, he said, the gain gets built into an individual stockholder’s permanent assets and his standard of living ideas change, with consumption rising accordingly.

  His general conclusion was that instability of the general economy results from the flexibility of the banking system, which supplies credit for the stock market.

  He questioned the theory that the enlargement of the Government’s role in the national economy had brought a “new era” in which an old-fashioned financial contraction was impossible.27

  As the stock market boomed through the first half of the 1960s, Greenspan consistently put in a bad word. For example, Time surveyed an ambivalent Wall Street in January 1962: “[T]he most pessimistic is Alan Greenspan of TownsendGreenspan, who says: ‘The peak of the bull market will be in the early spring, or at the latest by midyear.’”28 His opinion was validated sooner than he expected. The S&P 500 started falling almost immediately and shed 25 percent through June. It rebounded sharply through the end of the year.

  To be quoted in the Times was the logical route for a businessman. As such, Greenspan spent little time posturing for the academics who monopolized the status and careers of economists. Greenspan was not a prolific contributor to academic journals.

  27“Economists Sift Jobs and Stocks,” New York Times, December 28, 1959, p. 39. 28 “Wall Street Worries,” Time, January 26, 1962.

  “The New Economics”

  In 1961, John Kennedy was a fresh face in the White House. He recruited advisors who promoted the “New Economics,” largely, an American version of John Maynard Keynes’s beliefs. A leading proponent was Paul Samuelson: a graduate of the University of Chicago, of Harvard University, a kingpin of the Massachusetts Institute of Technology’s rise as an economic think tank, and a fervent flag waver for the efficient market hypothesis (EMH).29 In 1970, Samuelson would be awarded the Nobel Prize in economic sciences.

  Samuelson was Kennedy’s primary economic advisor. Viewing a sluggish economy in 1961, Samuelson wrote “what definitely is not called for is a massive program of hastily devised public works whose primary objective is merely that of making jobs and getting money pumped into the economy.”30 In November 1962, he warned Kennedy that he must cut taxes to avoid a recession: If —and only if—Congress passed a tax cut, by 1964, “events will be working clearly and strongly our way.” That is, for reelection.31 Washington politics had modified the new economics.

  Walter Heller, Kennedy’s Council of Economic Advisers chairman, argued that a higher rate of growth would be produced through a looser Federal Reserve monetary policy and by employing Keynesian fiscal policy in the form of a temporary tax cut. Martin was convinced that most of the data pumped out of the Council of Economic Advisers was used “to justify both an expansionary monetary policy and the Kennedy tax cut.”32

  Douglas Dillon, Kennedy’s treasury secretary, introduced initiatives to close the federal deficit to $2.5 billion—an unsatisfactory result, in Dillon’s opinion.33 This may have been the last time a treasury secretary sincerely believed that the government should only spend what it received in revenue.

  29 Peter L. Bernstein, Capital Ideas: The Improbable Origins of Modern Wall Street (New York: Free Press, 1992), pp.112–125 passim.

  30 Bremner, Chairman of the Fed, p. 151.

  31 Ibid., p. 176.

  32 Ibid., p. 183.

  33 Ibid., p. 166.

  After President Lyndon Johnson succeeded Kennedy (in 1963), spending for the Great Society and the Vietnam War raced ahead of revenues. Martin offered the public fair warning at the Columbia University commencement on June 1, 1965, where he told his audience that private domestic debt was rising, the supply of money and credit was increasing without an increase in the gold supply, and international indebtedness had risen.34 The federal budget deficit leapt from $3.7 billion in fiscal year 1965 to $25.2 billion in 1967.35

  Meanwhile, in addition to managing his firm, Greenspan spent considerable time with Ayn Rand. Rand was growing difficult to please: she had always been the sole arbiter of Objectivism, and her rants and excommunications grew fierce.

  In 1968, Rand threw Nathaniel Branden and his wife, Barbara, out into the cold. Greenspan was a signatory. The dismissal read in part: “Because Nathaniel Branden and Barbara Branden, in a series of actions, have betrayed fundamental principles of Objectivism, we condemn and repudiate these two persons irrevocably.”36 Greenspan would say later that “he added his name hastily, unsure in the midst of all the chaos of the charges or what was at stake.”37

  It is natural to condemn Perfidious Alan, but one should note the aptitude of this future government official who abandoned and embraced contradictory positions without rancor. Illuminating is the post-Randian friendship of Greenspan and Barbara Branden.38 Greenspan’s sterile, nerveless automation might sooth or itch, but was unlikely to repel. His biographer, Jerome Tuccille, wrote: “If Alan was shocked by any of the revelations … it did not show on his face. Alan presented the same face to the world through victory and tribulation. His expression rarely changed—laconic, mostly unsmiling, somewhat hangdog.39

  34 Brooks, The Go-Go Years, p. 100.

  35U.S. White House Office of Management and Budget, Fiscal Year Budget Data, October 15, 2008.

