Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (51 page)

It would be unfair to blame the Federal Reserve chairman for the institution’s somnolence. From public comments at the time, all of the governors seemed as unenlightened as Bernanke. In January 2007, Frederic Mishkin, former (and future) professor of economics at Columbia University andan author, with Ben S. Bernanke, of
Inflation Targeting: Lessons from the International Experience
(the two were considered the intellectual heavyweights at the Fed); stated: “To begin with, the bursting of asset price bubbles often does not lead to financial instability. . . . There are even stronger reasons to believe that a bursting of a bubble in house prices is unlikely to produce financial instability. . . . [D]eclines in home prices generally have not led to financial instability.”
³³

²⁹
Saskia Scholtes and Gillian Tett, “Worries Grow about the True Value of Repackaged Debt,”
Financial Times
, June 28, 2007.
³⁰
Ben S. Bernanke, “The Housing Market and Subprime Lending,” speech to the 2007 International Monetary Conference, Cape Town, South Africa (via satellite), June 5, 2007.
³¹
Will Edwards, “Bank of America’s Lewis Says U.S. Housing Slump Is Almost Over,” Bloomberg, June 20, 2007.
³²
Bob Ivry, “Bernanke Was Wrong: Subprime Contagion Is Spreading,” Bloomberg, August 10, 2007.

In July 2007, Federal Reserve Board Governor Kevin Warsh announced: “[F]rom the perspective of the institutions we oversee, [the commercial banks], we don’t see any immediate systemic risk issues.”
³⁴
Warsh added: “[T]he most important providers of market discipline are the large, global commercial and investment banks that are [the hedge funds’] principal creditors and counterparties.”
³⁵

In September, Federal Reserve Governor Randall Kroszner, a former professor of economics at the Booth School of Business at the University of Chicago, relieved fears: “[O]ne of the major lessons to be learned from past banking crises is the importance of a healthy banking system. . . . Effective banking supervision has helped foster a banking system in the United States that today is safe, sound, and well-capitalized. . . . Fortunately, this recent period of turbulence in financial markets has occurred at a time when U.S. commercial banks are strongly capitalized, reflecting years of robust profits.”
³⁶

Bernanke seemed incapable of learning from his own experience. In August, Countrywide Bank, a part of Angelo Mozilo’s empire, suffered a bank run when depositors fought their way into Countrywide branches. By that time, the Implode-O-Meter Web site listed 126 imploded mortgage companies, including 10 that closed up shop the same week.
³⁷
Yet, Bernanke told a group of central bankers and economists in October that he had no way of knowing if there had been a housing bubble.
³⁸

³³
Frederic S. Mishkin, “Enterprise Risk Management and Mortgage Lending,” speech at the Forecaster’s Club of New York, New York, January 17, 2007; in addition to Mishkin and Bernanke, there were two other authors of
Inflation Targeting
(Princeton, NJ.: Princeton University Press, 2001): Thomas Laubach and Adam S. Posen.

³⁴
Kevin Warsh, “Hedge Funds and Systemic Risk: Perspectives on the President’s Working Group on Financial Markets,” Hearing of the House Financial Services Committee, July 11, 2007.

³⁵
Ibid.
³⁶
Randall S. Kroszner, “Analyzing and Assessing Banking Crises,” speech at the Federal Reserve Bank of San Francisco Conference on the Asian Financial Crisis Revisited, San Francisco (via videoconference), September 6, 2007.
³⁷
The Fed followed with a surprising announcement. It would “continue to accept a broad range of collateral for discount window loans, including home mortgages and related assets.” This was an extraordinary change on the part of the Fed.

Elsewhere in Washington, Secretary of the Treasury Hank Paulson told
Fortune
in July 2007: “This is far and away the strongest global economy I’ve seen in my business lifetime.”
³⁹
In August 2007, Paulson said that the subprime mortgage fallout remained “largely contained.”
⁴⁰
(By February 2008, Paulson admitted: “In terms of subprime and the resets, the worst isn’t over, the worst is just beginning. We all know that.”
⁴¹
)

In October 2007, Chairman Bernanke abandoned his professorial demeanor at the Economic Club of New York when asked about CDOs: “I’d like to know what those damn things are worth.”
⁴²

³⁸
John Cassidy, “Anatomy of a Meltdown,”
New Yorker
, December 1, 2008, p. 9 of 15, from
New Yorker
Web site www.newyorker.com.
³⁹
Rik Kirkland, “The Greatest Economic Boom Ever,”
Fortune
, July 12 2007.
⁴⁰
Transcript of Secretary Paulson’s Press Roundtable, Beijing, China, August 1, 2007.
⁴¹
http://www.youtube.com/watch?v=ETQj3a221EQ.
⁴²
Ben Bernanke, in response to a question after his speech at the Economic Club of New York, New York, October 15, 2007, quoted in Edmund L. Andrews, “Treasury Chief Moves to Stabilize Markets; Bernanke Is Troubled by Housing Trend,”
New York Times
, October 16, 2007.

