To be published by Fudan University Press
I thank Fan Zhiqiang for his decision to translate Panderer
to Power. His great attention to detail in asking me to explain dozens of
phrases and terms for a Chinese audience reminded me of how the book
concentrates on the United States. The influence of Federal Reserve Chairman
Alan Greenspan's actions spread around the world. It would have been a much
longer book, though, if I wrote of how United States' policy influenced China
(for example), other than writing of it in reference to the United States.
That being said, Panderer to Power was written with foreign readers in mind. There are universal tendencies in how the United States changed from 1950 to the present. Lessons might be applied in other countries.
That being said, Panderer to Power was written with foreign readers in mind. There are universal tendencies in how the United States changed from 1950 to the present. Lessons might be applied in other countries.
Alan Greenspan embarked on his career at the mid-century
mark. His story is thus intertwined with that of the United States from its
post-World War II peak. In 1950, four million automobiles were built in the
U.S. while the rest of the world produced about one-half million cars. Most
ambitious young men went to work at manufacturing companies such as General
Motors. Alan Greenspan followed a different route. He became an economist. This
was either far-sighted or lucky, or both. The field produces non-tangible
products, unlike the automobiles made in Detroit.
A few economic numbers give a sense of how much the country
has changed. By 1956, a majority of the U.S. population was not engaged in
production. This was the first time, in any country, when more people worked in
administration than in agriculture or industrial production. In 1950, 59% of
U.S. corporate profits were in manufacturing, 9% were from financial
activities. During the period from 2000 to 2008, 18 percent of profits were
from manufacturing and 34 percent were from finance.
The 34 percent underestimates how the larger distribution
of profits has changed the habits of Americans. In the 1950s, most Americans'
investments were simple. They saved for their retirement. The money was
deposited in a local bank where it collected interest year-after-year. The
annual interest never exceeded the mid-single digits, but, consumer price
inflation never exceeded 2 percent a year and was generally well below that.
In the mid-1960s, the United States government and the
economists advising the government started to live in a world of make-believe.
This fit the times. Walt Disney and other fantasies were becoming more popular,
not only with children but with adults. President Lyndon Johnson decided to fight
an expensive war in Vietnam at the same time Congress passed his "War on
Poverty." This included greatly expanded programs of food and medical care
provided by the government.
Johnson surrounded himself with advisers who were more
inclined to write scripts fit for Walt Disney than for reality. Despite what
they told him, the U.S. could not fight a large war in Vietnam and a big war
against poverty at the same time the country was de-industrializing. The latter
was noted by Alan Greenspan in his autobiography. The steelworkers went on
strike in the late 1950s. Compared to industrial workers anywhere else in the
world they lived like princes. In addition to owning their houses, the workers
often owned large boats and winter vacation houses in Florida or Arizona. In
his autobiography, Greenspan wrote that American companies that were forced to
import steel during the strike often found it was both of higher quality and
less expensive than domestic steel. Many never turned back from their Japanese
and German suppliers. This pattern repeated itself thousands of times over the
next half century until industrial production had been hollowed out.
The United States' economy veered more and more out of
balance. It could no longer balance its fiscal budget. It was running greater
trade deficits with foreign countries. The median family income reached a peak
around 1971 and it has been a struggle to attain that standard of living ever
since.
The United States was bound by the Bretton Woods Agreement
of 1944. A foreign government (central bank) could convert $35 U.S. dollars
into an ounce of gold with the U.S. Treasury. On August 15, 1971, President
Richard Nixon announced the U.S. had closed the gold window. The importance of
this goes beyond the mechanics of monetary arrangements. In The Fate of the
Dollar Martin Mayer wrote about the weekend meeting at Camp David 1971 when
the decision to sever the gold link was reached. Quoting Mayer: "The fact
that this procedure would violate American treaty obligations does not seem to
have been mentioned by anyone..."
That nobody even mentioned the United States was acting
dishonorably, unilaterally walking away from obligations to foreign countries,
was a sign of the times - and, of the times ahead. For instance, until the
early 1970s, bonds sold by corporations to the public were issued to finance
large construction projects or to invest in power generation. These were bonds
backed by a constant flow of revenues to the issuer. There was no law or rule
against selling bonds backed by automobile loans or mortgages, but the Bretton
Woods agreement itself restricted behavior.
