Eat, Drink, and Buy Merrily
Celebrated Fed Chairman Alan Greenspan’s true legacy is one of debt and fiscal deceit. His successor aims to follow.
by Bill Bonner
Alan Greenspan, the most famous public servant since Pontius Pilate, leaves his post on Jan. 31. We stand back in awe and wonder. Is it not to him that we owe this long stretch of calm and prosperity, known to economists as the Great Moderation? Has he not ably served six administrations, tending the empire’s money? Did he not win a host of awards, including the prestigious Enron Prize for Distinguished Public Service?
If nothing else, the American empire has been a more entertaining place since Greenspan took over at the Federal Reserve 18 years ago. Without sinking into the esoterica economica of it, the Fed’s role is to maintain financial discipline, to “take away the punchbowl” before things get out of control. Greenspan’s approach has been different. Like a naughty schoolboy, he adds more gin. As he leaves office, financiers are tap dancing on tables on Wall Street, after passing out $21 billion in bonuses. In California, realtors slap each other on the back after another year of double-digit house price gains. And over on the other side of the world, Chinese manufacturers can’t remember ever having it so good.
Americans gave him the Medal of Freedom. The British made him a knight. The French inducted him into the Legion of Honor. To his peers he is the “greatest central banker who ever lived.” To the public, his powers are almost magical. So how did an appointed U.S. public official achieve such popularity? The answer is simple. He threw the biggest party the world has ever seen.
Setting short-term lending rates first below market levels and then even below the rate of consumer price inflation, his easy-money policies stifled a much-needed recession in 2001, stirred a real-estate bubble on both coasts, coaxed a generation of Americans deeper into debt, juiced the price of oil up 500 percent, and helped re-elect two presidents and hundreds of members of Congress.
From the time he entered the Fed on Aug. 11, 1987, to the time he leaves it, the tap has never stopped running.
Since 1987, outstanding home-mortgage debt has jumped from $1.8 trillion to $8.2 trillion. Total consumer debt has gone from $2.7 trillion to $11 trillion. Household debt has quadrupled.
In 2005, the party got so hot that the neighbors threatened to call the police. Real wages (adjusted for inflation) went down for the second year in a row, leaving people with little choice. If they wanted to continue living in the style to which they had become accustomed, they had to borrow. Spiders who tried to weave their webs in the doorways of America’s lending institutions got no rest in ’05; the savings rate went negative—for the first time since the Great Depression.
And government debt exploded too. The feds owed less than $2 trillion in the second Reagan administration, a figure that had been almost constant for the previous 40 years. But since Greenspan has been at the Fed, the red ink has gushed—to over $8 trillion.
Greenspan must have had a special place in his heart for politicians of both parties; he was always ready to back them with as much fresh credit as they required. During the two terms of George W. Bush, the federal government has borrowed more money from foreign governments and banks than all other American administrations put together, from 1776 to 2000. And more debt will be added in the eight Bush years than in the previous 200. If you distributed the cost of the government’s programs, promises, and pledges to the voters, along with the nation’s private debt, the typical household, and the nation itself, would be broke.
On Greenspan’s watch, the homeland also lost ground to its rivals. The trade deficit more than quadrupled from $150.7 billion to $661.8 and will reach $830 billion in 2006. When he came to power, the U.S. was still a creditor. Now it is a debtor, with more than $11 trillion worth of American assets in foreign hands, a more than 500 percent increase since 1987.
Yet the maestro’s financial reign has entered the history books as the Great Moderation, though there is nothing in the slightest bit moderate about America’s binge borrowing. And still, it is widely believed that the drunken revelry, the sturm und drang, the boom and bust of the markets have all magically vanished. It is as though a marching band had switched to elevator music, with the parade that normally follows replacing its clowns and freaks in gaudy get-ups with accountants, economists, and investment quants with laptop computers. The thrill has gone out of the whole thing. But so, supposedly, has the risk. Now the only risk is making a bad calculation.
That is said to be Greenspan’s real legacy; he has finally made central banking work. And his successor, Ben Bernanke, pledges not to mess it up. By targeting inflation, he says, he will be able to make the financial world even more stable and predictable. And if the party ever starts to wind down, he has told fellow economists that he will drop money out of helicopters, if necessary, to keep it going.