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2007–2008

Fame could distort [reality] but it could not destroy it. It did its own destroying. In the end, we turn [the famous] into characters and put them in a show, a modern version of the passion play. The ones we respect burn like angels. The ones who ask for worship burn like witches. Fame, like happiness destroys anyone who pursues it for its own sake, and exalts only those who have proper work to do. . . . Achievement without fame can be a good life. Fame without achievement is no life at all.
¹

—Clive James,
Fame in the Twentieth Century

Penguin published Greenspan’s autobiography,
The Age of Turbulence
, in mid-September 2007. Penguin needed to sell a warehouse of books to earn back its advance. The heart of its publicity campaign was Greenspan. He talked everywhere. Unfortunately for him (though maybe not for Penguin), he had become a more controversial figure. The reception of the book as a whole was more favorable than not, but he may have been surprised at the sources of criticism. The day after publication, a
New York Times
editorial (“Mr. Greenspan Spins the Bubble”) stated that the “issue is what the Fed did, under Mr. Greenspan’s leadership to rein in [the] lending. The answer is nothing.” The
Times
established, quite accurately, what to expect from him: “One thing is sure. As long as Mr. Greenspan is defining the terms

¹
Clive James,
Fame in the Twentieth Century
(New York: Random House, 1993), pp. 248, 252, 121.

337

of the debate, there will never be an illuminating discussion of what went wrong to land the economy in the place it is today.”
²

The
Wall Street Journal
kicked off the book tour with a similar editorial (“The Fed’s Alibi”): “Mr. Greenspan has emerged from the sixfigure speaking circuit with his memoir, ‘The Age of Turbulence.’” The
Journal
castigated Greenspan—and Bernanke—for “offering alibis for how we arrived at this pass.” It had little patience with a recent speech by the new chairman, in which Bernanke used the “global savings glut” as “his full-field explanation of just about everything. . . . The problem with this explanation is it omits the Fed’s role in producing this ‘savings glut.’ Billions of people around the world didn’t suddenly become more thrifty this decade. It was the Fed’s low interest rate policy—especially a 1% fed funds . . . that helped spur a global commodity price boom.”
³

The
Journal
went on to condemn the dissembling by Bernanke and Greenspan: “Contrary to the dreams of Wall Street there is no free monetary lunch. . . . Many on Wall Street want their bubble back and they are begging the Fed to reflate.”
⁴
There was no need to beg; Bernanke loved to cut rates and print money. The
Journal
criticism appeared just before Bernanke slashed rates like a mad professor. He cut the funds rate from 5.25 percent on September 18, 2007, to 1.0 percent on October 29, 2008. By that time, Fed funds were trading at close to zero percent. Bernanke’s market support operations were not often labeled the “Bernanke put,” but he was as determined as Greenspan to support the stock market. “Millions of intelligent investors” may have appreciated the government’s artificial pricing, but if they were, in fact, intelligent, they would have remembered that “the Greenspan put” had failed and led Greenspan to cut the fund’s rate to 1.0 percent.

Greenspan was quick to retract any statement from his book that provoked controversy. In
The Age of Turbulence
, he was uncommonly forthright in stating, “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq War is largely about oil.”
⁵
(In
The Age of Turbulence
, Greenspan is often saddened when others do not live up to his standards, particularly presidents.
⁶
) After publication, he told the
Washington Post
, “I was not saying that that’s the administration’s motive.”
⁷
He seemed to think that American troops discovered the Iraqi oil fields after the war started.

²
“Mr. Greenspan Spins the Bubble,”
New York Times
, September 18, 2007.
³
“The Fed’s Alibi,”
Wall Street Journal
, September 17, 2007.
⁴
Ibid.
⁵
Alan Greenspan,
The Age of Turbulence: Adventures in a New World
(New York: Penguin, 2007), p. 463.

