Unpublished Letters to the Financial Times and the New York Times

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009).



To the Financial Times, October 7, 2010:

Dear Sirs,

It is scandalous that you continue to give Alan Greenspan a forum ["Fear undermines American economy," FT, October 6, 2010]. He prattles on in his successful effort at rehabilitation by writing and speaking with the imprimatur of the Financial Times, the Brookings Institute, the Council on Foreign Relations and other institutions that should have no truck with the man most responsible for the financial ravages inflicted on The American people, and, indeed on the rest of the world.



To the Financial Times, October 13, 2010

Dear Sirs,

Edwin Truman, regarded as the wisest staffer during his time at the Fed, argued for the U.S. Treasury to sell the country's gold stock. ["Time to Unlock Fort Knox and Sell the Bullion" FT, October 13, 2010]. Truman rebuts the common argument for the gold stock to be held as a "rainy day precaution" with a question: "But after the recent economic and financial crisis and with the prospect of misery for several more years, how much more rain must pour before the US acts?"

In the Walt Disney movie Aladdin, the wise Blue Genie states: "You'd be surprised what you can live through".

It's a shame Mickey Mouse is not running the Fed. On second thought, he already is.


To the New York Times, October 15, 2010

Dear Sirs:

In "The Next Bubble," [editorial: October 13, 2010] you rue the "large inflows of capital" that "complicate macroeconomic management" of emerging economies. You identify the deadly consequences: These flows "promote fast credit expansion - which can cause inflation, inflate asset bubbles, and usually leave a pile of bad loans."

Here, you have stated matters of fact. But, you then write, there "is little policy makers in the rich world can do to stop these flows." There is everything the policy makers in the rich world ("formerly rich" -?) can do to stop these flows. We simply don't want to do what needs to be done; that is a different matter. The heart of the problem lies with the enormous creation of money and credit, most conspicuously in the United States, and which the Federal Reserve largely controls, that ricochets around the world and leads to such ruin.

The solution to this problem, both at home and abroad, is for the Federal Reserve to reduce the supply of money and credit. Your economic writer, Paul Krugman, wants the Federal Reserve to increase the supply of money and credit by several trillion dollars. Obviously, this will cause even greater "inflation, asset bubbles, and pile of bad loans" than those that are asphyxiating us today.

Leadership is not easy. You must choose your poison: Save the world or publish Krugman.


To the Financial Times, October 25, 2010

Dear Sirs,

Frederic Mishkin has made a useful suggestion in "The Fed must adopt an inflation target," [Financial Times, October 25, 2010]. He has not always been so radiant.

In 2006, when he served as adviser to the Icelandic government, Mishkin gave the green light to the country's banking system, claiming, "financial fragility is currently not a problem, and the likelihood of a financial meltdown is low." In 2007, Federal Reserve Governor Mishkin stated: "To begin with, the bursting of asset price bubbles often does not lead to financial instability....There are even stronger reasons to believe that a bursting of a bubble in house prices is unlikely to produce financial instability."

In this morning's Financial Times, Mishkin, the current A. Barton Hepburn Professor of Economics at Columbia University, and, co-author with Ben S. Bernanke of the text Inflation Targeting, writes that the Federal Reserve should adopt "a specific numerical inflation objective." The pen pal of the Federal Reserve chairman thinks 2% is the rate to hit.

In 1957, an Ivy League economics professor on the make (Sumner Slichter) charmed the Senate by claiming the United States needed 2% inflation. Federal Reserve Chairman William McChesney Martin told the senators that such a plot would place the heaviest burden on those who could not protect the value of their income or savings. Those "savings in their old age would tend to be the slick and clever rather than the hard-working and thrifty."

This may have been the best market prediction of the past half-century.

The advantage of Mishkin's proposal will be to put the long-running Fed policy of impoverishing the American people into writing. It will be official, as follows:

The Federal Open Market Committee (FOMC), in its September 21, 2010 press release, stated: "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent..." As a consequence, the average bank passbook savings rate in the U.S. is 0.09% (Bankrate.com, September, 21, 2010).

The adoption of Mishkin's 2% numerical inflation objective will be an official confiscation of Americans' savings, at an annual 2% rate. Once this policy is in writing, the Federal Open Market Committee will be as guilty of robbery as Willie Sutton and FOMC members can be prosecuted and sentenced with the same determination and result.

