Mr Greenspan Speaks Again
There is a rumour, quite possibly scurrilous, about the way that Chairman Greenspan's speeches are cleared in house at the Federal Reserve. There is no discussion about the merit of lack of same of the speech amongst either Mr Greenspan's staff or his peers at the Fed. Instead, the process goes like this.
The speech is distributed, on conditions of the strictest secrecy of course, to several eager "up and comers" at the various Fed banks. Each of these individuals is asked to analyse the speech, and the main message(s) contained in it, and to submit their analyses to Mr Greenspan's staff.
When all the analyses are received, they are compared. If no two analyses agree on any main point, the speech is immediately cleared and Mr Greenspan so informed. It is not for nothing that Mr Greenspan is said to have remarked once to a reporter after one of his speeches: "If I have made myself clear, then you must have misunderstood me."
Having said all that (the rumour is definitely scurrilous, by the way, since we just made it up), it must be said that the latest offering by Mr Greenspan, to the Securities Industry Association on November 5, is actually quite interesting.
Here is the part of the speech that many Gold commentators and others interested in Gold have been focussing on:
"Between our Civil War and World War I when international capital flows were, as they are today, largely uninhibited, that discipline was more or less automatic. Where gold standard rules were tight and liquidity constrained, adverse flows were quickly reflected in rapid increases in interest rates and the cost of capital generally. This tended to delimit the misuse of capital and its consequences. Imbalances were generally aborted before they got out of hand. But following World War I, such tight restraints on economies were seen as too inflexible to meet the economic policy goals of the twentieth century."
Is this an endorsement of the "Gold Standard". Clearly not. Is it a repudiation of same? No, it's not that either. It is simply a statement of fact concerning the standard itself, and a statement of opinion as to why it has been abandoned in the twentieth century. Now, of course, Mr Greenspan is well aware of why the Gold standard was abandoned, but he has not stated these reasons in recent years.
As a younger man, it was perfectly obvious that Mr Greenspan was in fundamental disagreement with, to quote his speech, "the policy goals of the twentieth century". Now, as the century draws to its close, Mr Greenspan is the most important man in the world, not in framing those policy goals, but in making them work. Given this fact, the central thesis of his most recent speech takes on a great deal of weight.
Consider this quote:
"The financial instruments of a bygone era, common stocks and debt obligations, have been augmented by a vast array of complex hybrid financial products, which allow risks to be isolated, but which, in many cases, seemingly challenge human understanding."
Now, it is a fact that in any age, stocks and bonds alone are quite sufficient to challenge many (perhaps most) people's understanding. But what Mr Greenspan is saying here is quite different. If you combine the two quotes from his speech reproduced here, a message emerges that the financial structure built up to meet the "economic policy goals of the twentieth century" has now reached the point where it cannot be understood, by anybody.
Mr Greenspan equates this growth in complexity, as he has in many of his recent speeches, to huge advances in technology (read computers, and especially software). It is a widely accepted truism that all modern software has "bugs" in it, and the more effort that goes into fixing one set of bugs, the more bugs appear from the implementation of the "fix".
Precisely the same phenomenon has been going on, for decades, in the global financial system. Once tampering with markets and money is established, the only policy which can be implemented is more and ever more intervention. At every stage, this intervention produces unwanted and/or unforeseen side effects which must be addressed. The process continues until, inevitably, one of two end results occurs. Either the market disappears entirely under a crushing weight of regulation and distortion, leaving a variation of the totalitarian state. Or the weight of regulation and distortion collapses of its own weight, the system goes through a crisis, and out of the rubble, the market re-emerges.
History has numerous examples of both these end results. Sadly, totalitarian states have often emerged. But the salutary lesson of history is that no totalitarian state, or completely un-free society, has ever stood the test of time. They have all, without exception, collapsed under the regulatory burden.
History also shows and Mr Greenspan fully understands, that Gold - as money - is the great protector against the lamentably common urge to shape the voluntary relationships between individuals to the wishes of some man or group of men. The grotesque distortions of markets everywhere in this century is the legacy of that urge, and because it has lasted throughout the entire century, the structure is, at the end of the century, of literally mind-boggling complexity.
There are "bugs" in it that no amount of tampering will fix. And as long as Gold is banished from the financial structure, the tampering will go on.
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