Most reviewers and initial media commentary concentrated on his unhappiness with President Bush. Greenspan’s scolded the president’s fiscal incontinence. There was no disputing this. Bush spent money like a drunken sailor who then sells the ship to keep spending. He introduced a fiscal year 2009 budget with a $400 billion deficit.
⁸
Greenspan grew mischievous in claiming his staunch opposition to deficit spending. A fallacy laid at the heart of the media critiques. Since they cover political squabbles the way a football announcer would—two distinct teams engaged in a win-or-lose competition—the media attached great importance to this lifelong Republican casting his Republican president into the night.

Greenspan had never really been a Republican or a libertarian or however else he described himself. He has devoted his life to a modern pursuit. Greenspan’s interests seemed aligned to a genus that congregated in Washington—the personal Opportunist Party. Thus, the controversy (when
Age of Turbulence
was published) of Greenspan praising Bill Clinton and chiding Bush was the same Greenspan who went along with expelling the Brandens from Ayn Rand’s inner circle in the 1960s. Bush’s days were coming to an end; Hillary Clinton was running for president. Ergo, Greenspan was positioning himself for something or other in a new Clinton administration.

Greenspan did find favor with the Clintons, although Hillary did not receive the Democratic nomination. One of her proposed initiatives was an “emergency group” to “deal with highrisk mortgages.” Greenspan was one of those she’d appoint. When an opponent questioned her selection of the former Federal Reserve chairman, Clinton offered an enigmatic endorsement. He had “a calming influence. . . . Don’t ask me why, because I never understand what he’s saying.”
⁹

⁶
Ibid
.
For instance: “I was saddened years later when I discovered that President Bush blamed me for his loss,” p. 122; after Greenspan learned about President Clinton’s affair with Monica Lewinsky, “It seemed so alien to the Bill Clinton I knew, and made me feel disappointed and sad,” p. 187.

⁷
Bob Woodward, “Greenspan: Ouster of Hussein Crucial for Oil Security,”
Washington Post
, September 17, 2007.
⁸
Michael Abramowitz and Jonathan Weisman, “Bush’s Budget Projects Deficits,”
Washington Post
, February 5, 2008.

Greenspan in the Autumn

Greenspan found it difficult to break a smile on his
Age of Turbulence
publicity tour. He spent the first couple of weeks answering questions about his Bush-Clinton opinions. Greenspan “glumly” told the
New York Times
that he was “very disappointed” with the Republicans.
¹⁰
“They swapped principle for power.”
¹¹
This sounds like a self-evaluation.

Criticism of Greenspan’s role in the subprime meltdown was growing. He was miffed: “There has been a bit of historical revisionism going on,” Mr. Greenspan complained to the
New York Times
.
¹²
Greenspan “acknowledged the housing frenzy had been pumped up in part because of very low interest rates,” but “it was a mistake to blame the Fed,” since the Fed “needed to reduce interest rates in order to fend off the recession of 2001.”
¹³
Reworded, the Fed decided to avoid a recession by igniting the housing bubble and home-equity spending splurge.

Again, the general reception of
The Age of Turbulence
was pleasant, but Greenspan insisted on defending himself when any question was posed that might impinge his reputation. By doing so, he called more attention to his past deeds. This probably damaged his reputation, although, it is difficult to separate these wounds from the arrows that would have been directed at Greenspan in any case, given that the financial system was both degenerating and beyond the capacity of any human to understand. On the television program
60 Minutes
, he insisted that while he knew subprime “practices were going on, I had no notion of how significant they had become until very late. I didn’t really get it until very late in 2005 and 2006.”
¹⁴
This did not persuade many viewers, since, presumably, most viewers knew, long before that, of sleazy practices and deadbeats who received home loans. He then defended the Fed’s lack of initiative by claiming that it was not his job. He claimed that central banks and market regulators lacked the resources to address criminal or illegal acts. “We are not skilled enough in these areas and we shouldn’t be expected to.” He offered advice: “It should be with the states’ attorney general and, frankly, it should be beefed up a considerable amount from where it is at this stage.”
¹⁵
The question was about regulation, not crime: nobody proposed that the Federal Reserve should open a prosecution office. If Greenspan had given half as many speeches admonishing irresponsible bankers as he did on energy, Citicorp’s CDO team would have been disbanded. Greenspan instinctively scolded the attorneys general and rejected responsibility for his own failure.