Alan greenspan, chairman of the Federal Reserve Board, is the second most powerful man in the US. He is also the most widely respected figure in American public life, whose every utterance attracts national attention. His influence has grown to the point where he exercises an unofficial veto over US economic policy. Shortly after taking office, he was credited with mitigating the fallout from the stock market crash of October 1987. Subsequently, he has been praised for curbing inflation and guiding the economy through its longest period of growth this century. He presides over the "Goldilocks economy"-not too hot, not too cold-and receives extravagant praise from politicians of both parties.
"America's leading economist," as the Fed chairman is sometimes called, never actually pursued an academic career. Born in March 1926, Greenspan was raised by his mother in the impoverished neighbourhood of Washington Heights, Manhattan, after his stockbroker father left home. During the war, he studied music at the Juilliard School in New York, and later played clarinet and saxophone in a jazz band. Subsequently, he took a degree in economics at New York University, but dropped out of his doctoral programme in the early 1950s. For the next 20 years, he earned his living as a consultant economic forecaster, inhabiting a grey area between the formal science of economics and quackery. During this period he belonged to the circle of Ayn Rand, the Russian ?migr? novelist (author of The Fountainhead and Atlas Shrugged). Miss Rand preached a gospel of laissez-faire derived from the Austrian school of economists, in particular Ludwig von Mises. She described herself and her followers as "radicals for capitalism."
Reversing traditional Christian nostrums, the militant atheist Rand believed that money was both "the root of all good" and "the barometer of a society's virtue." She castigated the coercive altruism of the welfare state, maintaining that "altruism is not a doctrine of love, but of hatred for man." Her philosophy, which she called "Objectivism," is characterised by a profound distrust of government intervention in the economy. The state should confine its activities to the protection of the individual from external acts of violence. In an essay entitled "Notes on the History of American Free Enterprise," Rand wrote: "Government control of the economy... has been the source of all the evils in our industrial history-and the solution is laissez-faire capitalism, i.e. the abolition of any and all forms of government intervention in production and trade, the separation of state and economics, in the same way and for the same reasons as the separation of church and state."
Rand's coterie, which gathered in her New York flat on Saturdays to discuss her work, was comprised mainly of friends and relations of her young lover, a psychotherapist named Nathaniel Blumenthal, who changed his name to Branden-an anagram of "Ben Rand," son of Rand-and established the Nathaniel Branden Institute to proselytise her ideas. Greenspan was introduced to the set by his first wife, Joan Mitchell, a friend of Branden's wife, Barbara.
An article in the New Statesman in March 1966 claimed that Objectivism "grafts old-fashioned capitalism on to a fresh branch of paranoia." Rand demanded complete fidelity from her followers and dissenters were punished with expulsion. At first, Greenspan fitted awkwardly into her circle. Branden dubbed him the "undertaker," and claimed his views were Keynesian. However, he soon softened. In an interview with Time in 1974, Rand recalled her early association with Greenspan: "He impressed me as very intelligent and unhappy. He was groping for a frame of reference. He had no fundamental view of life." Rand filled this emotional and intellectual void. In the late 1950s and early 1960s, Greenspan lectured at the Branden Institute, and wrote articles in The Objectivist Newsletter. His views became indistinguishable from those of Branden or Rand herself.
A central tenet of Randian economics was the iniquity of the antitrust provisions of the Sherman Act of 1890. In Rand's opinion, "America's persecuted minority" was "big business." She argued that "the repeal of the antitrust laws should be our ultimate goal." In support, Greenspan wrote an article entitled "Antitrust" in which he claimed that monopolies were not caused by the market but came invariably from government intervention. Left alone, the capital markets would produce the optimal distribution of resources. In another essay, "The Assault on Integrity" (1963), Greenspan claimed that a business's desire to protect its reputation was a sufficient form of regulation. Ignoring the US's long history of financial fraud, he asserted that "Capitalism is based on self-interest and self-esteem; it holds integrity and trustworthiness as cardinal virtues and makes them pay off in the marketplace, thus demanding that men survive by means of virtues, not of vices."
