Greenspan's Fraud: How Two Decades of His Policies Have Undermined the Global Economyby Ravi Batra
For two decades Federal Reserve Chairman Alan Greenspan has held reign over economic policy, outlasting three presidents. His long tenure has had a profound effect on global economics and on individuals. In this hard-hitting exposé, international bestselling author Ravi Batra takes sharp aim at Greenspan's policies since he came into power. Greenomics, Batra… See more details below
For two decades Federal Reserve Chairman Alan Greenspan has held reign over economic policy, outlasting three presidents. His long tenure has had a profound effect on global economics and on individuals. In this hard-hitting exposé, international bestselling author Ravi Batra takes sharp aim at Greenspan's policies since he came into power. Greenomics, Batra argues, has extracted trillions of dollars from the American middle class and sharply benefited the rich, while protecting big business. Batra proves that Greenomics has also been responsible for periods of irrational exuberance, and exposes the wild inconsistencies in his social security plans. Greenspan's Fraud explores Greenspan's influences and motivations and the discrepancies between his words and actions, while revealing how his policies have national and global impact.
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How Two Decades of His Policies have Undermined the Global Economy
By Ravi Batra
Palgrave MacmillanCopyright © 2005 Ravi Batra
All rights reserved.
THE TWO FACES OF ALAN GREENSPAN
October 19, 1987, is known as Black Monday, the day the New York Stock Exchange suffered the worst crash in history, with a bang that echoed around the world. The Dow Jones Index (the Dow in short) then sank 22.6 percent, almost double the single-day drop in the notorious crash of 1929. From Toronto to Tokyo, London to Sydney, Buenos Aires to Brasilia, share markets shed tears, mourning the demise of the Dow. Wall Street and investors across the globe agonized over a bleak future. They had been caught off guard, because no financial wizard had foreseen the debacle. But in one of financial history's biggest ironies, Black Monday launched the brilliant future of someone named Alan Greenspan. It propelled him into glory and celebrity, giving him unprecedented influence over the global economy.
Barely two months before the disaster of the Dow, with large bipartisan support, Greenspan had been appointed the chairman of the Federal Reserve (the Fed in short), a coterie of 12 regional banks that control the levers of money supply in the United States. He came with no banking experience; his credentials as an economist were considered by some to be mediocre, but he had foresight and business acumen that few can develop from their scholarship alone. He had not done any path-breaking work in economics, at least none that was commonly cited. Yet he was savvy enough to know when to open and shut the money pump that lubricates financial markets. He had made his mark through business forecasting, which had brought him close to big firms on Wall Street.
Actually, Wall Street's first choice in 1987 was not Greenspan but Paul Volcker, who had been selected as the Fed chairman by President Jimmy Carter in 1979. Volcker had done such a good job of taming inflation, which had plagued the globe since the early 1970s, that the financial world had come to adore him. But an inflation fighter is rarely popular with politicians, because he tends to keep interest rates high and raise the rate of unemployment. Volcker was not on amicable terms with the reigning president, Ronald Reagan, who preferred his pal and adviser, Wall Street's second choice, Alan Greenspan.
Following his swearing-in ceremony as Fed chairman in the month of August, Greenspan must have disappointed the president, as he raised the interest rates a notch, presumably to display his own credentials as an inflation fighter. This appeared to be a clear attempt to woo Wall Street, which was uneasy with Volcker's departure. Within weeks of Greenspan's arrival as the head of the Fed, financial brokers felt reassured. But then the stock market, which had been soaring since 1982, roared into a frenzied crash, shaking investors around the planet. Everyone wondered: Would the new chairman be up to the Herculean task of stabilizing the markets?
With the shareholder world in shambles, Greenspan swung into action to prevent the kind of economic collapse that had followed the much leaner 1929 crash. As Fed chairman, he had enormous power over interest rates and commercial banks. He flooded the financial world with money, made loans cheaply available to investors, and persuaded bankers across continents to follow his lead. The rest is history. Share prices stabilized around the globe in a matter of weeks, and economic calamity was averted. In fact, the Dow, along with global stock indexes, ended the year with a gain, mocking the October Massacre.
Black Monday presented one of the stiffest challenges to Chairman Greenspan, but he rose to the occasion, becoming a celebrity in the process. Henceforth, he became the darling of Wall Street and investors all over the planet. Greenspan had remained calm amidst financial jitters. Alan Murray of The Wall Street Journal commended Greenspan for "Passing a Test." Later, Forbes and other influential magazines described his handling of the crisis as "Greenspan's Finest Hour. He got on the horn and told the banks they had to lend money to Wall Street. Then he dropped money market rates and long-term rates fell sympathetically." Still later, the Associated Press recalled: "The 1987 crash occurred only two months after Greenspan was sworn in as Fed chairman. He received a large amount of praise for his handling of that financial crisis."
