by Matt Taibbi
Toward the end of her life, even Rand began to wonder about Greenspan’s commitment to the faith, leading to one of the few genuinely salient observations she ever made in her whole silly life: “I think that Alan basically is a social climber,” she said.
This ability to work both sides of the aisle at the same time would ultimately amaze even Barbara Walters, whom Greenspan somehow managed to make his girlfriend in the seventies. “How Alan Greenspan, a man who believed in the philosophy of little government interference and few rules of regulation, could end up becoming chairman of the greatest regulatory agency in the country is beyond me,” Walters said in 2008.
How did it happen? Among other things, Alan Greenspan was one of the first Americans to really understand the nature of celebrity in the mass-media age. Thirty years before Paris Hilton, Greenspan managed to become famous for being famous—and levered that skill into one of the most powerful jobs on earth.
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Alan Greenspan’s political career was built on a legend—the legend of the ultimate Wall Street genius, the Man with All the Answers. But the legend wasn’t built on his actual performance as an economist. It was a reputation built on a reputation. In fact, if you go back and look at his rise now, his career path has a lot less in common with economist icons like Keynes or Friedman than it does with celebrity con artists like L. Ron Hubbard, Tony Robbins, or Beatles guru Maharishi Mahesh Yogi.
Like the Maharishi, Greenspan got his foot in the big door by dazzling deluded celebrities with voluble pseudo-mystical nonsense. One of his big breaks came when a lawyer named Leonard Garment introduced him to Dick Nixon in 1968.
Garment would later describe Greenspan’s bloviating on economic matters in that meeting as “Nepal Kathmandu language.” Nixon, nonetheless, was impressed, saying, “That’s a very intelligent man.” Later he brought him into the campaign. And although Greenspan eventually declined a formal role in Nixon’s government, he would henceforth thrive in a role as economic guru to men with power, a role that the press somehow never failed to be made aware of.
When he finally did come into government full-time as head of Ford’s Council of Economic Advisers, glowing accounts of Greenspan’s authority in the White House routinely appeared in the press.
“Greenspan has a unique relationship with the president,” crowed BusinessWeek, which added that, according to one aide, “on economic policy, Alan is a heavyweight.” Future right-wing Godzilla Dick Cheney, then serving as Ford’s chief of staff, added in the New York Times Magazine that President Ford attached “more weight to Greenspan’s views than those of any other among his economic advisers.”
Sometimes Greenspan himself was the source of the compliments. The New Yorker in 1974, addressing the inflation issue that was hot at the time, offered this hilarious piece of praise: “Economists of all persuasions (with the exception of Alan Greenspan, an Ayn Rand disciple, who heads the President’s Council of Economic Advisers) admit to being baffled by today’s problems.”
Not long after that, in 1975, Greenspan became the first economist to grace the cover of Newsweek; by then he had also already been named to Time’s illustrious Board of Economists, which met four times a year to harrumph about economic matters for the mag. Greenspan was even asked for an interview by Penthouse that same year, although he declined.
That Greenspan has always been intensely interested in press attention is something that virtually every source I spoke with accepts almost without question. His interest in the media can even be seen in his personal life; he dated in succession three different prominent television figures, moving from Barbara Walters in the late seventies to MacNeil/Lehrer producer Susan Mills in the eighties to the woman he ultimately married, NBC correspondent Andrea Mitchell.
One reporter for a major daily newspaper who covered the Fed in the nineties tells of getting frantic calls from Greenspan’s office at 7:00 the morning after a negative piece appeared. “I was still half asleep, but the chairman was already unhappy,” he said. Around the same time, Paul Weller, a University of Iowa professor who wrote a blisteringly critical paper on Greenspan, was hounded for a copy by Fed press aides before it was even published. “Alan himself wanted to see it,” the author chuckles now.
Greenspan was exceptionally skilled at pushing his image of economic genius, particularly since his performance as an economic prognosticator was awful at best. “He was supposedly the smartest man in the world,” laughs economist Brian Wesbury today. “He was the greatest, the Maestro. Only if you look at his record, he was wrong about almost everything he ever predicted.”
Fed watchers and Greenspan critics all seem to share a passion for picking out which of Greenspan’s erroneous predictions was most ridiculous. One of his most famous was his pronouncement in the New York Times in January 1973: “It’s very rare that you can be as unqualifiedly bullish as you can now,” he said. The market proceeded to lose 46 percent of its value over the next two years, plunging from above 1,000 the day of Greenspan’s prediction to 571 by December 1974.
Greenspan was even bad at predicting events that had already happened. In April 1975, Greenspan told a New York audience that the recession wasn’t over, that the “worst was yet to come.” The economy swiftly improved, and the National Bureau of Economic Research later placed the end of the recession at March 1975, a month before Greenspan’s speech.
Greenspan’s career is full of such pronouncements. In July 1990, at the start of the recession that would ultimately destroy the presidency of George H. W. Bush, Greenspan opined: “In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” Months later, as the bad news continued, Greenspan soldiered on: “Those who argue that we are already in a recession I think are reasonably certain to be wrong.”