Randians believed, too, that depressions were not inevitable in a system of laissez-faire capitalism. Instead, economic crises, such as the Great Depression, were caused by government interference in the supply of credit. The Federal Reserve caused the boom of the late 1920s by keeping interest rates artificially low in the face of rising speculation: "A free banking system," wrote Branden, "would have been compelled to put the brakes on this process of runaway speculation... in a controlled economy, when a central planner makes an error of economic judgement, the whole country suffers the consequences."
Greenspan supported this thesis in an article entitled "Gold and Economic Freedom" (1966), claiming that the gold standard provided the only reliable balancing mechanism in the banking system and was the ultimate protector of property rights. Likewise, he blamed the Federal Reserve for its loose monetary policy in 1927, which spilled over into the stock market and led directly to the 1929 collapse. In the same article, he attacked welfare spending in the strident language of his mentor: "The welfare state is nothing more than a mechanism by which government confiscates the wealth of the productive members of a society to support a variety of welfare schemes."
Rand's circle, depleted by expulsions, finally collapsed in May 1968 when Rand broke with Branden-not over ideological differences but because Branden had secretly taken another lover. Greenspan and other members of the group were asked-and agreed-to denounce Branden, and the institute was closed down. At the time Greenspan was in his early 40s; he had yet to establish his reputation outside the business world. In his 1971 study of Rand, With Charity toward None, William O'Neill dismissed Greenspan as "the Randian economist"-in other words, not to be taken seriously. However, just as his connection with Rand was weakening, a new interest appeared in his life which was to lead him to the Federal Reserve.
Greenspan's entry into Washington politics is normally described as a chance event. It is said that one day, in 1968, he bumped into the former manager of his jazz band, Leonard Garment, who was working on Nixon's presidential election campaign and suggested that Greenspan join the team. In fact, his introduction to political life was sanctioned and facilitated by Rand. Rand had first encountered Nixon, then a Congressman, when she appeared in October 1947 as a witness before the committee investigating communist influence in Hollywood. It was through Rand that Greenspan met Martin Anderson, Nixon's director of policy development, who was sympathetic to Randian views.
When Greenspan first met Nixon himself he revealed a quality that has held him in good stead ever since. Greenspan has a remarkable ability to charm politicians with his knowledge of economic statistics and his confident, if opaque, predictions. L. William Seidman, President Ford's economic policy coordinator, refers to Greenspan's "good bedside manner with people in power... he speaks in ways that sound profound even if you don't know what the hell he's talking about." Nixon was entranced by him, and in 1974 offered him the plum of chairman of the council of economic advisors, a position which had only once before been held by a person without a doctorate (Greenspan received a PhD from Columbia two years later). After Nixon's resignation, Ford confirmed Greenspan's nomination, and in September 1974 he was sworn in. Ayn Rand attended the ceremony, boasting to a reporter, "Alan is my disciple."
Thirteen years later, in 1987, Greenspan was appointed chairman of the Federal Reserve. Central bankers are expected to hide their intentions, because an unguarded word may have an adverse effect on the markets. Greenspan has gone further than most, and he even jokes about his incoherence. When he reports to Congress, he delivers dull and worthy speeches which appear to allow for every eventuality: inflation may or may not be under control; economic growth might or might not remain strong; interest rates are likely to go up or down. Greenspan has also displayed great political skills. He runs a tight ship at the Fed, and has been reappointed to office by both Republican and Democrat presidents. As a result, he has acquired a reputation as a pragmatist. Yet he has also remained surprisingly faithful to Randian ideals.
Greenspan's preoccupation with inflation can be traced to Rand's influence. "Whenever destroyers appear among men," wrote Rand, "they start by destroying money." Charged with controlling inflation at the Federal Reserve, he has faithfully followed his mentor's instruction to "watch money." His record has been good. Although the rate of inflation increased in the late 1980s, peaking at about 6 per cent in late 1990, it has recently fallen below 2 per cent, despite strong economic growth.
