Posted by: N.S. Palmer | October 24, 2008

Giving Alan Greenspan a Break

By N.S. Palmer, Ph.D.

Alan Greenspan, former chairman of the U.S. Federal Reserve System (the USA’s central bank), said something today that you very rarely hear from economists or bankers of any ideological stripe:

“I made a mistake.”

Greenspan, who opposed most government regulation of business, conceded in testimony before Congress today that he was wrong to support de-regulating the financial system. His aversion to regulation was one of the factors that spawned the financial market meltdown of September and October 2008.

Like most conservative and libertarian economists, Greenspan put too much faith in the rationality of unregulated markets. Over-generalizing an insight of Adam Smith, the founder of modern economics, Greenspan thought that the market’s “invisible hand” would lead business decision-makers to promote the public good while seeking their own private profit.

He was wrong. Way wrong. At least he now admits it.

I was wrong about it, too, but it didn’t cost the world several trillion dollars for me to see my mistake. I work cheap.

Greenspan’s an interesting case. He didn’t start out as an economist, banker, or investment guru. He started out as a saxophone player. Yep, old Alan was a student at New York’s famous Julliard School of Music and got his first job playing tenor sax in a jazz band. Imagine how the world might be different if he had stuck with his first love. He might be the bandleader on “The Tonight Show” instead of the bete noir of the banking industry. I bet he could be funny if he wanted to be. I mean, just look at him.

Greenspan didn’t start studying economics until he switched to NYU, where he got his bachelor’s and master’s degrees. He didn’t get his economics Ph.D until 1977, when NYU gave him an honorary doctorate for his work as chairman of President Ford’s Council of Economic Advisors.

Another little-known and somewhat unbelievable fact about Alan is that in the 1950s, he was a big advocate of the gold standard. The gold standard based the value of money on the amount of gold you could get for it. In Greenspan’s youth, a U.S. dollar was at least theoretically redeemable in gold or silver. In fact, the word “dollar” is derived from a coin called a “thaler” minted in the 15th century in Germany. A dollar is still legally defined as the amount of silver in a thaler or the equivalent amount of gold. And a British pound sterling was originally — you guessed it — a pound of silver.

The idea of the gold standard (or a gold-silver standard) was that gold and silver had intrinsic value, but paper money was only valuable because you could exchange it for them. Gold bugs refer disdainfully to paper money and bank credit not backed by gold as “fiat money,” saying that it has value only because the government says it does.

In fairness, if we had been on a gold standard, this year’s economic bust probably couldn’t have happened. But it’s also true that if we had been on a gold standard, then our production, wealth, and income would probably be a lot lower. The same features of the gold standard that prevent crazy bubbles in financial markets are the features that prevent governments and central banks from doing things that promote economic growth. Yes, governments and central banks do the wrong things about as often as they do the right things, but on balance, we’re better off without a gold standard.

But back to Alan. Part of his gold fetish probably came from his association with the novelist Ayn Rand, who preached gold, capitalism, the worship of big business, the pursuit of self-interest, and to heck with everyone else. That might be a caricature, but not much. I speak with some authority: in college, I read Rand’s 1,200-page novel Atlas Shrugged 17 times, and memorized long sections of it. For a while there, I was no less of an “Ayn Rand Moonie” than old Alan probably was. I had an Ayn Rand quote for all occasions and always had a copy of Atlas Shrugged with me. (Yes, I was a smug, self-righteous jackass. I hope that I’m better now.)

Of course, when we read the news from Wall Street these days, the philosophy of “pursue your self-interest and to heck with everyone else” sounds eerily familiar. Adam Smith’s invisible hand theory didn’t do us much good there, as Alan now belatedly admits.

At any rate, when Alan became a governor of the U.S. Federal Reserve, back in the 1980s, there was Ayn Rand standing right beside him in the news photo. She didn’t much like the Federal Reserve, but if someone was going to run it, it might as well have been a friend of hers.

It was ironic that Alan supported the gold standard, because his first job in politics came in 1967, when his former bandmate Leonard Garment recruited him to work for presidential candidate Richard Nixon. It was President Nixon who, in the 1970s, took the U.S. off the gold standard once and for all. You might have heard about the Watergate scandal, but to gold bugs, that was small potatoes compared to his monetary apostasy — not to mention the fact that he made nice with the “Red Chinese.” (“Red” was a synonym for “communist,” which was the scary bogeyman of Nixon’s time, just as “islamofascism” is for us today.)

Alan didn’t become chairman of the Federal Reserve until President Reagan appointed him to the post in 1987. The rest is, as they say, history. We’re still living through the consequences.

Alan’s reputation at any moment depended a lot on the condition of the U.S. economy and stock market. In the last months of the 1990s economic boom, Senator Phil Gramm (best known for calling American workers “whiners”) hailed Greenspan as “the greatest central banker in the history of the world.”

However, after the first Bush recession started in 2001 and the stock market began to slide, everyone piled on Alan for his apparent failure to recognize and stop the dot-com “bubble” that had inflated the late-1990s U.S. economy to unsustainable levels.

Way back in 1962, Alan wrote an article for Ayn Rand’s newsletter in which he warned about “the destructiveness of compromise, of mixed premises and mixed purposes.” (“The Crisis Over Berlin,” The Objectivist Newsletter, Vol. 1, No. 1, January 1962.) He doesn’t seem to be against compromise anymore, and he admits that he was mixed up.

At least it’s a start. Now, we’d like our economy back, please.

Copyright 2008 by N.S. Palmer. May be reproduced as long as credit and URL (https://ashesblog.wordpress.com) are included.

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Responses

  1. This is completely fascinating, Noah. Not only did I learn a lot of things about Greenspan that I never knew (a saxophonist and NYU grad — I taught there from 1971 to 1974 and missed his honorary degree), but I learned a few more things about you. AND got reinforcement on one thing that I DID know — you are a heck of a writer.

    Cheers, John

  2. Good stuff here, Dr. Palmer. Good stuff, indeed.


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