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FOR THE AGES
By David Podvin
For almost two decades, Alan Greenspan has exerted a profoundly negative influence on the American economy. As Chairman of the Federal Reserve Board, it has been his job to regulate monetary policy in a way that helps the common citizen. Yet rather than fulfilling his responsibility, Mr. Greenspan has implemented policies that benefit multinational corporations while imperiling the long-term economic health of the United States.
In the fall of 2002, the chairman faced a fateful decision. The stock market had taken a terrible pounding, but was still dramatically overvalued on an historical basis. A continued decline would further depress the weakening economy just as George W. Bush was preparing to run for a second term. Greenspan could allow the stock market bubble to deflate fully, which would cause immediate pain but rid the financial system of speculative excess. Alternatively, he could lower interest rates and infuse the system with liquidity, thereby boosting the economy in time for the election. The second option would create temporary prosperity at the expense of generating massive new debt that would greatly damage America’s future.
Greenspan is a loyal servant of Wall Street, and Bush was Wall Street’s candidate, so the chairman opted for the latter scenario. As the Dow reached new multi-year lows while still sporting a price earnings ratio almost twice its norm, Greenspan slashed interest rates and dramatically increased the money supply. With vast new amounts of cash in circulation and money market funds yielding virtually nothing, Americans went on an unprecedented speculative spree. Soon, investment markets across the board skyrocketed. Stocks. Bonds. Real estate. Commodities. Collectibles. Even markets that traditionally move inversely, such as interest rate instruments and oil futures, rose in tandem. The Greenspan-induced surge produced profits for investors who owned anything.
Almost anything. As the markets soared, the value of the American currency plunged. Lasting prosperity cannot be attained by running the Treasury’s printing presses, so patient investors like billionaire Warren Buffett began taking huge positions against the dollar. They perceived that when the chairman flooded money into a system already immersed in debt, it was like treating a heroin addict’s withdrawal symptoms by injecting him full of smack, and that any respite from the distress would be dwarfed by an agonizing relapse.
Short term, the Greenspan gambit has been successful. Since the chairman’s intervention that began in 2002, the economy has partially recovered, the markets have strengthened, and Fortune 500 profits have rebounded. Additionally, Bush remains in office to do the bidding of the conglomerates that he and Greenspan serve. The former Texas governor survived the 2004 general election primarily due to the artificial sense of prosperity experienced by many home-owning voters. Across the nation, millions of Americans had capitalized on soaring real estate values by mortgaging their property and spending the cash, in effect using their residences as ATMs.
Primed by Greenspan’s low interest rates and his easy money policy, the price of housing has been rising at a parabolic rate. The real estate craze has become so wild that the housing market is now being sustained by interest-only loans, as reported by the Los Angeles Times:
Confronted with soaring home prices, Californians are adopting a “buy now, pay later” strategy on a massive scale. The boom in interest-only loans — nearly half the state's home buyers used them last year, up from virtually none in 2001, is the engine behind California's surging home prices. But all that borrowed money might be living on borrowed time. When higher bills start coming due, … hundreds of thousands of homeowners in the state will have to find ways to cope — or will have to sell. In the most dire scenario, if they owe more on the home than it's worth, they'll simply walk away. Abundant foreclosures could spark a downturn in the entire housing market, leading to the long-feared bursting of what some call a housing bubble.
The stated mission of a Fed Chairman has never been to influence electoral politics or to encourage personal recklessness. The Fed is supposed to prevent cycles of boom and bust, and that requires allowing a bubble in the stock market to deflate rather than creating a companion bubble in real estate. Given that the housing market is many times bigger than the stock market, the fallout from a “correction” in real estate is likely to create widespread grief.
As soon as it became apparent that a mania had developed in housing, Greenspan was obliged to discourage excessive speculation by raising borrowing costs. Instead, he repeatedly lowered the cost of borrowing. Seduced by microscopic interest rates, the average citizen has plunged perilously into debt, with half of adults now having zero savings. When interest rates rise, there will be a commensurate price increase in servicing those debts that will create an epidemic of bankruptcies.
At the same time that he was encouraging Americans to spend money they didn’t have, the chairman tolerated what will prove to be an even more devastating development. The Commodity Futures Trading Commission reports that at the beginning of 2004 the notional value of “derivatives” was $197 trillion, or roughly twelve times the size of the U.S. economy. Derivatives are unregulated, highly leveraged bets placed on everything from equities and bonds to airplane sales and rainfall.
