The Greenspan Gadfly
Trend Macro | March 1, 2002 | Donald Luskin
Posted on 3/1/02 2:56 PM Pacific by H.R. Gross
Ahead of the Curve
The Greenspan Gadfly
By Donald Luskin
March 1, 2002
THERE IT WAS, on live TV, in the Q&A session following Alan Greenspan's testimony before the House Financial Services Committee this week. Taking his turn with all the other committee members posing their loaded questions to score points with the voters back home about unemployment benefits, trade tariffs, tax cuts or whatever their pet issues might be, Rep. Ron Paul, a former doctor from the 14th district in Texas who brags on his Web site of having delivered over 4,000 babies, asked Chairman Greenspan point-blank if he thinks the Federal Reserve operates just like Enron (ENRNQ).
It was like a scene from "Mr. Smith Goes to Washington." Visualize Jimmy Stewart as Jefferson Smith here - a little nervous, perhaps a touch mad - but deep-down aw shucks sincere. Ron Paul, a Republican, looked the Master of the Universe in the eyes and said, "...we have nearly a $6 trillion debt.... Now the Federal Reserve comes in and they buy that debt in order to maintain the interest rate that they think is the right interest rate, and they take that and they use it as an asset. You put it in the bank, you call this debt that we have created an asset, and you use it as collateral for our Federal Reserve notes. So that's a pretty good scheme. And I think in moral terms, as well as in economic terms, it's very similar to how Enron operates."
A pause. The camera cut to Greenspan, scowling, almost a smirk, with his eyes rolled up looking at the ceiling, as though he were just waiting to see how this utterly bizarre monologue is going to resolve into a question he will actually have to answer, hoping maybe Paul's time will run out.
Paul went on for a while longer, talking about the perils of inflated paper money - fiat currency not backed by gold - issued by governments throughout history. And then the big finish: "...So I would ask you, can you see any corollary whatsoever on what you're asked to do in running our monetary system to that which Enron was involved in?"
If you were watching on CNBC you didn't get to see Greenspan's answer, because the network cut away then. But Greenspan did answer, and if you read the transcripts you'll find that he gave a respectful answer - perhaps even a thoughtful answer - to what might seem like a deliberately provocative question - perhaps even an off-the-wall question.
Greenspan admitted that "...in years past, there's been considerable evidence that fiat currencies have been mismanaged in general and that inflation has been too often the result.... There is some evidence that we are learning how to manage a fiat currency.... The evidence of recent decades is that it has been succeeding. Whether that continues is a forecast which I can't really project on."
And about that comparison to Enron? "And I don't perceive that anything we're doing as a central bank involves anything related to that. I hope that where we need to be transparent and indicate what we are doing, we do so, except in those areas where it...inhibits the ability to actually function as a central bank. But as I say in summary, I hope your analogy is inappropriate."
Congressman Paul told me Thursday that Greenspan is used to these out-of-the-box questions from him that cast doubt on the very legitimacy of the Federal Reserve. "My questions are always on the same subject. If I don't bring up the issue of hard money vs. fiat money, Greenspan himself does."
But at the same time, Paul says that he wasn't satisfied with Greenspan's answer. "I got what I expected: a nonanswer. He never gets into anything of substance, but, he does have a lingering doubt - he's not sure the system will work. He's a gold-standard person, but he's talked himself into believing he's the best manager in the world, and I just disagree with that."
Paul is a die-hard libertarian, who won't vote for any bill before the House - no matter how worthy it may seem - if he can't find a specific provision in the U.S. Constitution that empowers Congress to do what the bill proposes. And in that spirit, he thinks that the Federal Reserve has no right to exist in the first place. Paul told me, "All we'd have to do is support the Constitution and we'd abolish the Fed. The Federal Reserve Act is unconstitutional - nowhere in the Constitution does it say that Congress can create a central bank."
What would we do for money? Paul says, "Get the government out of money. Let the market determine it. Let American Express extend credit and decide what they want to back it with. But that's sort of idealism...so if the government is going to be involved, then government should just maintain the integrity of the monetary unit. Government should define the dollar as a weight in gold and maintain it. If I'm the secretary of treasury, I shouldn't issue the currency unless I've got the gold."
Paul puts his legislation where his mouth is. Following a bill to abolish the federal income tax, his latest effort is a law that would forbid the president, the Treasury or the Federal Reserve from engaging in any transactions in gold without specific authorization from Congress. Paul believes that the world's central banks, including the Federal Reserve, manipulate the price of gold to keep it deliberately low, to mask the inevitable inflation of their paper money.
He says, "They readily admit that foreign governments have loaned tons of gold, and Britain is outright selling gold. Our government denies it, and I don't know the answer. Right now they are sticking with the story that they do not deal in gold. I received a letter from Paul O'Neill stating clearly that they are not dealing in gold. This legislation is merely an attempt to open up the debate, make certain they aren't dealing in gold, or if they are that Congress knows about it."
It's hard to get radical ideas like this listened to - even if you're a congressman. I asked Paul whether he was taken seriously by his colleagues. "I think at times I'm a nuisance to them. They are so entrenched in the system. Those who do understand it would not like to rock the boat. It's no coincidence that we have a paper money system when we have a Congress that likes to spend a lot of money."
But Paul continues to fight his fight, and suspects that somewhere in Greenspan's heart of hearts, the Fed chairman may secretly be on his side. "There was a very special article he wrote in 1966 in The Objectivist Newsletter," he told me, referring to "Gold and Economic Freedom," a powerful plea for the gold standard published by radical capitalist Ayn Rand, then a close friend of Greenspan's. "I have an original copy and Greenspan signed it for me. I asked him if he still believes it, and he said he 'wouldn't change a single word.' Maybe deep down inside he's having a few doubts."
If you've been reading my columns for SmartMoney.com, you know that I have more than a few doubts. I assign a considerable amount of blame for the wild oscillations our economy has experienced over the past five years to Greenspan's ad hoc monetary policies. So Rep. Ron Paul may come off like a radical - but set against the context of the fawning, subservient adoration accorded Greenspan by virtually every other politician, I think Paul is doing us all a great service. He's telling the emperor that he's got no clothes, right on live TV. I'm glad Ron Paul is there.
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