While deciding how to write this piece regarding the interviews of Alan Greenspan, it dawned on me that has to be done in 2 parts. GATA followers had very high hopes Mr. Greenspan could be pinned down with nowhere to go regarding the central banks forays into the gold market, these hopes were dashed …sort of. In this piece I will try to relate to you what was said in the first of two interviews of Alan Greenspan by Gary Alexander. Along the way I plan to give my opinions of what was said and where injected logic might be helpful.
The interview started off with questions of Mr. Greenspan’s early years as a follower of Ayn Rand. She was described as “pure logic,” and with her reason was everything. The former chairman described his time working with Rand as living in a theoretical world. He admitted to his written piece in 1966 in the support of gold as money and the gold standard. Leaving the private sector and joining the public he said was “leaving the theoretical world and entering the practical world.” He told of an early paper he wrote where he suggested agricultural subsidies made no sense, not even to farmers. He said Washington was up in arms over the paper and it was this that opened his eyes. He realized he had to “conform” his actions even if he did not change his philosophy. It was at this point Mr. Greenspan said “I couldn’t work in today’s world” and everything must be compromised. What he politely was saying is either “sell out or stay out.”
When asked about his time on the Social Security board under Ronald Reagan, Greenspan said he was then and is still now in favor of privatizing the program but it “had to funded.” He made two comments in this segment which I am not sure how connected they were to the current topic of Social Security, he said he “believes he has changed the world” and “printing money makes systems fall apart.” These are both true statements and in my opinion the beginning moves to “cleanse his legacy.” My opinion of this first of three parts was Mr. Greenspan trying to explain that he had to conform to Washington where his (Rand’s) idealism could not work. He did say and I quote, “I never changed my philosophy or views, I had to change my actions to conform.” Ayn Rand had many famous quotes, the one which I believe would drain the blood from Mr. Greenspan’s face is as follows: “There is a level of cowardice lower than that of the conformist: the fashionable non-conformist.” This is exactly how I believe Mr. Greenspan is trying to portray his legacy, the fashionable non-conformist.
The 2nd part of the interview, Gary Alexander asked several questions of Mr. Greenspan’s chairman years. The question regarding going back to a gold standard was answered with “a gold standard is not possible in a welfare state.” Without saying it, you can understand his thought process here, under a gold standard there is no way for politicians to conjure (free) money out of thin air to give away, only with debt based money can this be done. When asked if the Fed or central banks tried to control the price of gold he answered a flat “no” and then added “only other central banks.” This to me was curious as “other central banks” during those years were strict puppets of the Fed. So there was no admission of Fed intervention but at least he “pointed a finger” so to speak.
Finally, Gary asked about “bubbles” and whether or not the low rates from 2001-2004 which he presided over were the cause of the housing crisis? Greenspan morphed into his old Congressional testimony form and passed the buck on this one. He said the major cause to the housing bubble were Fannie Mae and Freddie Mac. He said they were “subsidized” federally and built up loan portfolios too high. HUD, MBS and affordable housing issues along with the loosening of credit standards were the root cause of the bubble, not abnormally low rates. He also mentioned the adjustable rate market as what in his words “blew the market apart.” Without any further comment, I will just say one word …”disingenuous.”
The final part of the interview dealt with his years after the Fed. Mr. Greenspan recounted how Paul Volcker never spoke publicly while he was in office regarding monetary policy and neither would he. He was asked about 0% interest rates and inflation. His answer was true in my opinion and one which I have written of many times (even though we certainly have much higher inflation “leaking out” than is being reported). He said very low interest rates, massive credit creation and money supply growth have not translated to hyperinflation (yet) because of low “velocity”. The banks so far are sitting on massive quantities of money supply and are earning a “risk free” .25 basis points. As long as the banks don’t begin to lend or use the cash, inflation will remain subdued but the balances are like “kindling wood” which if ignited could start a raging fire. He also mentioned there is much capital coming in from European banks thirsting for positive yields as Europe is inverted.
Close to the end was the best part because the former chairman in my opinion was given a couple of tough questions where he was forced to lie and also told part truths. He was asked if there were any discussions between the Fed and the Treasury regarding deficits and our national debt. In my notes I wrote “never” as being the answer to which I can only say “REALLY???” You never, ever, ever spoke to the Treasury Secretary or an underling regarding the country’s debt? Isn’t that what you “purchase” day in and day out …”Treasuries?” You never, ever were given a heads up as to “how much” of this debt was going to be issued by the Treasury in case the Fed had to step up and purchase in their role as lender of last resort? Actually, I can remember Greenspan testifying before Congress that monetary policy “couldn’t solve all problems,” the budget needed to be more in balance (a Congressional job) and the deficits needed to be lessened. I won’t bother to do the research but I am sure there are records of phone calls and meetings between the chairman and Treasury secretary, there are plenty of records between Geithner and Bernanke. Did he and Robert Rubin ask how each other’s family were doing and whether or not it was going to rain the next day? Like I said, “really?”
His answer to the “too big to fail” question was very good and I say BRAVO…except he did not have the backbone to let it happen on his watch! He postulated that TBTF was the recipe to stagnation and that “creative destruction” is a necessary evil for capitalism. Creative destruction, meaning “bankruptcy” as punishment for a poor business decision or decisions. He went on to recount how well the RTC worked in the early 1990’s and actually ended up costing less than projected by letting the markets heal and clean the wounds. In his opinion, the RTC cannot be duplicated now.
I do want to point out the obvious here and why the RTC can never be duplicated again. The 2008 crisis and now any new crisis cannot ever be allowed the punishment of pure Mother Nature… although this is exactly what will happen, let me explain. Even though this is exactly what should have been allowed in 1991, 2001 and again in 2008, “they” wouldn’t let it happen. They wouldn’t (couldn’t) let it happen because the financial system itself was getting bigger and bigger, so big that a daisy chain of bankruptcies was feared would cascade into an outright deflation and take government finances with it. You see, in a fiat/deficit world the government must have the ability to borrow …in order to pay…interest that is. If markets were to go totally dysfunctional it would mean the Treasury would have no way of actually paying current interest and settling maturing debt.
So, there can now never be this “creative destruction” that Mr. Greenspan is speaking of these years later. “Inflate or die” lived and breathed down his neck while chairman of the Federal Reserve. He tried to talk a good game but if you know and understand financial and economic history, his modus operandi today is merely to cleanse his legacy before the final collapse and reset of the global financial system. In my opinion, he had a perfect opportunity in 1991 to allow “creative destruction,” he missed it and we went to war with Iraq to help the reflation. His last and final chance was 2001 but by then, the odds favor that it would have been the total destruction of the financial system due to size and leverage. Since 2001 there has been and can never be a “creative destruction.” 2008 saw TARP, ZIRP, $16 trillion of secret Fed loans and all the rest to forestall the destruction…next time there will be nothing available to hold back Mother Nature’s wrath.
Finally, he was asked if interest rates and gold 5 years from now would be higher or lower to which he answered “higher and higher.” When asked “how much?” he replied “considerably!”
This finishes part one, the second interview was much more interesting to me and there was much more discussion of gold, stay tuned!