According to Mr. Buffett, “The stock market is a house of cards built on infinitely complex derivatives that allow major financial institutions to invest using virtually no money. As long as the market does not decline to the point of critical mass, everything is okay. However, the leverage is so great that an unexpected big decline in the market will eventually result in some major banks and brokerages being unable to continue to do business, and on the day when the market literally cannot open because of those defaults, I plan on being mostly in cash.” Buffett claims that derivatives “pose a catastrophic risk to the economy”.
In defending the derivative business that is nothing more than riverboat gambling The Wall Street Journal editorialized, “These instruments are little miracles of financial engineering, permitting investors to take a position, or make a bet without having to actually hold the physical asset." The Journal claims it is socially constructive that the nation’s largest savings institutions and government entities like Fannie Mae are making enormous wagers utilizing leverage of up to 1000:1.
The sums being bet are so substantial that inevitably a major participant will miscalculate and go bust. In the past, Greenspan has covered the losses of irresponsible large trading companies like Long Term Capital Management by having taxpayers foot the bill, but those incidents involved mere billions. The stakes of the game are now significantly larger, and the next time a big investment firm defaults the entire system could be disrupted. Nevertheless, rather than imposing margin requirements that would dampen the derivatives frenzy, Greenspan has allowed the American economy to become a gigantic crapshoot.
The chairman has done so because the gluttons of Wall Street are getting phenomenally richer by brokering the action. The notional value of derivative contracts held by investment firm J.P. Morgan is $36 trillion, and other brokerages are also eagerly generating profits from the lucrative yet treacherous derivatives game that is destined to end in chaos. Rather than intervening to safeguard the financial health of the American people, Greenspan is protecting the selfish interests of the monied elite.
This behavior is consistent with Greenspan’s worldview. He is the protégé of Ayn Rand, a philosopher who claimed that humanity is comprised of geniuses and parasites. According to Rand, geniuses (wealthy people) should be lavishly rewarded for their efforts, whereas parasites (non-wealthy people) should be left to swim or – preferably – to sink. In this way, she theorized, only the strong would survive and the composition of the human race would improve correspondingly.
Greenspan fully embraces the Rand philosophy. In 1993, he threatened Bill Clinton with huge interest rate increases if the president pursued health care coverage for poor children. Eight years later, the chairman heartily approved when George W. Bush bankrupted the Treasury with tax cuts for the rich.
Demonstrating a mastery of understatement, Senator Harry Reid has called Greenspan “one of the biggest hacks we have here in Washington”. In fact, Greenspan is a whore for the ages, a Wall Street strumpet who has made America needlessly vulnerable to economic disaster. It is impossible to know exactly when that tragedy will occur, but the elements are now in place for the American economy to be hurt severely, and those elements exist solely for the benefit of corporate brigands.
The investment bankers whose acolyte runs the Federal Reserve Board are not currently functioning on a rational level. The nature of their participation in derivatives demonstrates that standard business discipline has been overwhelmed by compulsion. Their avarice has become pathological, the same phenomenon that ushered in the Great Depression. Since that nightmare ended the super rich have been largely content to skim all the cream off the American economy, but now no amount of mammon can satisfy them, and their insatiable greed will be our downfall.
Sadly, many innocent people are going to be destroyed. By sending interest rates plummeting towards zero and showering the economy with paper dollars, Greenspan has squandered the emergency tools at his disposal. As a result, when a real economic crisis finally does arrive, the Fed will be virtually unarmed.
That won’t be Greenspan’s problem because he perceives storm clouds gathering and is returning to private life. He will do so having been lionized by the mainstream media ever since his appointment in 1987. Corporate propagandists have had good reason to exalt Sir Alan. He has been a forceful advocate for the trade policies that have enhanced business profits by driving down wages and exporting jobs. During his tenure there has been a dramatic upwards redistribution of wealth, and Greenspan has enthusiastically enabled that theft. When he leaves there will remain the greatest debt mountain in history, the vile residue of robbing the peasants to make the wealthy even wealthier. It is a debt that will ultimately be paid by the American people in money and misery.
Ayn Rand’s favorite student has been relentlessly contemptuous of the average citizen, as his successor will doubtlessly be. Chairman of the Federal Reserve Board is a position for which patriots need not apply. The job is reserved exclusively for prostitutes of the multinational conglomerates that view our nation as something to be exploited. For eighteen years Alan Greenspan has ruthlessly exploited America, and the consequences of his actions will plague this country long after he is gone.
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