However, for Greenspan this was just the beginning of his climb to stardom on the global stage. Countless articles were written about his personality and life, heads of central banks envied him, politicians kowtowed to him, experts and economists, including Nobel laureates, lauded him.
Greenspan became a kind of cult figure. The world was infatuated with him, as the international media credited him with steering the globe through one economic disaster after another—the Mexican crisis, the Asian crisis, the Russian default, Brazil's crippling debt burden, and so on. His words became gospel to millions of people involved with share markets. With the world shaken by Russia's default on foreign debt in late 1998, The Economist headlined: "All eyes on Al," assuming that everyone knew "Al" meant Alan Greenspan. On May 4, 1999, The New York Times enquired: "Who needs gold when we have Greenspan?"
In March 2000, Time Europe posed a silly question: "How many Federal Reserve chairmen does it take to change a light bulb?" Then it offered a tongue-in-cheek answer: "One. Greenspan holds the bulb, and the rest of the world revolves around him." The same year, France decorated Greenspan with its highest award, the French Legion of Honor. Two years later, Queen Elizabeth II knighted him "in recognition of his outstanding contribution to global economic stability and the benefit that the UK has received from the wisdom and skill with which he has led the US Federal Reserve Board." Like heads of state, kings, and princes, he received the red-carpet treatment wherever he went.
People called him maestro, a visionary, the best economist ever. But who was this person who had catapulted into the spotlight from virtually nowhere? Did the world really know Alan Greenspan? Was there another side to his life and accomplishments, one that was not so pretty? In looking at his early influences, could you find a pattern of beliefs that lay underneath his choices? What were the hidden motivations behind his actions? Behind the soft outward face was there another, the face of a charmer, an opportunist, a social climber? It could explain how he had advanced so far without sufficient credentials; how his extraordinary career appeared to derive crucially not from merit but from favoritism and connections.
Greenspan first came into the national limelight when President Gerald Ford appointed him as the chairman of the Council of Economic Advisers (CEA) in 1974. Greenspan did not even have a Ph.D. at the time; nor had he penned anything pioneering to earn the recognition of his peers; yet he was able to rise to a position normally held by star economists, who usually hold a doctorate and are acclaimed for their original publications. The CEA chairman in 2004, for instance, was Dr. N. Gregory Mankiw, a Harvard University stalwart.
Greenspan's main credential in 1974 was his intimate friendship with then–Fed chairman Arthur Burns, who recommended his pal to the recently vacant position at the CEA. Burns was once a professor at Columbia University, where Greenspan enrolled for his doctorate from 1950 to 1952. The pupil and the teacher grew close because of their ideological affinity. But Burns was an eminent economist, renowned for his seminal work on the business cycle, whereas Greenspan dropped out of school after two years of laborious night classes. Thus the student and the teacher were a study in contrast—one had gained worldwide recognition for his scholarship, the other was interested in becoming a businessman rather than an erudite professor.
Despite their differences, the two grew so close that Greenspan even held the first mortgage to Burns's home in Washington in 1970, playing the role of a banker. When he was nominated as Fed chairman to become the world's foremost banker, this type of relationship proved more important than his meager banking experience. Greenspan, according to financial journalist Maggie Mahar, won the nomination "first and foremost because he was a Republican." Thus it can be argued, favoritism, not merit, nor genius, started Greenspan off to political prominence that eventually took him to stardom. Even Bob Woodward, a great admirer who called Greenspan maestro, could not help but note:
Greenspan had long had the habit of reaching out to the politically powerful.... Greenspan cultivated relationships with any number of people involved with politics, always making people think he was on their side.... Greenspan's attentiveness—his willingness to take a phone call immediately, arrange breakfast or a private meeting the next day—left many with the feeling that they had an exceptional relationship with the chairman. He had dozens of such relationships. (My italics)
Apparently "dozens of such relationships" with key people helped build the case for Greenspan in the minds of those who mattered, and enabled him to stay in power long enough to become by far the most celebrated Fed chairman ever. Greenspan can be seen to have two faces, one that reflects his true genius accurately, and the other that takes advantage of opportunities. This book focuses on the Greenspan that has managed to stay almost completely hidden from the world despite his public stature.
I will show you the real impact of Greenspan's influence, how he unwittingly effected a global crash and spread economic misery on our planet; my emphasis is on the duplicity underlying his actions that affect people in America and elsewhere. Whether it is Social Security, taxes, industrial deregulation, or financial markets, Greenspan sways it all. He has towered over far more than the world realizes.
This book is biographical but it also aims to be more. I will explore the economic theory and policies of this powerful man, including his legacy to us and to posterity. I begin with a chapter on Social Security, which charts a history of the effect of his tax proposals on the American people. The book goes on to describe his early life and the ideas that shaped his thinking and career. What I hope emerges is a more complete picture of Greenspan—an important figure in the financial world, yes, but also a proponent of an extreme form of rational selfishness, the stuff of his mentor, Ayn Rand—and of the extent of his power.
