Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (2 page)

1 twentieth-century inflation of words, constant distractions, and media promotion. Thus, there came the worship of celebrities simply because they are celebrities and the success of one pandering politician and clever opportunist: Alan Greenspan.

Alan Greenspan grew up in New York City, a metropolis that illuminates the changing tendencies and aspirations of Americans. Greenspan spent his young adulthood near or on Wall Street. In 1945, New York was the largest manufacturing city in the United States.
²
It was a city that made things. By 2008, it was no longer a working-class town. Nor was it a middle-income town. In Manhattan, 51 percent of neighborhoods were identified as being high-income and 40 percent as being low income.
³
Publicity and finance priced out the factories. The chairman of Lever Brothers, a soap manufacturer, explained why, in the mid-1950s, he moved his headquarters to Manhattan: “The platform from which to sell goods to America is New York.”
⁴

Lever Brothers sold an image; the image sold soap. Alan Greenspan also sold an image—productivity—but it was debt that boomed until it was too large to be paid back. 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.
⁵
Greenspan usually referred to the debt as “wealth.” This image matched what he was selling—first stocks, then houses. He expanded money and credit; he oozed praise for derivatives. The larger volume of credit shrunk the consequences of immediate losses. It was easy to overlook the areas of the economy that had shriveled and the instability of finance that had compounded over the past half-century. In early 2007, this massive inflation of paper claims, many of which were claims on abstractions rather than on material assets, tottered, then collapsed. The first to go was the subprime mortgage market.

Credit creation filled the void of falling production. In 1950, 59 percent of U.S. corporate profits were from manufacturing; 9 percent were from financial activities. During the past decade (2000–2008), 18 percent of profits were from manufacturing and 34 percent were from finance.
⁶

²
Robert A. M. Stern, Thomas Mellins, and David Fishman,
New York 1960: Architecture and Urbanism between the Second World War and the Bicentennial
(New York: Monacell: Press, 1995), p. 19.

³
Sam Roberts, “Study Shows Dwindling Middle Class,”
New York Times
, June 26, 2006.
⁴
Stern et al.,
New York 1960
, p. 61.
⁵
Figures from end of years he entered and left office. “Beginning of office” is December 31, 1987, from Federal Reserve Flow of Funds Account; “end of office” is December 31, 2005.

After graduating from New York University in 1948, Greenspan took a job at the Conference Board. He received a master’s degree from NYU in 1950; then studied economics under Arthur Burns at Columbia University. The two became lifelong friends. Arthur Burns served as chairman of the Council of Economic Advisers under President Dwight Eisenhower. He would become Federal Reserve chairman under President Richard Nixon. Greenspan headed President Gerald Ford’s Council of Economic Advisers (CEA) when Arthur Burns was Federal Reserve chairman.

In 1953, investment advisor William Townsend recruited Greenspan; the pair formed an economic consulting firm, TownsendGreenspan & Co. When William Townsend died in 1958, Greenspan became the sole owner.

Greenspan is sometimes described as a disciple of Ayn Rand’s Objectivist philosophy or as a libertarian. However, he may not even have understood what Rand was talking about. Nathaniel Branden, who was closest to Greenspan’s mind during this period, reflected decades later: “I wondered to what extent he was aware of Ayn’s opinions.”
⁷
Alan Greenspan’s contributions to group discussions were meager. Alan Greenspan was not philosophical; he was practical and, either by nature or by design, vague, remote, and impenetrable.

Greenspan used his Randian acquaintances to climb the political ladder. He joined Martin Anderson’s policy research group during Richard Nixon’s 1968 campaign for the presidency. Anderson, who traveled in Objectivist circles, later introduced Greenspan to Ronald Reagan.

Greenspan was riding the wave of the growing influence of accredited economists. By the late 1950s, Greenspan’s stock market predictions and economic forecasts were quoted in
Fortune
and the
New York Times
. His forecasts were usually wrong, as are those of most economists. Accuracy was less important than publicity.
⁸

⁶
Bureau of Economic Analysis (BEA) National Income and Product Accounts (NIPA) Table 6.16B,C,D. Income by industry has been so erratic over the past decade that the totals for 2000–2008 are averaged as a comparison to 1950.