While his stand against inflation receives widespread support, Greenspan fights more furtively on a second front: Randians reject the welfare state in general and government spending deficits in particular. Thus in 1977, Greenspan advised President Ford to reduce government expenditure even though at the time unemployment was more than 8 per cent. He claimed that excessive government expenditure was fuelling fears of inflation, forcing up long-term interest rates, and crowding out business activity-an argument that Keynes dismissed in the 1930s as the "Treasury view." Some people believe that Ford's acceptance of Greenspan's views lost him the election. In September 1980, on the Republican election trail again with Martin Anderson, Greenspan produced the infamous "Chicago statement," which forecast that Reagan's proposed tax cuts would produce a budget surplus of $93 billion by 1985. As it turned out, the figure was wrong by more than $300 billion (the budget deficit for 1985 amounted to $223 billion).
Greenspan has used his power at the Fed to coerce successive administrations into reducing the federal deficit. When the massive Reagan deficits continued into the Bush administration, he stubbornly maintained high interest rates in the early 1990s despite evidence of a severe "credit crunch." His obduracy aroused the resentment of Treasury secretary Nicholas Brady, who argued that recovery was possible without inflation. Although this viewpoint was scoffed at by the Fed, it has since become the conventional wisdom of the "new paradigm" economics of the late 1990s and has been accepted by Greenspan himself.
Ignoring Brady's pleas for lower interest rates, Greenspan focused on the federal deficit and only started reducing rates after Bush, contrary to his election promises, agreed to raise taxes in October 1990. Wayne Angell, a former governor of the Federal Reserve, has criticised Greenspan for meddling in fiscal politics: "It's an open secret that Greenspan promised that, if there was a fiscal deal, the Fed would make a monetary response." Unfortunately for Bush, the tax hike in the middle of a recession was political suicide-as Clinton's election refrain, "It's the economy, stupid," made clear.
Clinton was careful not to repeat the Republicans' mistake of alienating the Fed chairman. In December 1992, the president-elect invited Greenspan to the governor's mansion in Little Rock, Arkansas. At this meeting, according to Bob Woodward in his book The Agenda, Greenspan presented Clinton with his by now familiar argument that the federal deficit was the fundamental cause of high long-term interest rates: if the deficit were reduced, then rates would come down and the stock market would rise. Clinton and Greenspan struck a deal: the president would reduce the budget deficit and in return the Federal Reserve would keep interest rates low. Woodward claims that Greenspan personally proposed the figure of a $140 billion deficit reduction: "Greenspan," wrote Woodward, "was in some ways the ghost-writer of the Clinton Plan." His enhanced position was confirmed symbolically on 17th February 1993, when he was invited to sit between Hillary Clinton and Tipper Gore-the so-called "double date"-at Clinton's first State of the Union speech.
Thus, Clinton's "triangulation" of politics resulted in the economic policies of a Democrat administration being dictated by a welfare-hating Randian. Now that the Federal budget is in surplus, for the first time in a generation, Greenspan has rejected both Clinton's demand for increased welfare expenditure and the Republican proposal of a tax cut. Instead, he prefers paying off the national debt.
In his attitude towards financial regulation, too, Greenspan has remained loyal to Randian doctrine. In the course of the 1968 election campaign, he even persuaded Nixon to accept a plan to end government regulation of Wall Street (Nixon dropped the idea when it proved unpopular with voters). In his book, The Greatest Ever Bank Robbery, Martin Mayer says that during Greenspan's last spell as a business consultant in the mid-1980s, his faith in the adequacy of financial self-regulation led him to support Charles Keating of Lincoln Savings & Loan in an application to use the bank's deposits to invest in real estate, junk bonds and equities. Greenspan wrote to the California bank regulator that the management of Lincoln was "seasoned and expert... [with] a long and continuous track record of outstanding success." In another letter to the regulator Greenspan claimed that Keating's management had turned Lincoln into "a financially strong institution" which would pose no risk of loss to the federal insurer "for the foreseeable future." Keating is alleged to have paid Greenspan $40,000 for writing these two letters. Eventually, Lincoln's disastrous losses on its speculative investments cost the US taxpayer around $3 billion, and in January 1993 Keating was convicted on 73 counts of fraud, racketeering and conspiracy.
The Keating affair does not appear to have tarnished Greenspan's reputation or modified his antipathy to government regulation. Yet, if regulation has to happen, Greenspan considers it best carried out under his laissez-faire guidance. In 1993, he successfully opposed a plan to create a federal banking commission which would have stripped the Fed of its regulatory powers. More recently, he has clashed with the Treasury over its suggested reform of the Glass-Steagall separation of commercial and investment banking. Although Greenspan supported the reform, he has sought to ensure that the new superbanks come under the Fed's jurisdiction.
