44 Alan Greenspan, “The Mortgage Market and Consumer Debt,” speech at America’s Community Bankers Annual Convention, Washington, D.C., October 19, 2004.
45 Grant’s Interest Rate Observer, July 29, 2005, p. 4, quoting David Rosenberg, economist at Merrill Lynch.
46 Daniela Deane, “Everybody’s an Investor Now,” Washington Post, May 21, 2005.
47 “Frenzied Froth,” Economist, May 28, 2005.
48Motoko Rich, “Speculators Seeing Gold in Boom in Prices for Homes,” New York Times, March 1, 2005.
49Matthew Haggman, “Developer Leon Cohen Considering Twin 100-story Towers,” Miami Herald, May 5, 2005.
50 Alex Frangos, “Could Chicago Tower Pop the Real Estate Market?” Wall Street Journal, July 26, 2005.
Speech Number Five—April 2005 In April 2005, he made a speech appropriate for a man who never got it right:
With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . . These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.
[W]e must conclude that innovation and structural change ... [has] been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. Without these forces, it would have been impossible for lower-income consumers to have the degree of access to credit markets that they now have.”53
It was a speech his worst enemy could not write.
There was a significant structural change in the composition of buyers. The National Association of Realtors would find that nearly 40 percent of the houses bought in 2005 were second homes. Two-thirds of these houses were bought for investment—also called trading and flipping.54
51 Caroline Baum, Bloomberg, February 16, 2005, p. 32.
52Alan Murray, “Resolving War Issue May Be President’s Best Economic Plan,” Wall Street Journal, January 28, 2003, p. A4.
53 Alan Greenspan, “Consumer Finance,” speech at the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. April 8, 2005.
Alan Greenspan, Knight Commander of the British Empire, awarded the Ordre national de la Légion d’honneur (France), the Presidential Medal of Freedom (U.S), the (U.S.) Department of Defense Medal for Distinguished Public Service, and the Enron Prize for Distinguished Service, entered the Olympic stadium for his final lap, the torch held aloft, the crowd on its feet, cheering, weeping, and swooning. In July, a 24-year-old painter in New York opened a gallery show of 20 paintings and sketches of the highly decorated economist. CNBC aired the spectacle across the nation. The gallery owner was overwhelmed. “I’ve never seen anything like it. I had money managers calling from Nevada, Dallas, California.”55
Greenspan attended a Washington Nationals baseball game in August. “Security guards urged the Federal Reserve chairman to sit in an airconditioned executive suite but Mr. Greenspan . . . chose a seat in the stands[.]” He loved to be liked. “The 79-year-old central banker was . . . cheered as he arrived. People nearby asked him to autograph their tickets. From further back, there were shouts of ‘Go, Alan!’ and ‘Yeah, Alan, keep’ em low.’ ”56
Speeches Six and Seven—Jackson Hole and Loose Ends
Greenspan attended his final active-duty séance at Jackson Hole in August. His former vice chairman, Alan Blinder, spoke. He claimed that Greenspan might be the “greatest central banker who ever lived.”57 The departing chairman spoke of a potential flaw in the storied price “stability.” Investors are likely to project stability “over an ever more extended time horizon.” If they do so, higher values “can readily disappear.”58 This is another way of saying they could be wiped out.
54 Grant’s Interest Rate Observer, April 21, 2006, p. 2.
55 Ben White, “Greenspan, Her Art-Throb,” Washington Post, August 11, 2005.
56 Andrew Balls, “Greenspan’s Record,” Financial Times, August 22, 2005.
57 From paper “Understanding the Greenspan Standard,” presented by Alan S. Blinder and Ricardo Reis of Princeton University at a symposium sponsored by the Federal Reserve Bank of Kansas City (Jackson Hole, Wyoming, August 25, 2005: “The Greenspan Era Lessons for the Future.”) The authors contended, “when the score is toted up, we think he has a legitimate claim to being the greatest central banker who ever lived.”
