Alan Greenspan: Apologist for the Federal Reserve, Financial Bailouts and Bank Nationalizations
By David Theroux on Feb 19, 2009 in Bailouts, Budget and Tax Policy, Business, Economics, Federal Reserve, Great Depression, Money and Banking, Nationalization, Presidential Power, Regulation
Following up on his earlier support for federal bailouts for financial institutions, in a new interview in the Financial Times, former Federal Reserve System Chairman Alan Greenspan has stated the following in his backing of bank nationalizations in the U.S.:
It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring. I understand that once in a hundred years this is what you do.
And as reported by Bloomberg, in a February 17th interview and presentation before the Economic Club of New York, Greenspan states that in response to Obama’s $787 billion “economic stimulus package” plus the $315 billion remaining from the bailout of the financial industry:
The amount of money in both these pots may not be enough to solve the problem. . . .
What we are currently going through is a once-in-a-century type of event. It will pass . . . .
Given the Japanese experience of the 1990s, we need to assure that the repair of the financial system precedes the onset of any major fiscal stimulus. . . .
To stabilize the banking system and restore normal lending, additional TARP funds will be required. . . .
Banks are not going to increase their lending until they feel comfortable with the amount of capital they hold. That’s not going to happen for a while. . . .
Until we can stabilize the asset side of bank balance sheets, this crisis will not come to a close. . . .
The regulatory structures, especially internationally, were way behind the curve. . . .
There is a general belief that somehow we can regulate very complex organizations, and we can’t. What we’ve got to do is to try to make them more efficient, to put far more capital into these organizations.
Long lauded in major media, business, and government circles, Greenspan is directly culpable for expansionary federal policies that created the financial bubble and the current economic meltdown (see here and here). And for a detailed examination of how U.S. government policies directly caused the sub-prime mortgage crisis, see Research Fellow Stan Liebowitz’s Independent Policy Report, Anatomy of a Train Wreck: Causes of the Mortgage Meltdown.
Hence, we should not be surprised that in two earlier comments in The Independent Review, Alan Reynolds described Greenspan as a “mainstream Keynesian,” and Paul Craig Roberts similarly noted that in keeping with Keynesian views, Greenspan opposed restrictive monetary policy for being “inflationary.” In addition, the Austrian School economist Murray Rothbard similarly described Greenspan as follows:
He is, like most other long-time Republican economists, a conservative Keynesian, which in these days is almost indistinguishable from the liberal Keynesians in the Democratic camp. In fact, his views are virtually the same as Paul Volcker, also a conservative Keynesian. Which means that he wants moderate deficits and tax increases, and will loudly worry about inflation as he pours on increases in the money supply. . . .
Thus, Greenspan is only in favor of the gold standard if all conditions are right: if the budget is balanced, trade is free, inflation is licked, everyone has the right philosophy, etc. In the same way, he might say he only favors free trade if all conditions are right: if the budget is balanced, unions are weak, we have a gold standard, the right philosophy, etc. In short, never are one’s “high philosophical principles” applied to one’s actions. . . .
Over the years, Greenspan has, for example, supported President Ford’s imbecilic Whip Inflation Now buttons when he was Chairman of the Council of Economic Advisers. Much worse is the fact that this “high philosophic” adherent of laissez-faire saved the racketeering Social Security program in 1982, just when the general public began to realize that the program was bankrupt and there was a good chance of finally slaughtering this great sacred cow of American politics. Greenspan stepped in as head of a “bipartisan” (i.e. conservative and liberal centrists) Social Security Commission, and “saved” the system from bankruptcy by slapping on higher Social Security taxes.
Time’s Justin Fox earlier applauded Greenspan’s policies in “Alan Greenspan, Keynesian”. And Keynesian bulldog Paul Krugman has described Greenspan as a “vulgar Keynesian”:
[P]utting Greenspan (or his successor) into the picture restores much of the classical vision of the macroeconomy. Instead of an invisible hand pushing the economy toward full employment in some unspecified long run, we have the visible hand of the Fed pushing us toward its estimate of the noninflationary unemployment rate over the course of two or three years. To accomplish this, the board must raise or lower interest rates to bring savings and investment at that target unemployment rate in line with each other. And so all the paradoxes of thrift, widow’s curses, and so on become irrelevant. In particular, an increase in the savings rate will translate into higher investment after all, because the Fed will make sure that it does.
Why must we endure now the recommendations of Greenspan and others directly responsible for the financial crisis? The answer is that opinion among most of the American “political elite” still clings faithfully to a series of collectivist/statist economic myths that they strongly resist giving up, even when the evidence indicates the exact opposite to be true (see Senior Fellow Robert Higgs’s award-winning book, Depression, War, and Cold War). Obama supporters are exhibit A in this “irrational exuberance” (to use Greenspan’s own words) in worshiping government power, and since Greenspan’s continuing faith in Keynesian economics and now bank bailouts and nationalizations reflects neither moral principle nor economic wisdom, perhaps this speaks more about what it takes to remain a worthy member of this “elite.”
The American government plan of creating a bank which will be called aggregator bank is a superb idea. It is going to buy entire stock of so called toxic assets and give the money to the affected banks. But certain points are to be noted. The amount of money that the bank would pay should be the book value of the mortgaged properties. It is being said that these affected banks created a leverage of 30 dollar per dollar. So it obviously means that it was not only the money of the American banks but a good number of foreign banks also were involved in extending loans to financially weak home buyers. Now the idea of involving private banks that are financially strong in a public-private joint partnership is not a good idea since nobody can say when the price of houses will rise thereby making it possible for the banks to make profit. It may also make huge losses. Then these strong banks would turn into weak banks. So the government may print money to give away to affected banks and in return try to sell the affected houses at whatever prices the home owners may agree to pay back. The money received can be frozen to avoid inflation. The banks will again be flooded with money and the liquidity thus created will again start rotating the big wheel of American economy. There will be no inflation as the total amount of goods and services in the economy is still intact whereas the money supply is not matching. The other major economies of the world will also contribute towards buying up excess dollars to keep its value artificially high. In case of higher inflation the prime rate of the Fed may be increased.
Amitabha Mukhopadhyay | Feb 20, 2009 | Reply
In 1981 (and 2001) Greenspan strongly advocated gradual phasing-in reductions of marginal tax rate reductions simply to make short-term fiscal deficits look better.
OMB czar Dave Stockman, who shared that same myopic bookkeeping approach to economics, gladly went along with that advice. The results were predictably perverse.
In fact, a 2008 study by Karel Mertens and Morten Ravn concludes that the 1982 recession was caused by workers’ anticipation of lower marginal tax rates in 1983.
Alan Reynolds | Feb 21, 2009 | Reply