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

by Frederick Sheehan

  Again, the general reception of The Age of Turbulence was pleasant, but Greenspan insisted on defending himself when any question was posed that might impinge his reputation. By doing so, he called more attention to his past deeds. This probably damaged his reputation, although, it is difficult to separate these wounds from the arrows that would have been directed at Greenspan in any case, given that the financial system was both degenerating and beyond the capacity of any human to understand. On the television program 60 Minutes, he insisted that while he knew subprime “practices were going on, I had no notion of how significant they had become until very late. I didn’t really get it until very late in 2005 and 2006.”14 This did not persuade many viewers, since, presumably, most viewers knew, long before that, of sleazy practices and deadbeats who received home loans. He then defended the Fed’s lack of initiative by claiming that it was not his job. He claimed that central banks and market regulators lacked the resources to address criminal or illegal acts. “We are not skilled enough in these areas and we shouldn’t be expected to.” He offered advice: “It should be with the states’ attorney general and, frankly, it should be beefed up a considerable amount from where it is at this stage.”15 The question was about regulation, not crime: nobody proposed that the Federal Reserve should open a prosecution office. If Greenspan had given half as many speeches admonishing irresponsible bankers as he did on energy, Citicorp’s CDO team would have been disbanded. Greenspan instinctively scolded the attorneys general and rejected responsibility for his own failure.

  9 Nick Timiras, “Clinton Looks to Greenspan,” Wall Street Journal, March 26, 2008. 10Keach Hagey, “Greenspan Backtracks on Iraq War Oil Claim,” CBS News.com,

  September 17, 2007. Hagey quotes various reports from newspapers. 11 Edmund L. Andrews and David E. Singer, “Former Fed Chief Attacks Bush on Fiscal

  Role,” New York Times, September 15, 2007.

  12Edmund L. Andrews, “A ‘Disappointed’ Greenspan Lashes Out at Bush’s Economic

  Policies,” New York Times, September 17, 2007.

  13 Ibid.

  Greenspan’s Grand Tour

  Greenspan showed great stamina for a man in his eighties. After selling The Age of Turbulence on the domestic press circuit, he headed to Europe. In Paris, Greenspan told Le Figaro that Dominique Strauss-Kahn (France’s candidate to head the IMF) should be the next managing director, but the “IMF has to rethink its mission.”16 Greenspan was never at a loss to identify others’ faults.

  Safely across the border, he told a Bundesbank fiftieth-anniversary gathering that the newly elected president of France, Nicolas Sarkozy, should not be lobbying the European Central Bank to lower rates. After he hemmed, he hawed: Greenspan said that Sarkozy was doing a good job. In London, he told the Daily Telegraph that “Britain is more exposed than we are [to mortgage defaults]—in the sense that you have a good deal more adjustable-rate mortgages.”17 That would seem to contradict his variable-rate advice in February 2004, when he advised Americans to look overseas, “where adjustable-rate mortgages are far more common.”18 His statement to the Telegraph was on September 17, in the midst of a bank run on Northern Rock, a British bank. He may not have heightened the hysteria sweeping Britain, but he could have kept his mouth shut.

  14 Interview with Leslie Stahl, 60 Minutes, September 16, 2007.

  15 Jane Wardell, “Greenspan Defends Subprime,” Associated Press, October 2, 2007.

  16“World Markets Still Affected by Fear: Greenspan,” Le Figaro, September 23, 2007.

  17“UK More Vulnerable than America to the Credit Crunch, Greenspan says,” Daily Te l eg raph (London), September 18, 2007.

  After Britain, he was seen in Vienna, where he said, “[T]here is no doubt about the fact that low interest rates for longterm government bonds have caused the real estate bubble in the US” and “[real estate] prices are going to fall much lower yet.”19 In Amsterdam, Greenspan fueled a cabinet crisis (about unemployment) when he told the press and ING Bank’s guests that the unemployment numbers are so low in the United States because it’s easy to fire an employee and it’s also easy to find a job. 20

  The author grew more defensive. The same day the New York Times had upbraided him in September, Greenspan told CNBC: “I’m fully aware of the fact that everyone thinks that the Federal Reserve, back when I was chairman, inflated the economy. Well, we didn’t.”21 “Everyone” went too far, but celebrity economists were about to speak out. Nobel Prize winner Joseph Stiglitz claimed: “Alan Greenspan really made a mess of all this.”22 Patrick Artus, economic advisor to the French government and “one of France’s most listened to ‘pundits’” told Bloomberg that “Greenspan was an arsonist and fireman combined. . . . He absolutely failed to see where the malfunctions in the U.S. economy were.”23

  “I Didn’t Do It!” was the December 12, 2007, headline of a Salon.com story that described recent Greenspan excuses.24 This sort of headline had become a sport: “Not My Fault” was New York magazine’s synthesis;25 The Sunday Times (of London): “Don’t Blame Me!”;26 Palm Beach Post: “Will Alan Greenspan just shut up and let someone else try to clean up the damage he allowed to happen?”27

  18 Alan Greenspan, “Understanding Household Debt Obligations,” speech at the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C., February 23, 2004.