  36 Justin Martin, Greenspan: The Man behind Money (Cambridge, Mass.: Perseus, 2000), p. 51.

  37 Ibid.

  38 Ibid., pp. 147–148.

  39 Jerome Tuccille, Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker (Hoboken, N.J.: Wiley, 2002), p. 87.

  Greenspan’s 1966 Essay: “Gold and Economic Freedom”

  A few months after Martin’s Columbia address in June of 1965, Greenspan wrote an essay for Rand. It may have been prodded by the collapse in the national accounts. He never discussed the undisciplined policies of Congress and the Johnson administration, but the parallels are clear.

  In “Gold and Economic Freedom,” Greenspan vilified the Federal Reserve’s money-printing excesses of the 1920s. In Greenspan’s thesis:

  When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. … The excess credit which the Fed pumped into the economy spilled over into the stock market—triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a shar
p retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. … The world economies plunged into the Great Depression of the 1930’s.

  Greenspan knowingly contrasted the pre-World War I gold standard to the post-1914 monetary arrangement. He also explained the relation of money and the credit system:

  Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one—so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries.

  He attacked the politicians of an earlier era and their subterfuge of the gold standard.

  [T]he Federal Reserve System was organized in 1913.… Credit extended by [the Federal Reserve] is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (“paper reserves”) could serve as legal tender to pay depositors.40

  The succinctness of “Gold and Economic Freedom” is quite a contrast to the labored, meandering speeches that he would make as Fed chairman.

  Greenspan’s Warning about the Guns and

  Butter Deficit

  The Dow Jones Industrial Average had been rising for 18 years, but it reached its peak in 1966. Greenspan coauthored a front-cover story in the January 1966 issue of Fortune in which he projected much higher costs than the government foretold. This article was timely, accurate, and probably not welcomed by the administration, since President Johnson and Secretary of Defense Robert McNamara were furtively spending well over budget.41

  In “Gold and Economic Freedom,” Greenspan had warned that the “gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).” In the closing paragraph, he reminded readers that “deficit spending is simply a scheme for the confiscation of wealth.” To drive the nail home with a 2 4, he warned: “This is the shabby secret of the welfare statists’ tirades against gold.” Yet it was soon after this tirade against welfare statists that Greenspan changed course—he aimed his efforts toward Washington.

  40 Ayn Rand, Capitalism: The Unknown Ideal, Signet (paperback) 1967, essay by Alan Greenspan: “Gold and Economic Freedom” pp. 96–101

  41 Bremner, Chairman of the Fed, pp. 204, 224.

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  Advising Nixon: “I Could Have a Real Effect”

  1967–1973

  How Alan Greenspan, a man who believed in the philosophy of little government interference and few rules or regulations, could end up becoming chairman of the greatest regulatory agency in the country is beyond me.

  —Barbara Walters, 20081

  Alan Greenspan entered politics during the 1968 Nixon election campaign. By different accounts, this decision was influenced by at least two old friends. Greenspan met Leonard Garment on a noontime walk. Garment was a fellow graduate of the Henry Jerome Orchestra, where Greenspan spent his wilderness years between the Juilliard School and New York University. By this time, Garment was a lawyer who also recruited volunteers for the Nixon presidential campaign.2 Greenspan hosted Garment at the Bankers Club in Manhattan. Greenspan impressed his host with his enthusiasm for the presidential candidate.3 Garment arranged a meeting with Nixon. The economist put on quite a performance.

  1 Barbara Walters, Audition: A Memoir (New York: Knopf, 2008), p. 262.

  2 Justin Martin, Greenspan: The Man behind Money (Cambridge, Mass.: Perseus, 2000), pp. 67–69.

  3 Leonard Garment, Crazy Rhythm (New York: Times Books, 1997), p. 107.

  31

  In Garment’s recollection, Greenspan’s verbal calisthenics were “Nepal Katmandu language.” Nixon loved it: “That’s a very intelligent man.”4

  Martin Anderson also propelled Greenspan’s political career. Influential in Nixon’s policy research efforts, Anderson was familiar with Greenspan through Objectivist acquaintances.5 Greenspan served with Anderson’s policy group.

  As a Rand acolyte, Greenspan was forbidden to collaborate with the government. He rationalized his participation in terms that were not terribly convincing, unless one is Alan Greenspan, who had a special knack for appearing virtuous while raiding the cookie jar. He told Joseph Kraft for a 1976 profile published in the New York Times Magazine that he agreed to go to Washington in 1968 only when Arthur Burns at the Federal Reserve and Treasury Secretary William Simon told Greenspan “ ‘that I could have a real effect.’”6

  1968: Working for Nixon

  Greenspan’s role was coordinator of domestic policy research. It was, in the words of a Greenspan biographer, “a volunteer part-time gig, requiring just a few hours a day.”7 Greenspan gathered papers to be reviewed by different issue task forces. The task forces helped form policy for Nixon on topical issues. Most of Greenspan’s research was shipped off to Nixon’s staff.