After August 15, 1971, currencies issued by countries were
no longer bound by a physical restriction. In time, and never more than in
2013, governments, and their central banks, print unlimited amounts of
currency. This has unleashed an avalanche of debt a thousand times greater than
in 1971 and an unstable financial structure that has forced the savers of the
1950s into a whirlpool of fast-buck investing that confuses the best minds. In
1978, Federal Reserve Governor Henry Wallich told an audience these distortions
were a means "by which the strong can more effectively exploit the weak.
The strategically positioned and well-organized can gain at the expense of the
unorganized and aged."
"The strong," Wallich explained, "are smart
enough to understand [distortion] introduces an element of deceit into our
economic dealings." Contracts are no longer made to "be kept in terms
of constant values."
To achieve the public's acquiescence when most Americans
were falling behind, economists have turned all of what we have learned since
antiquity on its head. It was always understood that investment is the bedrock
of an economy. Consumption follows. It was always understood that imbalances -
of budgets, in trade - must revert and balance again. It was always understood
that a currency, the medium of exchange for trade, must be issued in limited
quantities, a gold or silver standard often acting as a brake on issuance. A
forgotten American essayist Alfred Jay Nock (Americans are expert at burying
essayists critical of themselves) said: "It is an economic axiom as old as
the hills that goods and services can only be paid for in goods and
services."
The economists who run the world today have turned all such
knowledge inside out and upside down. Their every decree defies common sense.
This is where Alan Greenspan came along at exactly the
right time. He provided economic advice to companies from the early 1950s. He
has been wrong at every turning point of the economy through his entire Wall
Street and government career. Not once has he foreseen a change in the economy
(for instance, when a recession or recovery was ahead). But: he was known on
Wall Street as willing to provide whatever service a client wanted. As finance
became more abstract and misleading after 1971, his advisory role to
duplicitous firms and banks flourished. He also spent a large amount of his
time courting the media. He deserves credit for anticipating that plastering
one's face on television would come to define one's importance.
He served first in government as Chairman of the Council of
Economic Advisers to President Gerald Ford in the 1970s. He served as Chairman
of the Federal Reserve Board from 1987 to 2006.
The man who was willing to provide Wall Street with any
service it wanted was more than willing to tell the U.S. Senate that it did not
matter if the U.S. produced nothing (in 2003). He was more than willing to
exhort Americans to buy adjustable-rate mortgages when the rates were at one
percent (February 2004). Four months later, he was the man who started
increasing rates.
Panderer to Power is the
story of a bad economist with a shady reputation who reached the most
powerful position in the United States. That the chairman of the Federal
Reserve became more powerful than the President of the United States is part of
that tale. I think it also important in understanding how power operates in our
media-saturated time, to note the dynamic of how the entire, non-stop noise
ensemble (newspapers, television, books), almost every economic department in
every university in the country, and most of Wall Street, worshiped whatever
Greenspan stated. It is little wonder then, that the American people, to their
financial regret and destruction, bought (literally) what Greenspan told them
to buy. That is the story you will read in this book.
We, the people in every country, are suffering from the
spell of the same dynamic under Federal Reserve Chairman Ben S. Bernanke. This
former head of the Princeton University economics department makes Greenspan
look like a genius. He has led the world (forced the world, if you like) into
the maddest and most destructive money printing scheme that has ever been
attempted across every country on every continent.
As this is written on April 18, 2013, most Wall Street
analysts and economists gleefully support central bank policies. Just listen to
them: our celebrity central bankers can double the supply of currency, yet
price inflation is dead. As long as consumers spend, we need not concern
ourselves with mounting debt. The United States has consistently lost
production jobs since 2000, but that does not matter. The only areas that have
produced new jobs during that time are in education and health; where job
growth has been produced by much higher government spending. The United States
is only collecting 60 cents in tax revenues for every one dollar it spends.
Somehow, this will continue. So, they tell us. They haven't been right in
decades.
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