Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (32 page)

The Road to Fame: Tell the People What they Want to Hear

James Glassman and Kevin Hassett, celebrities now, were on the editorial page of the
Wall Street Journal
touting
Dow 36,000
: “[W]hy should certain P/Es constitute a ceiling? … When you apply our model, the market looks like a very good deal, even at today’s prices.”
¹⁴
Greenspan spoke five days later at the Gerald R. Ford Foundation in

¹²
Ibid.
¹³
Fred Hickey,
HighTech Strategist
, September 3, 1999.
¹⁴
James K. Glassman and Kevin A. Hassett, “Bursting Mr. Greenspan’s Bubble,”
Wall Street Journal
, September 3, 1999.

Grand Rapids, Michigan. Before the former president, Greenspan made a sweeping and unverifiable claim: “It is safe to say that we are witnessing this decade, in the United States, history’s most compelling demonstration of the productive capacity of free peoples operating in free markets.”
¹⁵
Soon after, Abby Joseph Cohen gave a speech at the Waldorf-Astoria. Its title: “Supertanker America, Still on Course.”
¹⁶
This competing celebrity was as repetitious as Greenspan, which was why she was so valuable. In the words of another legendary self-promoter, Jim Cramer: “Every time she spoke, she turned around the futures, or broke the nasty selling waves, as she explained why panicking was wrong and we were in a rip-roaring bull market. In a market that had come to see this frumpy curly-haired nerd as a double-hulled supertanker herself.… Cohen had stayed bullish … not wavering for an instant from her Supertanker America thesis.”
¹⁷

The kinetoscope of images, incessant noise, and juvenile vocabulary exploded like shrapnel in the face of a world that had already run out of superlatives. Television ads promoting Internet companies featured a college student belching the alphabet, ravenous wolves attacking a highschool band, gerbils shot from cannons, children tattooed in day-care centers, a world in which “practically no bodily function is too private and no rude behavior too coarse to be featured in a spot.”
¹⁸

From the Horse’s Mouth: Analysts Are Paid

to Sell Stocks

The Fed raised the funds rate another 0.25 percent in August 1999, in November 1999, in February 2000, and in March 2000 to 6.00 percent.

¹⁵
Alan Greenspan, “Maintaining Economic Vitality,” speech in the Millennium Lecture Series sponsored by the Gerald R. Ford Foundation and Grand Valley State University, Grand Rapids, Michigan, September 8, 1999.

¹⁶
Abby Joseph Cohen, “Supertanker America, Still on Course,” speech at the Financial Executives International (FEI), Current Financial Reporting Issues Conference, Waldorf-Astoria Hotel, New York City, November 15, 1999.

¹⁷
James J. Cramer,
Confessions of a Street Addict
(New York: Simon & Schuster, 2002), p. 222.
¹⁸
Patricia Winters Lauro, “Dot-Com Companies Have Built Their Brands by Using More Ads, in Good Taste or Not. Often Not,” “The Media Business: Advertising,”
New York Times
, September 30, 1999.

There is little in the transcripts to suggest that the stock market played a role in these decisions, although it is probable that some worrywarts who had warned of a crash latched onto any rationale expounded (no matter how trivial) to slow the supply of credit into the stock market.

But credit was not slowing. The markets barely noticed these rate hikes. The expected rate of return by borrowers—Americans and foreigners alike—was far greater than 6 percent. The enthusiasm spilled over into the real economy, which was building more houses and selling more cars. In a March 1999 speech to the Mortgage Bankers Association, Greenspan had told the congregation: “The past few years have been remarkable for your industry.”
¹⁹

Greenspan’s productivity miracle was so calcified by the October 1999 meeting that it was no longer controversial. He informed the FOMC: “[W]e are seeing a remarkable acceleration in economic activity now, which under our old regime … would lead us to say that this expansion is getting dramatically out of hand.”
²⁰
The “old regime” was an addition to the Greenspan lexicon, presumably in lieu of the “old era/new era” construction. The new regime would be shooed into the tumbrels within six months. Security analysts were no longer enough; he juggled farther out on the gangplank: “I’m not saying [security analyst] forecasts are any good as far as earnings projections are concerned. Indeed, they’re awful. They are biased on the upside, as they are made by people who are getting paid largely to project rising earnings in order to sell stocks, which is the business of the people who employ them.”
²¹
(This inside information never reached a wider audience. Greenspan would, in the future, admit that analysts were prone to optimism, but not that they were corrupt, until he scolded the bunch of them after the Enron affair.)