  After his 1968 victory, Nixon wanted Greenspan to join his administration. Greenspan soldiered on in a temporary capacity, serving as liaison with the Bureau of the Budget during the 1968–1969 transition.8 He turned down the job of budget director.9

  By the late 1960s, Greenspan was a millionaire. He owned an apartment at 860–870 United Nations Plaza, known as “U.N. Plaza,” a new and fashionable address where Walter Cronkite, Truman Capote, and Senator Robert F. Kennedy lived.10 He seemed drawn to the celebrity culture.

  4 Martin, Greenspan, p. 69.

  5 Ibid.

  6Joseph Kraft, “Right, for Ford,” New York Times Magazine, April 25, 1976, p. 27. Burns and Simon held those positions when the article was written in 1976, not in 1968. William McChesney Martin was chairman of the Fed until January 31, 1970. Arthur Burns became a member of the Federal Reserve Board on the same day and chairman of the board on February 1, 1970 .

  7 Martin, Greenspan, p. 71.

  8“The Soft-Sell Charm of Alan Greenspan”, BusinessWeek, April 28, 1975, p. 2.

  9 Martin, Greenspan, p. 74.

  The Wall Street that Alan Greenspan observed from his day job was radically different from the mortuary of gray-faced men who had moped around the stock exchange in the 1950s. The stock market attracted a Youth Movement. The 1960s would be known as “the Go-Go Years.”

  The fear of a “disastrous stock market break” (a possibility that Greenspan discussed with the New York Times in 1965) would elude investors for another seven years.11 But from 1966 to 1973, the market endured a period of indecision, with sharp breaks and recoveries.

  Mutual fund assets—a barometer for retail interest in the stock market—rose from $1 billion in 1945 to $35 billion in 1965, and to $50 billion by 1969.12 Richard Jenrette, cofounder of Donaldson, Lufkin & Jenrette, called this the “great garbage market,” since the public ignored old stalwarts such as General Motors and General Electric and bought Four Seasons Nursing Centers and United Convalescent Homes.13

  By 1969, institutional investors had come to dominate the stock market: they held 60 percent of New York Stock Exchange dollar volume, roughly double their position in 1960.14

  In short, this was the same carnival atmosphere Greenspan would see three decades later, only in the 1960s the numbers were smaller.

  The Rise and Fall of the Conglomerates

  The serendipitous restructuring of American companies had compounded at an astounding pace since Greenspan’s early professional career. Federal Reserve Chairman William McChesney Martin explained both the construction and the consequences of accelerated finance before the Senate Committee on Finance on August 13, 1957. Martin warned that “a spiral of mounting prices and wages seeks more and more financing” with a “considerable volume of the expenditure … financed at all times out of borrowed funds.”15 The “slick and the clever” would tend to do be
st.16

  10 Robert A. M. Stern, Thomas Mellins, and David Fishman, New York 1960; Architecture and Urbanism between the Second World War and the Bicentennial (New York: Monacelli Press, 1995), pp. 630, 632; Martin, Greenspan, pp. 64–65

  11 Vartanig G. Vartan, “There Are Smiles on Wall Street, Smiles Are Relit,” New York Times, June 17, 1965.

  12 John Brooks, The Go-Go Years Weybright and Talley, 1973, p. 101.

  13 Ibid., p. 184.

  14 Ibid., p. 260.

  Borrowed funds were rising in the 1960s because the Federal Reserve was printing too much money. Credit was increasing at doubledigit rates by mid-decade. The economy was growing at a single-digit pace. What was the result? Alan Greenspan knew when he spoke to Fortune magazine in 1959. The reporter summarized Greenspan’s concerns: “The Fed … has recently been boxed in by a huge and partially monetized federal debt, which tends to produce an addition to the money supply, whose size is unrelated to the needs of private business.”17 And so, speculation and frenzied finance followed.

  There will be three periods of abundant finance discussed over the course of this book: first, the 1960s conglomerates phase; second, the 1980s leveragedbuyout period; third, the recent buyout boom that peaked in 2007. Refinancing and merging companies is healthy, up to a point. It is when the flows of credit grow out of proportion to the economy that finance mutates companies.

  During the conglomerate years, Alan Greenspan, as consultant, knew how vulnerable the Fortune 500 companies had become. There was no knowing if the biggest and strongest might fall victim to an onslaught of bank debt, convertible bonds, and warrant issues that shareholders found irresistible. It was a world turned upside down. Greenspan was Federal Reserve chairman when leveraged buyouts reached their peak in 1989, and he was still chairman in 2006, when the latest buyout scramble was building to a climax.