Once you get to know the real Greenspan, I think you will wonder along with me how he became such a powerful figure in the world, towering over heads of state for almost two decades; how he secured high- level positions and obtained the approval of Democratic senators, while opposing almost everything they cherished.
In the pages that follow, you will see a slow erosion of the gloss adorning Greenspan and discover the man's real views. You will see how he operates, and be privy to key moments in his business and political career, such as when the chairman cheered his mentor for denouncing President John F. Kennedy as a fascist dictator; paid lower wages to young female employees while getting personally involved with some and (in his own words) getting "better quality work" from them; denounced antitrust laws as "utter nonsense"; regarded big business as "America's persecuted minority"; and even enhanced the credibility of security analysts, some of whom later drew hefty fines from New York Attorney General Eliot Spitzer for research fraud. Throughout his suspect actions and views, he has nurtured ideas that blatantly contradict history. For instance, he backed the claim of supply-side economists that low income tax rates nourish economic growth, even though the decades with the highest post–World War II growth rates also had by far the highest tax rates in U.S. history.
Few of the chairman's theories, I will show, stand the test of history. For example, Greenspan would even abolish the minimum wage, claiming that it creates job losses, even though the 1960s, the decade with the highest minimum wage—$8 per hour in terms of 2004 prices—also had the lowest rate of unemployment since World War II, at 3.5 percent. The contrast should be apparent when you realize that the hourly minimum wage today is a pitiful $5.15, with a jobless rate in excess of 5 percent.
Few have any idea that Greenspan's theories blatantly contradict logic and historical facts. Not surprisingly, they first created a share-price bubble, and then hurtled the world into a devastating stock market collapse at the birth of the new millennium, wiping out, at one point, over $7 trillion of wealth.
Such discoveries and conclusions about Greenspan came as a shock to me, and I think they will shock you as well. I wondered how this man of intensely extremist views frequently bypassed the careful vetting process through which the Senate and the media normally examine the credentials of a president's nominee.
Chairman Greenspan has actually been actively involved in framing U.S. policy for more than three decades. People only know about him as the head of the Federal Reserve since 1987, but he shaped tax legislation as President Reagan's economic adviser from 1981 to 1983, and, as mentioned above, served as the CEA chairman under President Ford from 1974 to 1976. Greenspan has outlasted at least five presidents, and, in the process, become a legend—a folk hero to investors and lawmakers, but also an anathema to a growing number of critics. Some say he even dwarfs the president of the United States in terms of worldwide influence.
This book is a critical examination of the variety of contributions that Greenspan has made to the American and world economy. There is no doubt that he was and is a controversial figure, but so far no one has accused him of committing fraud. This is not fraud in the legal sense, but in the sense of trickery that seriously afflicted the finances of millions of families in America and, possibly, around the world. Few understand that the chairman has swayed U.S. tax laws as much as the supply of money and interest rates.
I will demonstrate that Greenspan has personally benefited from his tax policies, for which millions of Americans have paid the bill. This is not to suggest that his proposals were motivated purely by self-enrichment, but that the legislation and policies born from his advice brought him gains at the expense of working families.
Throughout the book I take great care in assigning motivation to Greenspan's actions. While it's difficult to read somone's intent, it's also true that actions mirror one's mind. There is a well known dictum in economics: Choice reveals preference. In the same way our endeavors reveal our thoughts and goals. Sometimes the circumstantial evidence behind a case is so copious and compelling that it easily leads us to definitive conclusions. My claims regarding Greenspan are supported by his own words, actions, and, occasionally, by similar opinions voiced by others.
Greenspan's economics has extracted trillions of dollars in taxes from the American middle class and sharply enriched the rich, who are essentially people like himself and his friends—multimillionaires, politicians, and businessmen. Furthermore, I will argue that he, more than anybody else, is responsible for the prolonged stagnation in which the United States has been mired since the start of the new millennium. His policies have led to the pooring of America as well as the world, while a tiny minority has raked in millions, even billions, in profit. He may be a legendary figure in the eyes of many, but when you carefully explore what he has wrought, the aura of public reverence around him can evaporate quickly.
This book will show that because of Greenspan's beliefs or support for certain policies family income and real wages have declined for a broad swath of Americans, while CEOs have earned millions in stock options and capital gains; U.S. manufacturing has been decimated and the country is saddled with more than half a trillion dollars of trade deficit per year; nearly two million lucrative jobs have vanished since 2000, and millions of people have been downsized.
Excerpted from Greenspan's Fraud by Ravi Batra. Copyright © 2005 Ravi Batra. Excerpted by permission of Palgrave Macmillan.
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