[A-List] My BBC - World Service statements on Alan Greenspan

[Michael Hudson]

Here's what I said today on BBC ­ September 17, 2007, World Service, 9 PM
GMT, discussion of Alan Greenspan¹s legacy, as his autobiography was
published today.
 
            Somewhat against my wishes, the interviewer insisted in starting
the program with my anecdote about how I was designated to fire Mr.
Greenspan in 1966. I was Chase Manhattan Bank¹s balance-of-payments
economist at the time, and was writing a study of the balance of payments of
the U.S. petroleum industry. Chase and Socony Oil Company each had paid
$10,000 to finance the study, and Socony had insisted on bringing on Alan
Greenspan. My boss in the Economic Research Dept., John Deaver, worried that
Greenspan was so eager to get business by giving the client what it wanted,
that few people had much confidence in his statistics. Greenspan was
supposed to make statistics on US oil company capital investment. What he
did was take a rough approximation ­ based on total worldwide investment. He
told his two statistical assistants (Lucille Wu and one other) to assume
proportionality. ³It¹s all implicit,² she said. By ³implicit,² she meant,
assuming that European and Near Eastern depreciation rates and other tax
laws were identical to U.S. laws, obviously not the case. Mr. Deaver and I
were invited up to David Rockefeller¹s dining room, who told me to inform
Mr. Greenspan that unless he could provide specifically U.S. numbers ­
and/or be forthright about his assumptions ­ we would have to exclude his
numbers. (Socony¹s rep. was a friend of his, and I think they made sure he
got paid as their favorite business lobbyist de jour.)
 
            Mr. Greenspan was an economic lobbyist for the rich, for large
corporations and for Wall Street. That is the job of a Federal Reserve
chairman these days. Like a good criminal defense lawyer or the ³expert
witnesses² they hire, a good lobbyist makes a cover story believable. Mr.
Greenspan crafted a myth that many people wanted to believe. The myth was
that people ­ just about everyone ­ could get rich by going into debt, to
buy property whose prices were being inflated by Federal Reserve policy of
lowering interest rates and deregulating the financial sector to usher in a
period of ³wild finance.²
            Mr. Greenspan sponsored the confusion that increasing asset
prices constituted ³wealth formation.² It was not the kind of wealth that
Adam Smith meant in The Wealth of Nations. Posing as an enemy of
³inflation,² he tried to make people love one particular kind of inflation:
asset-price inflation.
            The distinguishing feature of asset-price inflation ­ the bubble
­ is that it raised the price of property relative to labor¹s wages. This
put the class war back in business ­ this time a class war by the financial
sector against industry as well as against labor. It took more and more
take-home wages to buy a house or a retirement income.
 
1.            As the most vocal cheerleader for the Bubble Economy, Mr.
Greenspan was more responsible than anyone else for loading the U.S. economy
down with debt, leaving a legacy of negative equity in his wake. For almost
the first time in history, people thought that they could get rich by
borrowing to buy assets that were rising in price. This was the essence of
America¹s Bubble Economy. Mr. Greenspan made America KOVE inflation ­ at
least, asset-price inflation.
            The myth that he created was that people should treat their
houses like a piggy bank. But borrowing is NOT like drawing down a bank
account. It leaves a legacy of debt ­ that must be repaid. And while prices
for real estate and stocks may go down, the debts remain in place.
 
            Lowering interest rates enabled a larger debt to be carried, by
a given rental income.
            Lowering down payments, and even giving ³reverse mortgages²
where banks agreed to lend borrowers the interest, is what Hyman Minsky
called the ³Ponzi phase² of the credit cycle.
 
2             His main role as economic lobby for his financial clients was
anti labor. Although he claimed to support cutting taxes to ³spur markets,²
he played a major role in raising taxes for most wage-earners. He did this
as head of the Greenspan Commission in 1982. The rhetorical ploy he
suggested was to pretend that Social Security and health care should be
treated as user fees, not as part of the overall budget. This freed the
wealthiest tax brackets from having to finance Social Security for the
bottom 90 percent of the population.
 
            Mr. Greenspan happily approved the Bush tax cuts of 2002 ­ but
later, professed to be shocked, shocked, to find that there was gambling
going on and the cuts on the higher tax brackets led to a large budget
deficit, and recommended that the government cut back Social Security and
medical care expenditures to pay for the tax cuts that benefited the upper
brackets ­ his constituency.
 
3            In the above respects, Mr. Greenspan was the architect of
dollar devaluation, by flooding the economy with low interest rates. He put
short-term stock speculation and bank lending over the dollar¹s long-term
stability. But then, finance always has lived in the short run.
            
            The ³pro-Greenspan² man on the interview was Ron Susskind of The
Wall Street Journal, author of The 1% Solution. He gave a pretty balanced
judgment on Mr. Greenspan, and said that after all, he had created a lot of
wealth for a lot of people, and increased home ownership. True enough ­ but
also a lot of debt and subsequently, foreclosures.
            Mr. Susskind made the good point that Greenspan praised Clinton,
virtually as a good Republican for listening to Treasury Secretary Rubin and
Mr. Sommers. True enough!
 
 
            I wish I could have mentioned another anecdote. A few years ago
the Minneapolis Fed asked me to write an article on Mesopotamian debt
cancellations. I did, and was paid nicely for it. They had an artist draw up
a really good diagram. But at the last minute, they cancelled the whole
issue ­ not only my article, but the entire issue was junked.
            I asked why. There was a bit of embarrassment, and my contact
told me that Mr. Greenspan had asked them to do a survey asking their
subscribers who the greatest economist of the 20th century was. Mr.
Greenspan apparently was disappointed with the result. ³Do you mean, that he
wasn¹t Number One?² I asked, somewhat naively. There was almost a one minute
silence. Finally I broke it. ³I see,² I said.

Michael Hudson