Greenspan admitted that central banks should at least consider acting beforehand. The Fed’s “forecasts and hence policy are becoming increasingly driven by asset price changes.”59 Permitted the closing remarks to the conference, the chairman sounded like an escapee from a POW camp when he declared: “Debates on the relative merits of asset targeting also will continue and possibly intensify in years ahead.”60 This should have sparked a debate of the Greenspan doctrine, but apparently, his audience was content.61
Greenspan tied another loose end before the American Bankers Association in September. The value of houses had risen from $8 trillion at the end of 1995 to $18 trillion in 2005. “[W]e can have little doubt that the exceptionally low level of home mortgage interest rates has been a major driver of the recent surge of home building and home turnover and the steep climb in home prices.”62
Greenspan thought the decline of interest rates implied that the “increase over the past decade in consumption expenditure [was] financed by home equity extraction, rather than by income and other assets. [This] would account for much of the decline in the personal saving rate since 1995.”63 It took Greenspan an extra decade to conclude what Larry Lindsey told him in 1995.
The chairman discussed “a long list of novel mortgage products,” such as 40-year loans, option ARMs, piggyback mortgages, and HELOCs (“home equity lines of credit”) used as piggyback loans. If house prices cooled, “these borrowers, and the institutions that service them, could be exposed to significant losses.”64
58 Alan Greenspan, “Reflections on Central Banking,” speech at Jackson Hole, Wyoming, August 26, 2005, p. 4.
59 Ibid.
60 Alan Greenspan, “Closing Remarks,” August 27, 2005.
61 A headline from the Financial Times, three years later: “Greenspan Doctrine on Assets Questioned,” article by Krishna Guha, March 28, 2008. There have been a few noises since Guha wrote the article, a year ago, but the doctrine is still cited.
62Alan Greenspan, “Mortgage Banking,” speech to the American Bankers Association Annual Convention, Palm Desert, California (via satellite), September 26, 2005.
63 Ibid.
64 Ibid.
The hosannas flowed. In the Wall Street Journal, Milton Friedman wrote that Alan Greenspan was right and he (Friedman) was wrong: rather than “strict rules to control the amount of money created,” Greenspan had told Friedman that discretion was preferable. “Greenspan’s great achievement is to have demonstrated that it is possible to maintain stable prices” without strict rules. Friedman wrote that price stability under Greenspan “supported a high level of productivity.”65 Friedman opposed any Fed action that would consider asset prices (bubbles) a menace. By admiring Greenspan’s term as a “great achievement,” Friedman tacitly absolved the Fed from any responsibility for the stock bubble and the mortgage bubble. He never mentioned “credit” or “debt,” the expansion and acceleration of which was the reason the economy grew.
The Economist was less deferential. It stated that Greenspan was “leaving behind the biggest economic imbalances in American history.”66 The magazine was not impressed with productivity: “[T]he main reason why America’s growth has remained strong in recent years has been a massive monetary stimulus.” It threw a fit about rising debt: “By borrowing against capital gains on their houses, households have been able to consume more than they earn.” The rising GDP was “at the cost of a negative personal savings rate, a growing burden o
f household debt, and a huge current-account deficit.” The Economist did not expect much from Chairman Bernanke: “He is likely to continue the current asymmetric policy of never raising interest rates to curb rising asset prices, but always cutting rates after prices fall.”67
Farewell
Greenspan retired on January 31, 2006.
“It was a farewell dinner at the White House that only Alan Greenspan
could have engineered.”68 The New York Times continued with this breathless party review: “[S]everal dozen of Mr. Greenspan’s closest friends” were hosted by President Bush in the Blue Room. “But it was the list of guests . . . that highlighted his stature as both an icon and an iconoclast.”69 It could be argued that William McChesney Martin Jr. was more of an iconoclast when he addressed the gathered at his White House farewell: “I wish I could turn the bank over to Arthur Burns as I would have liked. But we
are in deep trouble. We are in the wildest inflation since the Civil War.”70 The collection of guests is almost “unheard-of in today’s bitterly
divided capital.”71Robert Rubin and Vice President Dick Cheney attended.