⁷
Nathaniel Branden,
My Years with Ayn Rand
, (San Franciscio: Jossey-Bass, 1999) p. 160.
⁸
The pervasiveness of publicity was to smother American life, but it was not new; the old may have been even bolder than today. From the pitch to sell the movie
Alimony
in 1924: “Brilliant men, beautiful jazz babies, champagne baths, midnight revels, petting parties in the purple dawn, all ending in one terrific smashing climax that makes you gasp.”

Greenspan observed Federal Reserve Chairman William McChesney Martin Jr. lose the fight against inflation. In 1957, Martin warned the Senate that the current inflation problem that had persisted since World War II had been fostered by “economic imbalances,”
⁹
of which the heaviest hit were those who could not protect the value of their income or their savings
¹⁰
—the “little man”
¹¹
. Martin predicted that those with “savings in their old age would tend to be the slick and clever rather than the hardworking and thrifty.”

This was a foresighted summary of the period from 1957 to the present. Greenspan seemed to understand that permanent, underlying inflation supported asset prices. In 1959, he told
Fortune
that an “artificial liquidity in our financial system” could power “an explosive speculative boom.” According to the
Fortune
reporter: “Once the Federal Reserve was set up, Greenspan reasons, the money supply never really got short. With one eye necessarily cocked towards politics, the Fed has always maintained a more than adequate money supply even when speculative booms threaten.”
¹²

The stock market rose from 1950 to 1966. The rise was validated by the booming economy, but around the time Greenspan spoke to
Fortune
, fancy finance was playing an expanding role. The conglomerate craze, technology stock bubbles, and the huge growth of institutional money management (mutual funds and hedge funds) would end in tears, but fortunes were made. By 1969, Greenspan was a millionaire.
¹³
Greenspan described his specialty to Martin Mayer as “statistical espionage.”
¹⁴
Mayer would later discuss Greenspan’s technique at greater length: “the book on him in that capacity was that you could order the opinion you needed.”
¹⁵

Richard Nixon was introduced to Greenspan during the 1968 campaign. The candidate’s evaluation: “That’s a very intelligent man.”
¹⁶
Greenspan was nominated by Nixon as Council of Economic Advisers chairman in 1973. Gerald Ford was president when Greenspan passed his confirmation hearing in 1974.

⁹
William McChesney Martin, Statement, Before the Committee on Finance, U.S. Senate,

August 13, 1957, pp. 9–10.
¹⁰
Ibid., p. 15.
¹¹
Ibid., p. 23.
¹²
Gilbert Burck, “A New Kind of Stock Market,”
Fortune
, March 1959, p. 201.
¹³
Justin Martin,
Greenspan: The Man behind Money
(Cambridge, Mass.:

Perseus, 2000), p. 65.
¹⁴
Martin Mayer,
New Breed on Wall Street: The Young Men Who Make the Money Go
(New York: Macmillan, 1969), p. 82.
¹⁵
Martin Mayer,
The Greatest-Ever Bank Robbery: The Collapse of the Savings and
Loan Industry
(New York: Charles Scribner’s Sons, 1990), p. 140.
¹⁶
Martin,
Greenspan
, p. 69.

This was an ideal time for a publicity-minded economist to enter government. It was the same year that Time introduced
People
magazine. Greenspan, who had cultivated the press for years, maneuvered his portrait on to the front cover of
Newsweek
—the first economist to garner such attention.
¹⁷
Greenspan set an example that flattery could get one anywhere.

The United States had been buying more than it produced since the 1950s. The dollars piled up overseas, and creditor nations demanded that the United States redeem dollars with its gold reserves. The U.S. government abandoned its promise to buy dollars for gold in 1971, when it dropped the gold standard. The dollar then traded at whatever people believed it to be worth, which wasn’t much.

By the late 1970s, doubters prevailed. The period was plagued with higher inflation and a bewildered society. Many kept up by trading jewelry or houses. In 1980, the
New York Times
spoke to the economist: “Alan Greenspan, the economist, has asserted that the translation of homeownership equity into cash available for consumer spending is perhaps the most significant reason why the economy in 1975–1978 was consistently stronger than expected.”
¹⁸
When the Nasdaq crashed in 2000, the Federal Reserve chairman remembered this lesson.

