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Essays, Opinion, & Commentary |
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September 19, 2007
by Gary North, Ph.D.
The book's title is "The Age of Turbulence." Yawn. The guys in the marketing division should have insisted on "Straight Talk -- Finally." Mr. Mumbles at long last has come clean about what I had said for almost two decades: his mumbling was deliberate.
I like the phrase, "syntax destruction." The master of this art -- the mixmaster -- was President Eisenhower. He was equally deliberate. He was perfectly content to be ridiculed by the press as a verbal incompetent. He played the press like the puppets they really are. Greenspan did the same, with equal success. In the interview, Stahl referred to his advance on the book's royalties: $8 million. Even I was stunned. If he was paid top royalty -- 15% -- then at $35 per book, the publisher needs to sell over 1.5 million copies in hardback just to break even. This advance was extraordinary for an autobiography. It indicates just how influential he was and remains. She asked him which currency he would prefer to be paid in. He said he plans to diversify. That was a way of saying, "I will not stick with the dollar 100%." He has the picture. I do not begrudge him his $8 million. It was clearly worth that to get him out of the Federal Reserve System. I do begrudge the way he got it: by presiding over the FED and relying on monetary inflation to bail out the stock market in 1987, 1990-91, and 2000--2004. He said that he did not grasp what was happening in the subprime mortgage market until late 2005. Stahl did not know enough to ask him why he did not recognize that a federal funds rate falling from 6.5% in mid-2000 to 1% in mid-2003 was inevitably going to produce arbitrage opportunities between the short-term rates and long-term, just at yen carry trade did, beginning in the early 1990's. The strategy of "borrow short, lend long" created the savings & loan bust in the mid-1990's in the United States. Why did he think it would be different after 2000? Both Stahl and Greenspan kept coming back to Greenspan's love of economic statistics. The show's Greenspan segment ended with this:
This was Greenspan's problem for two decades: a preference for data that were separated from a coherent economic theory of the business cycle. When he was a young economist in the 1960's, he was a devoted advocate of the gold standard. He understood cause and effect in economic theory. He understood how monetary inflation distorts the capital structure, leading to booms and busts. But, at his accession to the Chairmanship of the Board of Governors in 1987, his personal love for, and deep faith in, economic statistics overcame his mid-1960's faith in stable money as a matter of economic principle. He adopted the print-and-spend policies that have plagued every nation that has adopted central banking, which is all of them except Monaco and Andorra. To begin with statistics is to begin with built-in blinders to economic cause and effect. Statistics are merely what government agencies have sampled in the past. Following statistics rather than a policy of stable money, he spent his career at the FED looking into a government-built rear-view mirror. He got out as Chairman just in time for the day of reckoning to arrive. Bernanke will get to ride the tiger that Greenspan left for him, just as Paul Volcker left Greenspan the tiger -- smaller and weaker -- in 1987. MORE INFLATION Greenspan argued that FED policy in his era did not face the problem of price inflation that Bernanke faces today.
If he were Pinocchio, his nose would have grown six inches. Greenspan spent his entire career at the FED warning against price inflation, which was just around the corner. Only once do I recall that he warned against deflation, and he refused even to use the word. That was in his October, 1998 testimony after the New York FED had called together New York banks that had lent billions to Long Term Capital Management, Ltd., which was about to go bankrupt. He warned against cascading cross defaults. But he did not call this what it would have been: mass deflation. Over and over in his career, he warned that inflation was the economy's main threat. Year after year, the FED inflated. Inflation is always the problem because the Federal Reserve System exists. He thinks we are at long last entering the age of inflation -- not the mamby-pamby inflation that the FED has engineered ever since 1982, but the real thing. The present credit crunch is not the main problem.
This is utter nonsense, and if he does not know that it is nonsense, then he has become an amateur psychologist rather than a professional economist. Credit crunches are not human behavior problems. They are fractional reserve banking problems. They are the inevitable result of prior monetary expansion. In the very next paragraph, he admitted as much. He predicted rising price inflation.
But why is price inflation inevitable? Stahl did not pursue this on-screen. Inflation is inevitable because the FED will create new fiat money in order to overcome the existing credit crunch, as it always does, and as it surely did under Greenspan in 1987, 1990, and 2001. The coming inflation is no more a problem of human behavior than today's credit crunch is -- and no less. Humans behave in terms of signals provided by the external world, and the crucial signals known as prices are deliberately, self-consciously distorted by central bankers. I am not arguing against Greenspan's prediction of rising prices in general. I merely point out that he refused to blame price inflation on its source: the Federal Reserve System. THE HOUSING BUBBLE There is one exception to his prediction of falling prices: real estate.
Here is my assessment:
On "60 Minutes," he said housing prices will fall further. He was more specific in his interview in the London "Financial Times."
The author of the article reminded readers that Greenspan had refused as Chairman to call this market a bubble.
THE CREDIT CRUNCH His description of the credit crunch in the "Financial Times" was far less rosy than on "60 Minutes."
His audience on "60 Minutes," as well as the interviewer, was not ready for a discussion of asset-backed securities. The issue is risk. The market had failed to assess the level of risk. Yes, it had. But why? Why should entrepreneurs make such a mistake? The business cycle theory offered by Ludwig von Mises in 1912 gave the answer: the central bank's inflation sent out false signals to entrepreneurs. Low short-term interest rates persuaded them that there was more capital available than there really was. When entrepreneurs at last discover this, there is a credit crunch. This is now happening.
There it is, in plain English: the capital markets have borrowed short and lent long. Greenspan's comparison was correct. This practice was also the cause of the S&L crisis of the 1980's.
CONCLUSION Alan Greenspan has not come clean. He has not come close to admitting that he presided over the FED as a joint agent of the commercial banking system, Wall Street, and the Federal government. He does not admit that the FED has not attempted to deliver stable money since about 1933. He has never admitted that the FED under his administration constantly returned to monetary inflation as a way to forestall recession. He did not mention that prices doubled under his era as Chairman, and nobody asked him. He gets softball interviews which help sell his book. He has dropped FedSpeak, but he has not abandoned convenient memory loss. The Establishment media, which are also dependent on commercial banking, the stock market, and the Federal government, plays ball with him. His general assessment is accurate, however. Housing prices will continue to fall, probably in the double digits. The credit crunch will subside, due to FED intervention. Finally, the economy's long-term threat is more inflation, just as it has been since 1914. Dr. Gary North earned a Ph.D. in history and is one of America's keenest economic analysts and commentators. He supports the Austrian school of economics and is a previous assistant to libertarian congressman Dr. Ron Paul. Visit his website at http://garynorth.com. To subscribe to Gary North's Reality Check go to http://www.dailyreckoning.com/sub/GetReality.cfm If you enjoyed this essay and would like to read more of Gary's writing please visit his website at http://www.garynorth.com or http://www.freebooks.com
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Enrich your life with a book about politics and current events...
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Alan
Greenspan's autobiography was released on September
17. He was interviewed by Leslie Stahl on September
16 on CBS's "60 Minutes," for what has to be the
most successful book promotional appearance I can
remember.
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