Greenspan plunged on by introducing a new measurement: corporate executives were lowering their costs. The new metric is corporate executives, who apparently could be taken at their word. This was another bandwagon Greenspan grabbed hold of just in time for it to explode.

¹⁹
Alan Greenspan, “Mortgage Finance,” speech at the Mortgage Bankers Association, Washington, D.C., March 8, 1999.
²⁰
FOMC meeting transcript, October 5, 1999, p. 49.
²¹
Ibid., p. 48.

A year before,
BusinessWeek
had published an advertising supplement that addressed the priorities of corporate executives. Chief financial officers responded to the question: “As CFO, I have fought off other executives’ requests that I misrepresent corporate results.” In response, 55 percent replied, “Yes, I fought them off,” while 12 percent answered: “I yielded to the requests.”
²²
In
Bull! A History of the Boom and the Bust, 1982–2004
, Maggie Mahar writes: “That two-thirds of these CFOs freely admitted that they had been asked to goose the numbers suggested that the type of person who might blanch at such a suggestion had probably fallen off the corporate ladder early on in the bull market.”
²³
That Greenspan would still take the word of corporate executives at face value is difficult to believe.

Greenspan’s Y2K Fear: Another Dog That

Did Nothing in the Nighttime

Greenspan’s Y2K fear (“Year 2000”) was contributed by technology companies, the same experts who were compressing information from months to minutes. Computers built 20 or 30 years earlier were not capable of calculating the “2” digit to succeed the “1” when “1999” came to a close. We were doomed: the developed world would cease to function at midnight on New Year’s Eve. Planes and elevators would fall from the sky; sewage plants would burst, ruining water supplies; financial calculations (in statements and security prices) would make us all billionaires, or broke.

Greenspan may have believed the prophecies, or he may have feared that panic ahead of the millennium would drain the banking system of cash. Whatever the case, he told the Senate Banking Committee that the Fed was preparing to let loose $50 billion into the banking system.
²⁴
The gates were so wide open that there was nothing the Fed could do to slow the market’s ascent. Yet there was very little talk of Y2K in FOMC meetings. It had been discussed a couple of times at meetings over the previous two years, but never in reference to monetary policy.
²⁵
No one mentioned the $50 billion. Given the amount of time the FOMC debated symmetric and asymmetric communiqués, a word or two about $50 billion dropped into the banking system would seem appropriate.

²²
BusinessWeek
, July 13, 1998, p. 113 “The Seventh Annual
BusinessWeek
Forum of Chief Financial Officers,” polling provided by Meridia Audience Response, Plymouth Meeting, Pennsylvania.

²³
Maggie Mahar,
Bull! A History of the Boom and the Bust
, 1982–2004 (New York: Harper Business, 2004), pp. 269–270.
²⁴
Jerome Tuccille,
Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker
(Hoboken, N.J.: Wiley, 2002), pp. 244–245.

“The Most Fascinating Person of 1999”

The chairman sounded no worse for wear at the FOMC meeting on December 21, 1999. “I see no overheating other than in the stock market.”
²⁶
Maybe so, but he was viewing the world through the clogged end of a drainpipe: the stock market
was
the economy.

Greenspan prefaced his stock market assessment with a lesson in stock market aesthetics: “To talk in terms of momentum, or price/sales ratios, or, even better, how much in losses a firm has experienced as reasons for higher stock prices is clearly just nonsense. The fundamental consideration is that a buyer is purchasing claims against future cash.”
²⁷
This was not true. Day trading was sweeping the nation—teachers and lawyers quit their jobs and traded stocks from their bedrooms. Their future was lunchtime.

