Thursday, February 14, 2008


Analysts have suggested that former Chair of the Federal Reserve Alan Greenspan had a heavy hand in keeping consumer demand high (with low interest rates), and that he created the financial conditions for the bubble economy and economic mess we now confront. Is Alan Greenspan the root of our economic troubles, or simply a convenient scapegoat?

Let’s start with this. Alan Greenspan came to the Fed during the Reagan-Bush years. Deregulation of America’s economy and mega-mergers were already under way. From the decision to unleash the Savings & Loans, to deregulation, and industry friendly legislation, the argument can be made that Alan Greenspan was merely “the good bartender” at the corner Deregulation Bar.

Then President Clinton came to office. Clinton courted Wall Street and presided over the dismantling of the Depression Era Glass-Steagall Act, which had kept the same financial institution from offering loans, insurance, and broker-investment services. So, after passing the Financial Modernization Act we shouldn’t act surprised that lenders ended up in the messy sub-prime mess. They could pawn off their new loans (which generated hefty fees and fat profits) to underwriters in their own building. Throw in the flood of deficit dollars ($3.5 trillion) that were pushed into the economy by record U.S. spending under Bush II, and the case can be made that Mr. Greenspan was merely pouring the drinks, and was the not the real “host” of America’s economic binge.

Here’s another way to look at the situation. Greenspan let things get out of control by not raising the cost of money (by raising interest rates) and cutting off the American economy when it mattered. Indeed, Greenspan as Bartender played to the deregulation of the bars by firing the bouncers, ignoring sensible drinking limits, closing only when no one was left, and letting the drunks leave with the car keys. If we accept this logic we have to accept that economies – like bars - need rules, enforced discipline, and limits. Greenspan ignored this logic.

We need to keep in mind that rules are designed to help discipline those who can’t control basic human instincts, like greed and avarice. The Reagan-Bush–Bush years got out of hand, fattened the wallets of the already wealthy, and added $6.7 trillion to our national debt. The Republican strategy of deregulation and cutting taxes to make the rich richer is – as economist Nouriel Roubini no doubt agrees – a travesty of economic logic. It’s here that Robert Reich helps us understand Alan Greenspan's role in today's economic situation.

In a review of Alan Greenspan’s book Reich tells us how Greenspan supported the deficit driven binge years of President Bush in 2001. By backing Bush’s tax cuts for the rich Greenspan ignored the long-term effects of not paying down our national debt and not investing in our infrastructure. Worse, by giving approval to Bush’s tax cuts in his testimony to Congress Greenspan gave his stamp of approval to Bush’s larger economic policies. In what will surely go down as one of history’s greatest displays of ego and partisan selfishness, Greenspan essentially told America “go ahead and spend your projected surpluses … you don’t need them anyways because I’m saying everything will be alright.”

By giving President Bush the Green Light to transfer America’s hard earned savings (the surplus) to the rich Greenspan’s congressional testimony did something else. It insured that whoever followed Bush in the White House would be saddled with so much debt they would not be able to pursue viable public programs because just as Clinton had to pay back Reagan’s borrowing binge debt (which Greenspan noted), so it would be with Bush’s successor. Massive budget deficits by republican administrations insures that subsequent (i.e. Democratic) administrations would have their hands tied which, as Robert Reich tells us, is “almost exactly” as the Republicans “planned it.”

Greenspan had to understand this. He's not a dumb man. Nor is he as objective or apolitical as he would like us to believe. For buying into the Republican tax cut nonsense, and for putting partisan ideology over national interests, it is both understandable and deserved that Greenspan shoulder a good portion of the blame for the current economic mess.

At the end of the day, making Greenspan out to be either the “disease” or the appropriate “scapegoat” is not entirely appropriate – he’s both.

- Mark

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