Groveling at the Fed: Greenspan and Bernanke

Groveling at the Fed: Greenspan and Bernanke


Federal Reserve Chairman Ben S. Bernanke gave a speech on January 3, 2010 that was incomprehensible. The address itself will be discussed later. It is important first to consider the precedent of Federal Reserve chairmen making absurd claims – and getting away with it.

A place to start is Alan Greenspan’s 2002 speech in Jackson Hole, Wyoming. The then Federal Reserve chairman explained that central banks could not identify bubbles because “only history books and musty archives gave us clues to the appropriate stance for the policy.” There are several problems with this excuse, not to mention his even less credible fiddle-faddle. More important though, is that the chairman’s address was disseminated with very little opposition along channels of communication. Economists cheered or remained silent. With a few notable exceptions, the media reported Greenspan’s speech as if it was a press release, which it was.

More up-to-date is Alan Greenspan’s appearance before Congress in October 2008. He had left the Fed in January 2006. In 2008, he testified about his contribution to the worldwide financial meltdown.

Greenspan was “shocked” to find a “flaw” in his “ideology.” He discussed his model that impugned “40 years or more of considerable evidence.” His model miscalculated the “self-interest of lending institutions” that he believed protected shareholder interests. Greenspan explained his naiveté was the reason he had not regulated banks properly.

Greenspan’s mistake was so often repeated that it acquired an official status. There are (at least) three official bodies that profit from this hallucination. First, the politicians. Since the Federal Reserve is the nation’s leading bank regulator, the politicians who inflated the credit bubble (e.g, through Fannie Mae, Freddie Mac, Countrywide Credit, banks that securitized mortgages, the National Association of Homebuilders) have not been held to account. The politicians are free to toy with petty financial regulation, while Fannie, Freddie and lethal derivatives are compounding as before.

The second body is the Federal Reserve. In a more mature world, after such a display of catastrophic incompetence, the Fed would be disbanded. Instead, since Greenspan’s mistake was due to his model’s flaw (not a fault of the former Federal Reserve chairman) and because bankers’ standards of integrity fell so far below Greenspan’s impeccable conduct that he could not comprehend such behavior, the Federal Reserve has been handed a parking ticket.

The third body is Alan Greenspan. He has been exempted from his responsibility for the ongoing liquidation of America. The former chairman has received blame, but still receives accolades. Greenspan continues to speak for large fees. His prophecies are still quoted across the media and the recently endowed Alan Greenspan Chair in Economics at New York University demonstrate that groveling can get you anywhere.

Greenspan has remained relatively unscathed because he is still useful. In this case, to the politicians and every economist who is using Greenspan’s error to promote more regulation. There will be many opportunities for both politicians and economists to get rich from new legislation.

Alan Greenspan’s self-proclaimed “ideology” is essential to his innocence, to the Fed’s exemption from failure and to the politicians’ fevered attempts to separate themselves from responsibility. Despite the incessant noise about Greenspan’s ideology, he never had one. He’s never even had an idea.

The publicity is of a man who acquired his free-market ideology sitting at the feet of Ayn Rand. This is reported over and over by the media. He didn’t know what Rand was talking about.

Nathaniel Brandon, Rand’s number one acolyte in the 1950s and also the Randian closest to Greenspan, wrote years later: “Now, looking at [Alan], I wondered to what extent he was aware of Ayn’s opinions.” Complimenting Ayn on some passage, Greenspan might say, “On reading this…one tends to feel…exhilarated.” Platitudes and assurances also mesmerized the nation 50 years later.

Today, for the media to suggest Greenspan did not operate from a free-market ideology would throw open the question of why Greenspan blew up the banking and credit systems. It would introduce the possibility that he was prone to act as the large financial institutions would like him to act. It would also reveal the extent to which he – and Bernanke – say what politicians want them to say.

On January 3, 2010, Federal Reserve Chairman Ben S. Bernanke stated low interest rates set by the Federal Reserve from 2002 to 2006 did not play a part in the housing bubble. Instead, he claimed, it was loose regulation that has left a good part of the country on the cusp of poverty. This interpretation cannot even be classified as poor economics, but it is good politics. In January, the Senate is scheduled to vote on a second four-year-term for Bernanke as Fed chairman. Like Greenspan, Bernanke is useful. He will probably receive another term.