Here is where the gods must start holding their sides and rolling on the ground. This is not the first time they have seen this movie, but they laugh hard every time. Since 1971, the world has had an “experimental” financial system, with currencies backed by nothing more than the full faith and credit of government. Too bad, but history shows that government faith and credit always runs out, usually sooner than you expect. There are no counterexamples. Even the most successful empires in history have not been able to make full faith and credit stick.
The Roman Empire followed a, shall we say, classical model of imperial finance: it was built on a foundation of forced tribute. As the empire matured, force gave way to fraud. A kind of habitual cheating that the Romans called consuetudo fraudium crept into every transaction. First, the imperial money lost its value. Then, eventually, the empire itself was lost. Nero had no helicopters, but he knew Bernanke’s trick. In AD 64, he decreed that the number of aureus coins minted from a pound of gold would increase from 41 to 45, making each coin about 10 percent less valuable. The silver denarius, meanwhile, lost 99.98 percent of its value in the five centuries before the sacking of Rome.
Paper money makes it easier to cheat. Without dumping it from the sky, the dollar has lost 95 percent of its purchasing power since the Fed was set up to protect it in 1913. The Roman Empire managed to stand for a while before it went down. The American empire, on the other hand, barely stands at all. It is already a rickety slum of debt, delusion, and swindle—built on a mountain of Mr. Greenspan’s easy money.
Down at the bottom are petty agents spreading deceit and misinformation. Financial planners, tax advisors, stockbrokers, and real estate agents tell the public what it wants to hear. A stock? A house? Just buy and hold for the long run. You can’t lose. Appraisers and analysts stretch valuations in order to help close a deal. Mortgage lenders know perfectly well that the appraisals are lies, but they wink at them with one eye and wink at the borrower’s phony income declaration with the other. Lenders no longer verify income claims.
In California, house prices have raced so far ahead of incomes that barely one in 10 buyers can afford the median house. Yet thanks to “creative financing,” more houses are sold than ever before. In New York, lenders do not stick around to see how the loans work out. Instead, they pretend the credits are good and package the debt into handy units for “investors” to buy. The financiers know that many home buyers can’t afford their houses and that the U.S. government can pay back its debts in dollars of almost any value it chooses to make—or not pay them back at all. But no one mentions it.
Further up the hillside are whole legions of strategists, kibitzers, economists, and full-time obfuscators whose role is to make us all believe six impossible things before breakfast and a dozen more before dinner. Economists at the Bureau of Labor Statistics, for example, do to numbers what guards at Abu Ghraib did to prisoners. They rough them up so badly that they are ready to say anything. In mid-2005, for example, it was reported that productivity was increasing at a 2.9 percent rate—the fastest pace in 9 months. Productivity is supposed to measure output per unit of time. But the yardstick was bent. If a computer this year can process information 10 times as fast as one last year, the worker who assembled it has multiplied his output 1000 percent, they said.
But of all the twisted concepts that came out in 2005, the explanation of the world’s international financial system offered by Alan Greenspan’s replacement, Ben Bernanke, is perhaps the most elegantly preposterous. Americans are not spending too much, said Bernanke. The problem is that Asians are spending too little. As a result, they have a “savings glut” that Americans helpfully recycle into granite countertops and home entertainment systems.
Bernanke managed to condense a whole universe of lies, misapprehensions, and conceits into two short words. Yet as compact as they were, they covered up a grotesque system of global finance so out of whack that even congressmen are appalled: One nation buys things it doesn’t need with money it doesn’t have. Another sells on credit to people who already cannot pay—and builds more factories to increase output.
And the party goes on! Every level colludes with every other level to keep each from noticing that anything is wrong. On the banks of the Potomac, people of every class, rank, and station are pleased to believe that all is well. And there, at the Federal Reserve headquarters, is our caste of economic holy men. Fed economists and Fed governors themselves not only urge citizens to mortgage their houses, buy SUVs, and commit other acts of recklessness, they also make sure the nation’s money plays its role in the fraud. They do not even have to clip the precious metal out of the imperial coins as their Roman predecessors used to do; there is no precious metal to take out.
From the center to the furthest garrisons on the periphery, from the lowest rank to the highest, everyone willingly, happily, and proudly participates in one of the greatest deceits of all time. The wage slaves squander borrowed money on imported doodads and gamble their homes on adjustable-rate mortgages. The patricians gamble on hedge funds that speculate on treasury debt and Miami condos.
And right at the top is Alan Greenspan himself, with a smile on his face, passing the bottle to Ben Bernanke.
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