Greenspan “made few enemies in his 18-year tenure.” The Times went
on: “Mr. Greenspan is almost an institution in Washington—ubiquitous
on the party circuit and a constant dispenser of economic advice to top
lawmakers and presidents.”72 A few years earlier, the social editor of the
Washington Times considered Greenspan’s social rank “up into the stratosphere.” The Federal Reserve chairman was “definitely A-list.”73 It was a half-century back when Ayn Rand asked Nathaniel Branden:
“Do you think Alan might basically be a social climber?”74
65 Milton Friedman, “He Has Set a Standard,” Wall Street Journal, January 31, 2006.
66“Danger Time for America,” “Leaders” section, Economist, January 14, 2006.
67 Ibid.
68Edmund L. Andrews, “Greenspan, Another Monument in Washington, Prepares to Leave,” New York Times, January 30, 2006.
69 Ibid.
70 Robert P. Bremner, Chairman of the Fed: William McChesney Martin and the Creation of the Modern American Financial System (New Haven, Conn.: Yale University Press, 2004), p. 276.
71 Andrews, “Greenspan, Another Monument in Washington, Prepares to Leave.”
72 Ibid.
73 Justin Martin, Greenspan, The Man Behind the Money, (Cambridge, MA: Perseus, 2000), p. 228.
74 Nathaniel Branden, My Years with Ayn Rand (San Francisco: Jossey-Bass, 1999), p. 212; original from the University of California.
INTRODUCTION TO PART 3
THE CONSEQUENCES OF POWER
2006–2009
[I]t is most astonishing that huge private fortunes and imposing concentrations of capital were amassed [in Germany] in the years 1919–1923: years which were not, on the whole, a time of general economic prosperity. The fact is certainly surprising, although the surprise is lessened if we consider that even in the past times of economic regressions, of social dissolution, and of profound political disturbances have often been characterized by a concentration of property. “In those periods the strong recovered their primitive habits as beasts of prey.”1
—Constantino Bresciani-Turroni, The Economics of Inflation, 1937
Alan Greenspan retired from the Federal Reserve on January 31, 2006. A week later, he appeared as a “holographic image in Tokyo” and told investors the high price of gold did not reflect fears of inflation. Rather, he explained there were people who believed that a nuclear weapon could be detonated within five years.2 In February, he reportedly received $250,000 to speak at a dinner that Lehman Brothers hosted for hedgefund managers.3 He could not stop talking. A year later, he responded to
1 Constantino Bresciani-Turroni, The Economics of Inflation: A Study of Currency Depreciation in PostWar Gernmany, 1914–1923, p. 289, George Allen & Unwin Ltd., London, Third Impression, 1968. The book was originally published in Italian in 1931.
2 “Terror Threat Responsible for High Gold Price—Greenspan,” The Times, February 8, 2007.
3 Roddy Boyd and Niles Lathem, “Want Alan Greenspan to Come to Dinner? That’ll Be $250,000 . . .”New York Post, February 9, 2006.
301 criticism: “I was beginning to feel quite comfortable that I was fully back to the anonymity I was seeking.”4 He was also well paid for his private advice. Deutsche Bank, Pimco, the worlds largest bond manager, and John Paulson, a hedge fund manager who profited magnificantly from the real estate crash, all hired Greenspan as an advisor.
THE PEAK
All asset classes were inflating. This worldwide credit bubble developed after the stock market crash in 2000. Now, stock markets around the world, and also bonds, commodities, and art (of all periods), were rising.5 As markets rose and credit spreads shrank, there seemed to be one explanation: liquidity. This is a word with several meanings. Probably most timely was that practically anything was tradeable. Houses and dining-room sets were securitized, as were trees and art. Of course, there had to be a willing buyer and there was no shortage of purchasers for the most dubious of assets. (Home-equity loans was bundled and sold. They were backed by rising house prices. Thus, the word liquidity: assets flowed like a river after a monsoon.
In 2005, U.S. house prices stalled. In 2006, prices fell. “Illiquidity” followed. Many of the other asset classes (if not all the others) were supported by the higher level of collateral and credit that spilled back from elevating house prices. When house prices peaked, so did the collateral. But credit kept rising.