  19 “House Prices to Drop Much Lower: Greenspan,” Reuters, September 21, 2007.

  20 De Telegraaf, September 29, 2007, translated by Hans Merkelbach.

  21Alister Bull, “Critics Charge Greenspan but Maestro Legacy Endures,” Reuters, September 18, 2007.

  22Reed V. Landberg and Paul George, “Greenspan ‘Mess’ Risks U.S Recession, Stiglitz Says,” Bloomberg, November 16, 2007.

  23Farah Nayeri, “Greenspan Was ‘Very Bad’ Fed Chairman, Says Artus of Natixis,” Bloomberg, November 30, 2007.

  24Andrew Leonard, “Alan Greenspan on the Mortgage Crisis: ‘I Didn’t Do It!’” Salon. com, December 12, 2007.

  Greenspan did not agree. The problem was in not explaining himself, the chairman told Steve Inskeep on NPR radio.28 This was a puzzling self-critique, since he was doing little else. Greenspan rejected criticism that the Fed had fueled the housing bubble by lowering interest rates. That argument “doesn’t coincide with the facts. . . . [W]e’ve had housing bubbles in two dozen or more countries around the world.” Greenspan had grown astonishingly adept at identifying bubbles—at least 24 this time.29 He did not mention what many critics now argued: there was no one more responsible for the two dozen real estate bubbles than Alan Greenspan. He printed the dollars the rest of the world absorbed. This led to the worldwide asset inflation.

  Greenspan addressed derivative problems as if he were a rookie financial reporter recently transferred from the Arts & Leisure section. Greenspan told Reuters the abrupt upheaval in markets as a result of the subprime crisis “was an accident waiting to happen.”30 He revealed: “It was a failure to properly price these risky assets that set off the tidal wave of risk contamination.”31 On another topic: “Markets from their earliest days have been plagued by bubbles.”32

  His most obvious claims were quoted as nuggets of wisdom: “The markets for certain complex, structured products, will surely contract.”33 A few days later, he “defended the U.S. subprime mortgage market, arguing the repackaging and sale to investors of risky home loans—not the loans themselves—was to blame for the current global credit crisis.”34 Any diversion would do.

  25 “Not My Fault,” New York, September 14, 2007.

  26“Alan Greenspan: Don’t Blame Me; I Couldn’t Alter Asset Prices,” Sunday Times (London), January 27, 2008.

  27“The Greenspan Bubble,” Palm Beach Post, December 19, 2007.

  28“Greenspan: Recession Odds ‘Clearly Rising,’” NPR, December 14, 2007.

  29 Ibid.

  30“Highlights—Speeches from UK’s Brown and Darling; Greenspan,” Reuters, October 1, 2007.

  31 I
bid.

  32 Ibid.

  33 Ibid.

  On January 24, 2008, the itinerant author was in Vancouver, Canada. He told Sherry Cooper at BMO Financial Group that his now-infamous adjustable-rate mortgage speech in February 2004 had been misrepresented. Greenspan, in defending himself, told Cooper that he spoke to the Economic Club of New York seven days later, “where I strongly clarified my remarks,” and “[s]o I plead not guilty.”35 (Greenspan had blamed several guilty parties over the past few weeks: reporters, Dick Cheney, George Bush I, George Bush II, the cold war, models, history, commercial lenders, mortgage companies, appraisers, and home buyers.) His speech to the Economic Club was about the trade deficit. He discussed the mortgage issue during the question-and-answer session. The Federal Reserve Web site posts only speeches. If Greenspan thought he had been misunderstood, he should have addressed adjustable-rate mortgages in a speech, or several speeches.