By October, with the U.S. in the sixth of what would ultimately be ten consecutive months of job losses, Greenspan remained stubborn. “The economy,” he said, “has not yet slipped into recession.”
The economy has a lot in common with the weather, and even very good economists charged with the job of predicting market swings can become victims of unexpected turns, just like meteorologists. But Greenspan’s errors were often historic, idiotic blunders, evidence of a fundamental misunderstanding of problems that led to huge disasters. In fact, if you dig under almost every one of the major financial crashes of our time, you can find some kind of Greenspan quote cheerfully telling people not to worry about where the new trends in the economy were leading.
Before the S&L crisis exploded Greenspan could be seen giving a breezy thumbs-up to now-notorious swindler Charles Keating, whose balance sheet Greenspan had examined—he said that Keating’s Lincoln Savings and Loan “has developed a series of carefully planned, highly promising and widely diversified projects” and added that the firm “presents no foreseeable risk to the Federal Savings and Loan Corporation.”
The mistake he made in 1994 was even worse. After a few (relatively) small-scale disasters involving derivatives of the sort that would eventually nearly destroy the universe in 2008, Greenspan told Congress that the risks involved with derivatives were “negligible,” testimony that was a key reason the government left the derivatives market unregulated. His misreading of the tech bubble of the late nineties is legendary (more on that later); he also fell completely for the Y2K scare and at one point early in the George W. Bush presidency actually worried aloud that the national debt might be repaid too quickly.
But it wasn’t Greenspan’s economic skill that got him to the top banker job. Instead, it was his skill as a politician. During Ronald Reagan’s first and second terms, while the irritatingly independent Paul Volcker sat on the Fed throne, Greenspan was quietly working the refs, attending as many White House functions as he could. Former Reagan aides told Greenspan’s biographer Jerome Tuccille that “Alan made a point of regularly massaging the people who mattered.” Another official, Martin Anderson, reported that “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 absolutely astounded by his omnipresence.”
Greenspan had proved his worth to Reagan by using a commission he headed to perform one of the all-time budgetary magic tricks, an invisible tax hike that helped the supposedly antitax Reagan administration fund eight years of massive deficit spending.
In 1981 Reagan appointed Greenspan to head the National Commission on Social Security Reform, which had been created to deal with an alleged short-term funding crisis that would leave the Old-Age and Survivors Insurance Trust Fund bankrupt by 1983. It goes without saying that any political decision one makes with regard to Social Security is hazardous; cutting benefits is a shortcut to electoral death, and the alternative, raising taxes, isn’t so palatable either.
Greenspan’s solution was to recommend hikes in the Social Security tax, which of course is not considered a real “tax” (Reagan would hilariously later describe such hikes as “revenue enhancements”) because the taxpayer theoretically gets that money back later on in benefits. The thinking here was that in the early eighties, with so many baby boomers now in their prime earning years, the Reagan administration would hike payments to build up a surplus that could in twenty or thirty years be used to pay out benefits when those same baby boomers reached retirement age. The administration accepted those proposals, and the Social Security tax rate went from 9.35 percent in 1981 to 15.3 percent by 1990.
Two things about this. One, Social Security taxes are very regressive, among other things because they only apply to wage income (if you’re a hedge fund manager or a Wall Street investor and you make all your money in carried interest or capital gains, you don’t pay) and they are also capped, at this writing at around $106,000, meaning that wages above a certain level are not taxed at all. That means that a married couple earning $100,000 total will pay roughly the same amount of Social Security taxes that Lloyd Blankfein or Bill Gates will (if not more, depending on how the latter two structure their compensation). So if you ignore the notion that Social Security taxes come back as benefits later on, and just think of them as a revenue source for the government, it’s a way for the state to take money from working- and middle-class taxpayers at a highly disproportional rate.
Second, Greenspan’s plan to build up a sort of Social Security war chest for use in paying out benefits to retirees twenty years down the road was based on a fallacy. When you pay money into Social Security, it doesn’t go into a locked box that is separate from the rest of the budget and can’t be used for other government spending. After the Greenspan reforms, the Social Security Administration bought T-bills with that money, essentially lending the cash back to the government for use in other appropriations. So if, let’s say, your president wanted an extra few billion dollars or so of short-term spending money, he could just reach into the budget and take all that Social Security money, leaving whoever would be president two decades later holding not cash to pay out Social Security benefits, but government notes or bonds, i.e., IOUs.
And that’s exactly what happened. The recommendations ushered in after Greenspan’s commission effectively resulted in $1.69 trillion in new, regressive taxes over the next twenty years or so.
But instead of keeping their hands off that money and preserving it for Social Security payments, Reagan, Bush I, Clinton, and Bush II spent it—all of it—inspiring the so-called Social Security crisis of George W. Bush’s presidency, in which it was announced suddenly that Social Security, far from having a surplus, was actually steaming toward bankruptcy. The bad news was released to the public by then–Treasury secretary Paul O’Neill, who let it slip that the Social Security fund had no assets at all, and instead just had pieces of paper in its account.
“I come to you as managing trustee of Social Security,” O’Neill said. “Today we have no assets in the trust fund. We have the good faith and credit of the United States government that benefits will flow.”