Greenspan’s dyspeptic (for him) outburst was probably in reaction to staff economist Michael Prell’s earlier discussion of an IPO prospectus. The indefatigable Prell had discussed VA Linux, which entered the carnival on December 9, 1999. VA Linux jumped 700 percent on its first day of trading. It was valued at $9 billion. Prell compared the current atmosphere to that of England’s South Sea Bubble fiasco in 1720 which so devastated Isaac Newton, he would not discuss it for the rest of his life. He quoted from the South Sea share offering: “ ‘A company for carrying on an undertaking of great advantage, but nobody to know what it is.’”
²⁸

²⁵
For FOMC comments, see William A. Fleckenstein with Frederick Sheehan,
Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve
(New York: McGraw-Hill, 2008), pp. 78–79.

²⁶
FOMC meeting transcript, December 21, 1999, p. 49. This FOMC meeting is discussed at greater length in Fleckenstein and Sheehan,
Greenspan’s Bubbles
, pp. 76–79.
²⁷
FOMC meeting transcript, December 21, 1999, pp. 46–47.

Greenspan had taken to ignoring—not even mentioning—warnings from the FOMC and the staff. Why he felt a need to respond (that is, assuming that he was responding to Prell’s specific claim with: “how much in losses a firm has experienced”) would be conjecture, but his insistence that stocks were bought for their estimated profits in 2004 (five years hence) must have left some FOMC members wondering why they were spending their time listening to his malarkey.

There were real Internet businesses pulling in real revenue, the accomplishment of which turned traditional business planning on its head. The
New York Times
reported in October 1999 that the top 10 online brokers (those that facilitate stock and bond trading on the Internet) had dedicated $1.5 billion to their advertising budgets for the next year. This was approximately the same as Ford’s annual advertising allowance and far above those of Coca-Cola and Walt Disney combined.
²⁹
Deciding that the Internet ruckus was more fun than making a buck, American Express offered free trading; E*TRADE paid $150 per person to convert one competitor’s customers’ brokerage accounts; and Ameritrade gave new customers two round-trip tickets to London, Mexico, or Hawaii.
³⁰

The A&E Biography television network named Greenspan the “most fascinating person of 1999.” He even appeared on the cartoon shows: “[A] suitably dour animated likeness of the Fed chairman appeared on [
The Simpsons
].… Bart tries to high-five the Fed chairman, but Greenspan ignores him.”
³¹
The CNBC financial network (which was more whimsied than
The Simpsons
) “took to providing live coverage even of some of the Fed chairman’s minor testimony, with the tag line: ‘Greenspan Speaks.’ It also introduced a wildly popular and widely imitated feature called the Briefcase Indicator”
³²
: as Greenspan walked to his office in the Eccles Building on the mornings of FOMC meetings, CNBC would stake out his path. The premise: if his briefcase was thin, the chairman was in harmony with the world; if it was thick, a conundrum brewed. In the latter instance, CNBC deduced that a change in policy was on the table. CNBC anchors rattled on with step-by-step commentary during his stroll, to background music such as the theme song from
Mission: Impossible
.
³³

²⁸
Ibid., p. 10.
²⁹
Joseph Kahn, “The On-Line Brokerage Battle,” “The Media Business: Advertising,”
New York Times
, October 4, 1999.
³⁰
Patrick McGeehan, “Latest Lure on the Web: Free Trades,” “Investing,”
New York Times
, November 14, 1999. AMEX offered “commission-free stock purchases for anybody who deposited $25,000.” E*TRADE’s offer applied to Discover Brokerage Direct (of Morgan Stanley Dean Witter). Ameritrade offered the free round-trip flights to anyone who opened an account with a minimum balance of $5,000 (from full-page advertisement in the
Wall Street Journal
October 27, 1999, p. C9).

The question hung heavy: was Greenspan aware of the pageantry? A CNBC producer observed: “This is one of the most powerful men in the world. Why doesn’t he just get dropped off at the front door?”
³⁴
Although Greenspan claimed to be an introvert, he certainly was an exhibitionist.

³¹
Justin Martin,
Greenspan: The Man behind Money
(Cambridge, Mass.: Perseus, 2000), p. 225.
³²
Ibid., p. 223.
³³
Ibid.
³⁴
Ibid.

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January–May 2000