Greenspan has also clashed with Brooksley Born, head of the Commodity Futures Trading commission (who recently resigned), over her proposals to tighten regulation of derivatives. He has been a supporter of financial innovation, claiming that derivatives created the most efficient mechanism for directing capital to the most suitable users at the lowest cost. Greenspan also shielded the hedge funds-private investment partnerships which use derivatives in their speculative trading strategies-from proposed regulation. Only a fortnight before the near-collapse of the over-leveraged hedge fund Long Term Capital Management (LTCM) in September 1998, he told Congress that hedge funds were "strongly regulated by those who lend the money."
Greenspan's interpretation of the performance of the US economy in the late 1990s is similarly informed by his youthful convictions. In a speech last year, he suggested that the US's prosperity reflected the benefits of unfettered capitalism: "It has become difficult for policy-makers who wish to practice, as they put it, a more 'caring' capitalism to realise the full potential of their economies... Only free market systems exhibit the flexibility and robustness to accommodate human nature and harness rapidly advancing technology to advance living standards."
But the truth is that the success of the 73-year-old Fed chairman is due more to luck and pragmatism than Randian principle. The Greenspan myth originated in the stock market crash of 19th October 1987. During the panic, the Fed injected a huge amount of liquidity into the financial system so that banks and brokers were able to meet their obligations, and the Fed funds rate-the rate the Fed pays banks on their deposits-was reduced. Although Greenspan played only a small role in the crisis management-on the day of the crash, he left for Dallas to attend a conference-the following day he issued a public statement: "The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirms its readiness to serve as a source of liquidity to support the economic and financial system."
The market rebounded, and because the crash was not followed by a recession, Greenspan was hailed as the economy's saviour. (In fact the actions of the Fed during the Great Crash of October 1929 were broadly similar and, in the short term at least, equally successful.) Since 1987, Greenspan has been applauded for guiding monetary policy with supreme precision. But this analysis underplays both the rise of inflation in the late 1980s and the recession which followed from the Fed's maintaining excessively high rates at the start of the decade. Greenspan's popularity really took off in 1993, after the deal with Clinton, during the period when the Fed funds rate was kept at 3 per cent and the stock market boomed. Although short-term interest rates were raised the following year in a pre-emptive strike against inflation, the continuing economic growth has led many to conclude that Greenspan had achieved the lightest of "soft landings" for the economy and even that he has effectively ironed out the business cycle.
Greenspan has been lucky. His tenure at the Fed has coincided with a worldwide reduction in inflationary expectations which appears to have broken the link between economic growth and inflation which has plagued western economies since the 1960s. This has allowed the US to enjoy eight years of strong growth and the lowest levels of unemployment in a generation, while inflation has remained quiescent. Furthermore, the Asian crisis of 1997 served to reduce inflationary pressures in the US, by causing commodity prices to collapse and the dollar to rise.
As the stock market has climbed, so has Greenspan's reputation. His reappointment as Fed chairman in the summer of 1996 met with the same jubilation that greeted Treasury secretary Andrew Mellon's reappointment in early 1929. Greenspan has become the talisman for the US's greatest bull market. The faith of investors seemed to be rewarded in the autumn of 1998. First, the Federal Reserve arranged the bailout of LTCM (contrary to Greenspan's theory of financial self-regulation, the banks had extended credit to the hedge fund so recklessly that the failure of LTCM threatened their own survival). And when this action was insufficient to calm market jitters, Greenspan authorised three cuts in interest rates. The market responded jubilantly: the Dow Jones index climbed from a low of about 7,500 in September 1998 to 11,300 in August this year. At the end of 1998, the Financial Times named Greenspan "man of the year." Many commentators marvelled at his un-Randian pragmatism, laying aside his preoccupation with inflation and reducing interest rates at a time when economic growth was strong.