  Anna Schwartz spoke to the Daily Telegraph from her office at the National Bureau of Economic Research, where she had worked since 1941. The coauthor with Milton Freidman of A Monetary History of the United States offered a new monetary interpretation. According to the Te l egraph: “She is scornful of Greenspan’s campaign to clear his name by blaming the bubble on an Asian savings glut.” In Schwartz’s opinion: “This attempt to exculpate himself is not convincing. . . . It can’t be blamed on global events. . . . It is clear that monetary policy was too accommodative. Rates of one percent were bound to encourage all kinds of risky behavior.”36

  Big Money

  Greenspan was hired by John Paulson in January 2008. This was Greenspan’s lucky day: a chance to really make fast money on the crack-up. Paulson saw the future of housing by 2005, when he told one of his colleagues: “We’ve got to take as much advantage of this as we can.”37 Paulson & Co. took the short side of mortgage security credit default swaps. The strategy paid off handsomely in 2007 when two of Paulson’s hedge funds rose 590 percent and 350 percent.38 Paulson earned a personal paycheck of $3 to $4 billion.39

  34 Jane Wardell, “Greenspan Defends Subprime, Sees Some Early Signs of Easing in Credit Crisis,” Associated Press, October 2, 2007.

  35 Bill Fleckenstein, “Did Greenspan Push Risky Home Loans?” Contrarian Chronicles, February 4, 2008; moneycentral.msm.

  36Ambrose Evans-Pritchard, “Anna Schwartz Blames Fed for SubPrime Crisis,” Daily Telegraph (London), January 13, 2008.

  Greenspan was more responsible than any other person for the bust, which might have caused a moral dilemma before he tackled his new job, but Greenspan had a knack for rationalizations. After the Paulson hiring, the Wall Street Journal asked Greenspan: “All three of your clients—Pimco, Deutsche Bank, and now Paulson—were bearish early on housing and mortgages. Is there a connection?” The absent-minded Ph.D responded: “I hadn’t [noticed] until you just raised the issue.”40

  Pimco had hired Greenspan as an advisor in May 2007, and Deutsche Bank had done so in August. The Wall Street Journal asked Deutsche Bank’s CEO Joseph Ackerman why Greenspan is “uniquely qualified to help his clients.” Ackerman said that he admired Greenspan’s ability to “explain very complicated subjects and situations in simple terms.”41

  “Don’t Blame the Crisis on Me”

  Greenspan defended himself on the editorial pages. “We Will Never Have a Perfect Model of Risk” was both the title and the theme of a March 16, 2008, Financial Times op-ed: “[M]athematically elegant economic forecasting models . . . once again have been unable to anticipate a financial crisis or the onset of a recession.”42 It was unseemly. Richard Russell, the renowned author of the oldest financial newsletter in the country (Richard Russell’s Dow Theory Letters), wrote to his clients: “Greenspan with his proclivity to creating bubbles is largely responsible for the subprime mess. But this publicity-seeking ego-maniac continues to act like the great oracle. Is there any way of getting Greenspan off the public scene? The man has absolutely no shame.”43

  37 Gregory Zuckerman, “Trader Made Billions on Subprime,” Wall Street Journal, January 15, 2008.

  38 Ibid.

  39 Ibid.

  40“Greenspan: Subprime Sales May Be Near Bottom,” Wall Street Journal, January 15, 2008.

  41Greg Ip, “Fed Ex-Chief Greenspan to Advise Deutsche Bank,” Wall Street Journal, August 13, 2007.

  42Alan Greenspan, “We Will Never Have a Perfect Model of Risk,” Financial Times, March 16, 2007.

  Greenspan was consumed with his own legacy. He did not have the decency to retreat when the Wall Street collapse commenced. On March 16 the Fed announced an “overnight loan facility” that would provide “funding to primary dealers.”44 In a flash, the Fed had increased its mandate to fund brokers and dealers, not just banks. Bernanke’s Fed opened this facility when Bear Stearns could not borrow. Investment banks needed constant government borrowing support just to exist. The Fed arranged a wedding between JP Morgan Chase and Bear Stearns to save the latter. It was now obvious the derivatives that Greenspan still extolled (credit derivative swaps) had concentrated risk in financial institutions rather than spreading risk among parties. His record for wrongheadedness remained intact.