After Ford left office, in January 1977, Greenspan was a celebrity back in New York. He ran TownsendGreenspan, but he seemed to exert his greatest efforts outside the office. He dated Barbara Walters, a television personality. He was a regular in the
Times
’s “Evening Hours” and “Notes on Fashion” columns.

Greenspan is classified as a Republican. In practice, however, his flattery was nonpartisan. When Ted Kennedy ran for the Democratic nomination in 1980, Greenspan hosted a breakfast for the Massachusetts senator in New York with “key Wall Street figures.”
¹⁹
At the 1980 Republican convention, Greenspan almost corralled Ronald Reagan into offering him the position of treasury secretary.

¹⁷
Ibid., p. 127.
¹⁸
John H. Allan, “Thrift Adrift: Why Nobody Saves,”
New York Times
, February 17, 1980.
¹⁹
Steven Rattner, “The Candidates’ Economists,”
New York Times
, November 18, 1979, p. F1.

Greenspan remained in the public eye during the early Reagan years. He was called a “superstar” (
New York Times
) on the speaking circuit, making 80 speeches a year for up to $40,000 a speech.
²⁰
He joined corporate boards. He spent most of his time in Washington. Martin Anderson, who both worked in the Reagan White House and had introduced Greenspan to politics back in the 1960s, remembered: “I don’t think I was in the White House once where I didn’t see him sitting in the lobby or working the offices. I was astounded by his omnipresence.… He was always huddling in the corner with someone.”
²¹

His record as an economic forecaster was unimpressive. Senator William Proxmire castigated the nominee at Greenspan’s Federal Reserve confirmation hearing in 1987. Proxmire recited Greenspan’s economic predictions as CEA chairman. His Treasury bill and inflation forecasts were the worst of any CEA director.
²²

There was little left of TownsendGreenspan when he became Federal Reserve chairman.
²³
Proxmire had another concern with Greenspan’s nomination. The senator thought that the growing concentration of financial power and solvency of the financial system was heading down a dark road, toward “increased concentration of banking.”
²⁴
Proxmire’s fears proved correct. Two decades later, the highly concentrated financial system is semi-insolvent.
Nobody contributed more to the concentration of finance than Alan Greenspan. As Federal Reserve chairman, Greenspan, who had recently resigned as a director of J. P. Morgan to take the post, permitted Morgan to underwrite debt, then equity—the first time either had been permitted by a commercial bank since 1933.
Luckily for Greenspan, his nomination preceded the public denouement of Lincoln Savings and Loan and of Charles Keating. Greenspan had been hired by Keating to persuade the Federal Home Loan Bank of San Francisco that Lincoln was in good shape. Greenspan succeeded even though Lincoln was one of Michael Milken’s top three junkbond customers among savings and loans (S&Ls).
²⁵
The rise of Milken—and of Greenspan—was attuned to the hectic financialization of America in the 1980s. “Maximizing shareholder value” turned out to be a veil for loading corporate balance sheets with debt, a much cheaper and faster route to growth than from retained profits. The market would not have accommodated such indiscretions 30 years earlier.
The capital foundations were growing unstable. Greenspan could (and would) salute the economy’s flexibility. The economy was, in fact, vulnerable to collapse and needed constant infusions of money and credit to sustain it. Hands trembled at the word “recession,” and rightfully so: balance sheets—government, corporate, and personal—were no longer constructed to weather a storm. This was capitalism with little respect for capital.
An error-prone but malleable Federal Reserve chairman was a predictable choice for the most influential financial position in the world.

²⁰
Martin,
Greenspan
, pp. 139, 276.
²¹
Jerome Tuccille,
Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker
(Hoboken, N.J.: Wiley, 2002, pp. 157–158.
²²
Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 41.
²³
Tuccille,
Alan Shrugged,
p. 154.
²⁴
Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 60.
²⁵
Barrie A. Wigmore,
Securities Markets in the 1980s
, Vol. 1 (New York: Oxford University Press, 1997), p. 286.