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

Five Questions

for Frederick J. Sheehan, Author,
PANDERER TO POWER

Q. What was Alan Greenspan’s greatest influence on the United States?

FS: Alan Greenspan was the kingpin in the impoverishment of the American people. The middle class barely exists today, though the barrage of government spending prolongs the illusion of stability. As Federal Reserve chairman, Alan Greenspan’s pronouncements were sacrosanct. He told the American people they were getting richer when they were becoming poorer. It is axiomatic that when savings are depleted and debts are rising the person, or company, or government is poorer.


Q. How did Greenspan create an illusion of recovery, based on complex math-designed products, rather than the creation of goods and real jobs?

FS: The American economy’s recovery from the early 1990s was financial. This was a first. The recovery was a product of banks borrowing, leveraging and lending to hedge funds. The banks were also creating and selling complicated and very profitable derivative products. Greenspan needed the banks to grow until they became too-big-to-fail. It was evident the ‘real’ economy – businesses that make tires and sell shoes – no longer drove the economy. Thus, finance was given every advantage to expand, no matter how badly it performed. Financial firms that should have died were revived with large injections of money pumped by the Federal Reserve into the banking system.

The change in the American economy can be seen in how profits shifted from manufacturing to finance. In 1950, 59% of U.S. corporate profits were from manufacturing; 9% from financial activities. During the past decade (2000 -2008), 18% of profits were from manufacturing and 34% from finance.

Middle management, a staple of the middle class, had lost considerable ground during the early-1990s. Companies hollowed out middle management to cut costs. A large portion of those who were laid off never recovered financially. The same was true after the recession that followed the stock market bubble that popped in 2000, particularly among technology workers. Many have never recovered.


Q. What role did Greenspan play in the financialization of the economy?

FS. He cut the fed funds rate from nearly 10% in early 1989 to 3% by late 1992. This was the platform from which the financial firms borrowed at low short term rates and invested at higher long-term rates. This also chased the middle class into the stock market. Net cash flows into stock-mutual funds rose from $8 billion in 1985 to $79 billion in 1992 and to $127 billion in 1993. In 1992 and 1993, money market funds suffered net outflows. This was unusual: individuals were pouring money into the stock market when their incomes were falling (according to the Census Bureau). In addition to incomes falling, so had returns on fixed investments. They were chased into the stock market by the Federal Reserve.


Q. Did Greenspan continue to influence destructive consumer behavior?

FS. Behind closed doors, at FOMC meetings, the Federal Reserve Open Market Committee] Alan Greenspan was told (in 1994) by Federal Reserve governor Lawrence Lindsey: “[T]he non-rich, non-old live paycheck to paycheck, quite literally.” In 1995: “[T]here has been a lot of easing of credit terms. At some point this is going to stop.” In 1996, Lindsey lectured Greenspan: “I think there is a long-term social cost we are going to pay from all this…. [T]he price we are paying is the increasing fragility of the underlying financial structure of the household sector.”

How did Alan Greenspan respond? “[T]his big increase in installment credit” is a product of the mortgage market. “[L]arge realized capital gains…have been financed in the mortgage market. Those funds are going disproportionately into the financing of consumer durables.”

That was in 1996, when he told the FOMC: "I recognize that there is a stock market bubble problem at this point.... We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” He soon retreated and claimed central banks could not see a bubble until it popped. Greenspan needed the stock market bubble to support the economy. Greenspan was no dummy when it came to enticing the public to speculate when interest rates fell. Again, behind closed doors, to the FOMC: “The sharp decline in long-term yields has struck me as quite extraordinary.... [W]e are getting issues of 100-year bonds…. The fact that some borrowers are issuing these bonds is terrific. Until you get somebody dumb enough to buy them...."


Q. Has Greenspan learned any lessons from the stock market bubble?

FS. He certainly remembered how to lure the public into an inflating bubble: cut interest rates. The platform for wild housing speculation was the fed funds cut from 6.5% in 2001 to 1.0% in 2003. Money always chases the rising asset class, especially when so much of the money is superfluous to the “real” economy: From the time Greenspan was named Federal Reserve chairman until he left office, the nation’s debt rose from $10.8 trillion to $41.0 trillion. The “real” economy only grew by a fraction of that rate-of-growth. Alan Greenspan had turned the country into a gambling casino.

The median cost of an existing, single-family house in California rose from $237,060 in 2000 to $542,720 in 2005. We can see the consequences are spreading far beyond the housing market. The state of California is cutting costs by laying off workers, not fixing sewers, and plans to release 40,000 prisoners. California leads the other states in trends. Greenspan’s legacy will be how he turned the United States into a third world country.

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