In other words, Greenspan and Reagan had conspired to hike Social Security payments, justifying it with the promise of building up a Social Security nest egg for subsequent decades, then used up that nest egg on current government spending.
Now, it was bad enough that Greenspan, who as a Randian was supposedly against all use of government “force,” would propose such a big tax hike. But what made his role especially villainous was that when George W. Bush decided to start sounding alarm bells about the future of Social Security, it was none other than Alan Greenspan who came out and argued that maybe it was time to cut Social Security benefits. This is from a Washington Post story in February 2004:
Greenspan offered several ways to curtail federal spending growth, including reducing Social Security and Medicare benefits. The Fed chairman again recommended raising the age at which retirees become eligible, to keep pace with the population’s rising longevity. And he reminded lawmakers that they could link cost-of-living increases in benefits levels to a measure of inflation other than the consumer price index, a widely followed measure that some economists believe overstates the rise in overall prices. A measure that showed less inflation would cause benefit levels to rise more slowly.
To recap: Greenspan hikes Social Security taxes by a trillion and a half dollars or so, four presidents spend all that money on other shit (including, in George W. Bush’s case, a massive tax cut for the wealthy), and then, when it comes time to start paying out those promised benefits, Greenspan announces that it can’t be afforded, the money isn’t there, benefits can’t be paid out.
It was a shell game—money comes in the front door as payroll taxes and goes right out the back door as deficit spending, with only new payroll taxes over the years keeping the bubble from popping, continuing the illusion that the money had never left. Senator Daniel Patrick Moynihan, way back in 1983, had called this “thievery,” but as the scam played out over the decades it earned a more specific title. “A classic Ponzi scheme” is how one reporter who covered Greenspan put it.
Coming up with a scheme like this is the sort of service that endears one to presidents, and by the mid-eighties Greenspan got his chance at the big job. Reagan had grown disenchanted with Volcker. The administration apparently wanted a Fed chief who would “collaborate more intimately with the White House,” as one Fed historian put it, and they got him in Greenspan, whom Reagan put in the top job in 1987. Greenspan “struggled inwardly to contain his glee,” his biographer Tuccille wrote, and came into the job with great fanfare, including a Time magazine cover story that anointed him “The New Mr. Dollar.”
He breezed through the nomination process, despite a battering by Wisconsin senator William Proxmire, who whaled on Greenspan’s record of failed forecasts during his tenure on Ford’s Council of Economic Advisers. In one of the more humorous exchanges, Greenspan attempted to deny that he had once predicted a T-bill rate of 4.4 percent for 1978 (it turned out to be 9.8 percent) or that the U.S. Consumer Price Index would rise 4.5 percent (it actually rose 9.5 percent). “That is not my recollection of the way those forecasts went,” Greenspan asserted.
Proxmire then went on to read out Greenspan’s predictions one by one.
“Well,” Greenspan quipped, “if they’re written down, those are the numbers.”
Proxmire kept at Greenspan, but it didn’t take. On August 11, 1987, Alan Greenspan was sworn in as Federal Reserve chairman, effectively marking the beginning of the Bubble Generation.
The shorthand version of how the bubble economy works goes something like this:
Imagine the whole economy has turned into a casino. Investors are betting on oil futures, subprime mortgages, and Internet stocks, hoping for a quick score. In this scenario the major brokerages and investment banks play the role of the house. Just like real casinos, they always win in the end—regardless of which investments succeed or fail, they always take their cut in the form of fees and interest. Also just like real casinos, they only make more money as the numb
er of gamblers increases: the more you play, the more they make. And even if the speculative bubbles themselves have all the inherent value of a royal flush, the money the house takes out is real.
Maybe those oil futures you bought were never close to being worth $149 a barrel in reality, but the fees you paid to Goldman Sachs or Morgan Stanley to buy those futures get turned into real beach houses, real Maseratis, real Park Avenue town houses. Bettors chase imaginary riches, while the house turns those dreams into real mansions.
Now imagine that every time the bubble bursts and the gamblers all go belly-up, the house is allowed to borrow giant piles of money from the state for next to nothing. The casino then in turn lends out all that money at the door to its recently busted customers, who flock back to the tables to lose their shirts all over again. The cycle quickly repeats itself, only this time the gambler is in even worse shape than before; now he’s not only lost his own money, he’s lost his money and he owes the house for what he’s borrowed.
That’s a simplistic view of what happened to the American economy under Alan Greenspan. The financial services industry inflated one speculative bubble after another, and each time the bubble burst, Greenspan and the Fed swept in to save the day by printing vast sums of money and dumping it back on Wall Street, in effect encouraging people to “drink themselves sober,” as Greenspan biographer William Fleckenstein put it.
That’s why Alan Greenspan is the key to understanding this generation’s financial disaster. He repeatedly used the financial might of the state to jet-fuel the insanely regressive pyramid scheme of the bubble economy, which like actual casinos proved to be a highly efficient method for converting the scattered savings of legions of individual schmuck-citizens into the concentrated holdings of a few private individuals.