  Paul Volcker was distraught. He spoke at the Economic Club of New York on April 8, 2008. Earlier in the year, Volcker told the New York Times that “[t]oo many bubbles have been going on for too long. The Fed is not really in control of the situation.”45 This day, he shredded the Bernanke Fed. Volcker was asked if he predicted a dollar crisis in future years. “You don’t have to predict it, we’re in it.”46 The former Federal Reserve chairman explained: “As custodian of the nation’s money, the Federal Reserve has the basic responsibility to protect its value and resist chronic pressures toward inflation.”47 It was apparent that Bernanke’s concerns did not include the dollar. He was busy bailing out participants in the crony capitalism that was making the United States look like a fourth-world country. 48

  43 Richard Russell, Dow Theory Letter, March 17, 2008, pp. 7–8.

  44 Federal Reserve Bank of New York, “Primary Dealer Credit Facility: Frequently Asked Questions.” www.ny.frb.org

  45Roger Lowenstein, “The Education of Ben Bernanke,” New York Times Magazine, January 20, 2008.

  46“Volcker’s Demarche,” “Review & Outlook,” online.wsj.com, April 9, 2008.

  47 Paul Volcker, remarks at a luncheon of the Economic Club of New York, New York, April 8, 2008.

  While Volcker worried about the country, Greenspan had more parochial concerns. He was back in the Financial Times on April 7. The newspaper seemed to be using Greenspan more than the other way around. In the weekend edition (April 5–6, 2008), there was a large advertisement for his Monday column. A solid, black background housed the topic in pink letters: “Greenspan: Don’t Blame the Crisis on Me.”49 His immaculate record had become a joke.

  The title of Greenspan’s article said more than enough: “The Fed Is Blameless on the Property Bubble.”50 More model problems. The press was less subservient than before. Some headlines on April 8: New York Post: “Greenspan Blames Investors for Crisis”51; Reuters (Singapore): “Greenspan Says Unfairly Blamed, Has No Regrets”; Sydney Morning Herald, Australia: “Greenspan Rejects Interest Rates Criticism”; Gulf Times (Qatar): “Investors to Blame for Crisis, not Fed, Says Greenspan”52; Los Angeles Times: “Memo to Greenspan: Enough Already.” (The first sentence from L.A. Land, the newspaper’s blog: “The unseemly, globetrotting, money-grabbing, legacy-spinning, responsibility-denying tour of Alan Greenspan continues, as relentless as a bad toothache.”53)

  On the same day, April 8, the Wall Street Journal published a long self-defense in an interview with Greenspan. The bull market icon who used to be God told the Journal that he didn’t regret a single decision.54 Greenspan was particularly upset with criticisms “by friends and former colleagues, many of them respected economists who backed his policies at the time but now say, in hindsight, that the calls were wrong.”55 This was a fair point. It does seem that profes
sional economists waited until the housing meltdown before tossing the former chairman overboard. Among possible explanations, those who now spoke may have believed what they now said all along, but there was no one in the media interested in quoting them; they may have waited until it was safe to talk; they may have been as inept as Greenspan at looking ahead; they may have grown sick and tired of his whining or they may have, in concert, derided Greenspan, using him as a sacrificial offering, since the fallacy of economics as taught over the past half century was unraveling.

  48 Bernanke was just warming up. Within a few months, all the investment banks had either failed, been absorbed, or been allowed to hide under a commercial banking umbrella. The big five had been Bear Stearns, Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman Brothers. Aside from the various Federal Reserve windows (soon there were more than in the cathedral at Chartres), the government (through the Treasury Department) was pouring billions of dollars into Citicorp, Fannie Mae, Freddie Mac, and Bank of America (the government had absorbed Mozilo’s Countrywide Credit), and the Fed was running the biggest insurance company in the world: AIG.

  49 Financial Times, April 5–6, 2008, p. 9.

  50Alan Greenspan, “The Fed Is Blameless on the Property Bubble,” Financial Times, April 7, 2008.

  51 The headline was in the New York Post; the accompanying article is from Reuters.

  52 The headline was in Gulf Times (Qatar); the accompanying article is from Reuters.

  53Peter Viles, “Memo to Greenspan: Enough Already,” Los Angeles Times, blog called “L.A. Land,” April 8, 2008.

  After reading the Journal article, Senator Jim Bunning commented, “He protests too loudly of the criticism that is justly due him. I’ve never seen someone who doesn’t think he needs defending himself so much.”56

  Comparisons the next day were inevitable. Caroline Baum wrote: “Volcker is a man of few words; Greenspan won’t shut up.” Baum quoted another apostate to the Greenspan legend, former Federal Reserve Governor Alice Rivlin: “[T]he culprit was not imperfect models. It was a failure to ask common sense questions, such as, ‘will housing prices keep going up forever?’”57 The title of Baum’s article captured a general mood: “Volcker Stands Tall, Greenspan Keeps Shrinking.”58