But the experience of the US in the 1930s and Japan in recent years suggests that the virtuous cycle of boom years is followed by a vicious cycle of decline, when falling asset prices cause a contraction of consumption and investment, and the financial system is weakened by excessive debts contracted during more prosperous times. For this reason central bankers try to restrain excessive speculation. Greenspan, on the other hand, appears to have decided to let the bubble run its course. In December 1996, he issued a half-hearted warning to speculators in the form of a rhetorical question: "How do we know when irrational exuberance has unduly escalated asset values... And how do we factor that assessment into monetary policy?" The market shuddered in response, but as the question remained unanswered and led to no policy response, its rise continued shortly after.
Subsequently, Greenspan has mentioned the possibility of stocks being overvalued but has not pressed the point. Instead, he has leaned towards "new paradigm" ideas, such as the beneficial effects of new technology on productivity growth, and has referred to "basic improvements in the longer-term efficiency of our economy," to explain the long boom. Furthermore, at times he has been keen to distance himself from responsibility for the stock market. In February 1997, he asked Congress: "Why should the central bank be concerned about the possibility that financial markets may be overestimating returns or mispricing risk?" Two years later, he was similarly non-committal, saying that "equity prices are high enough to raise questions about whether shares are overvalued." In late August this year, at a meeting of central bankers, Greenspan referred to the "extraordinary increase in stock prices over the past five years" and suggested that in future the Fed would take the stock market into account when considering monetary policy. Yet he was also careful not to say that share prices were overvalued and even suggested that corporate profits were understated as a result of investment in information technology being reported as an expense, when it should be seen as capital investment.
Since Greenspan first referred to "irrational exuberance," the stock market has risen by more than two thirds. The Fed chairman asserts that stock market bubbles are impossible to identify while in progress, and that even if there is a bubble, astute direction of monetary policy can protect the wider economy from the effects of any crash. Greenspan has come to believe the hype surrounding him-that with him in the cockpit, the economy can continue to achieve one "soft landing" after another.
But some commentators claim that Greenspan should have done more to hinder the bubble's inflation. In recent years, "margin loans" (credit provided to speculators against the collateral of stocks) have been rising in line with share prices as they did in the 1920s. By the end of April, total outstanding margin loans had reached $173 billion, up from $100 billion in early 1997. Greenspan's critics argue that he should have raised margin requirements. Other economists have suggested that Greenspan's promise to reduce interest rates in the case of a stock market meltdown-as he did in October 1987 and after the LTCM fiasco-has created a condition of "moral hazard": investors, believing that the Fed will protect them against loss, have been prepared to take on ever greater risks.
Ironically, the monetary policy of the Fed in recent years has recreated the imbalances that Greenspan observed in the US economy of the late 1920s. With inflation under control, the Fed has permitted strong growth in the money supply. As a result, money has flooded into the stock market, most of whose growth has come from a higher valuation placed on corporate earnings rather than increased profits. The economist, Tim Congdon of Lombard Street Research Ltd, concludes: "Greenspan enjoys a high reputation for the sagacity of his decisions on interest rates and his skill in protecting the solvency of the US banking system... However, he must also take responsibility for the money supply excesses of recent years and for the continued froth in US asset markets. It is perfectly fair to refer to the Greenspan bubble."
The greatest ideological compromise Greenspan ever made was in accepting a job at the Fed. Paper currencies and central banks were abhorrent to Rand. Indeed both Branden and Greenspan blamed the Fed for stimulating the stock market boom of the 1920s with low interest rates. Perhaps Greenspan believed he could solve the dilemma by acting as a proxy for gold. Indeed traders say that Greenspan allows the market to dictate his interest-rate policy. He reacts to the market rather than leading it.
Greenspan's current term of office is due to expire in May next year. The leading candidates for next year's presidential election are falling over each other to praise him. Vice-President Al Gore has called Greenspan's performance "A-plus-plus." George W Bush, the Republican front-runner, has expressed a desire to "end his family's feud" with the Fed chairman. A Bush adviser and former Federal Reserve governor, Lawrence Lindsey, has called for Clinton to reappoint Greenspan immediately in order to end uncertainty in the market. Yet Greenspan has not made it clear that he will take the job on again. Perhaps he will leave while the going is still good-after all, Calvin Coolidge surrendered the US presidency in early 1929, so saving himself a few headaches.