Banks and brokerages borrowed to lend. By 2007, brokerage firms were leveraged at 30:1 and 40:1. (At 40:1 leverage, the firm becomes insolvent if the prices of its assets fall more than 2.5 percent.) Investment banks and brokerages lent to those who were already highly leveraged: hedge funds, funds of funds, and buyout funds. Leveraged structures were compounded on top of other leveraged structures. The global derivative market rose above $500 trillion: some now calculate that it is over a quadrillion dollars, but what was the point of counting? To both institutional investors and mortgage recipients, there was no limit to what they could borrow.
4 James M. O’Neill, “Greenspan’s Long Shadow Needs to Shrink, Management Gurus Say,” Bloomberg.com, March 7, 2007, http://www.bloomberg.com/apps/news?pid=2067 0001&refer=home&sid=aXFdEFhGhKrI.
5The general observation was made in Marc Faber’s Gloom, Boom & Doom Report, March 1, 2007, p. 8.; Zimbabwe’s currency was an exception to the rise.
Alan Greenspan reportedly received $8.5 million for a book contract. The Age of Turbulence was published September 2007.6 This was shortly after public awareness of financial problems arose. Greenspan was talking to everyone. He was full of insights. Greenspan claimed that “the abrupt upheaval in markets due to the subprime crisis ‘was an accident waiting to happen.’”7 This was true, but it was Greenspan, in 2005, who extolled “techniques for efficiently extending credit to a broader spectrum of consumers [which has] led to rapid growth in subprime mortgage lending.”8
Greenspan would accept no blame for the rapidly deteriorating American landscape. Greenspan’s prophecies no longer moved markets. He received withering criticism from some well-known economists. Greenspan then complained about the economists who complained about Greenspan.
The former chairman was called before the Committee of Oversight and Reform on October 23, 2008. Greenspan looked withered. Congressmen filleted and roasted the man who once was God. The attacks on Greenspan were well deserved, but the prosecuting politicians were most intent on saving their own hides.
Greenspan opened his testimony by stating, “[W]e are in the midst of a once-in-a-century credit tsunami.”9 The real once-in-a-history-of-theuniverse stimulant was Greenspan.10
Greenspan admitted to a “flaw” in his model that impugned “40 years or more of considerable evidence.” Until this latest model problem, he thought that financial institutions were t
he best regulators.11 Did he really believe this? He saw that bank risk departments did not monitor counterparty holdings with LongTerm Capital Management.
6 A non-definitive number proposed by Publisher’s Weekly: http://www.publishersweekly. com/article/CA6469524.html?q=“age+of+turbulence”.
7 Reuters, “Highlights—Speeches from UK’s Brown and Darling; Greenspan,” October 1, 2007, http://www.reuters.com/article/companyNewsAndPR/idUSBROWN20071001?sp=true.
8Alan Greenspan, Consumer Finance At the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. April 8, 2005.
9Testimony of Dr. Alan Greenspan, Committee of Oversight and Reform, October 23, 2008, p.1.
10Caroline Baum at Bloomberg listed Greenspan’s once-in-a-century proclamations. Greenspan had told us a few years back that we were in the midst of a “once-in-a-lifetime” technological boom. In July 2002, he announced a “once-in-a-generation frenzy of speculation” was over. In the summer of 2008, he ordained the solvency crisis a “once-in-a-century phenomenon.” Caroline Baum, “No Limit to Greenspan’s Once-InA-Century Events,” Bloomberg, August 18, 2008.
11 Scott Lanman and Steve Mathews, “Greenspan Concedes to ‘Flaw’ in Market Ideology,” Bloomberg, October 23, 2008.
Greenspan blamed his model. It had miscalculated his input that the “self-interest of lending institutions” protected shareholder interests. He may have believed this, but a moment’s reflection would have reminded him the “bank holding companies that control an increasing proportion of all the commercial banking in our country”—as Senator Proxmire had lectured Greenspan 21 years earlier—acted exactly as the senator had warned. They used their bulk to indulge their own desires and left their institutions (and the United States) on the precipice of collapse.
Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession Page 33