April | 2014 | JMGshortcuts

In the wake of the 2008 global economic crash, the once-esteemed name of Alan Greenspan doesn’t carry much weight. In the final analysis, his downfall came because he just couldn’t bear to close down the party.

Greenspan was appointed Federal Reserve chair by President Reagan in 1987. He succeeded the legendary Paul Volker, who is credited with having broken the back of virulent 1970s inflation by choking off growth in the money supply.

Because of his business background and admitted “Libertarian Republican” ideology , Greenspan was expected to continue emphasizing his predecessor’s low-inflation policies.

By any objective measure, Greenspan merited the title “History’s most qualified central banker.” He was, after all, no ivory tower academic lost in the stacks of some dusty library without hands-on experience in the real world. In fact, his vast and varied range of life experiences truly made him a quintessential man of the world.

As an undergraduate during the 1940s, he studied clarinet at the Julliard School of Music. He then toured the country as a saxophonist in a popular jazz band.

During this time he developed a sideline preparing income tax returns for fellow musicians. He then enrolled at New York University to study economics and became a member of an informal discussion group led by Ayn Rand, the famous libertarian philosopher who, through her best-selling novels “The Fountainhead” and “Atlas Shrugged,” was instrumental in resurrecting free market economic theory.

After NYU, he went to work for an economics consulting firm whose clients included Fortune 500 companies. He eventually became the firm’s owner and CEO (so he knew what it was like to have to meet payroll) and made himself a nice fortune in the process, earning an honorable discharge from the financial wars.

He had his first federal government experience during the Ford administration, when he chaired the President’s Council of Economic Advisors. After that, he returned to his consulting firm.

Almost immediately after being named Fed chair, Greenspan was confronted by the massive October 1987 stock market crash. He responded by flooding the financial markets with liquidity, which prevented a Wall Street bloodbath from laying a glove on Main Street.

During all these years, he led an exceedingly full life as an active pursuer of interesting women. His romantic targets included celebrities like Barbara Walters and NBC’s Andrea Mitchell, who became his second wife while he was Fed chair.

When a 1998 hedge fund meltdown triggered concerns that sizable losses to the firm’s creditors (mainly large Wall Street banks) would cause credit markets to freeze up, Greenspan worked behind the scenes to have the Federal Reserve Bank of New York orchestrate a bailout of the hedge fund by these banks. The Fed pumped up the money supply to depress interest rates, thereby making life easier for the banks.

Then the dot-com bubble burst, wiping out more than $5 trillion (that’s “t” as in “trauma”) in stock market value among tech companies by the end of 2002, helped along by the 9/11 terrorist attacks.

These events and others gave Greenspan plenty of excuses to keep interest rates low by pumping up the money supply, to oppose financial regulation, and arrange bailouts when banks got into trouble. All of which he repeated to the point where they opened wide the door for the housing and derivative booms.

He largely ignored the ruling guideline expressed by former Fed Chair William McChesney Martin, who supposedly said, “The Fed’s job is to take the punch bowl away just when the party’s going good.”

So when it comes to managing the money supply, the Fed should presumably grow it more slowly during good economic times and more rapidly during recessions.

But Greenspan’s guideline was to keep the party going full blast with generous bowls of vodka-spiked punch until the guests were staggering around the room, stumbling into the furniture, singing bawdy songs, knocking over floor lamps and throwing up on the carpet.

And then bring in the Fed to clean up the mess.

originally published: April 26, 2014

At 5:12 on the morning of Wednesday, April 18, 1906, San Francisco was struck by a severe earthquake estimated at 7.8 on the Richter scale. The San Francisco quake devastated a great many of the city’s buildings and generated fires that burned for four days.

By the time the fires were out, more than 80 percent of the city’s built-up area had been destroyed, more than 3,000 people lay dead and half of the city’s 400,000 residents were homeless. It was a catastrophe equal (in relative terms) to the five B-29 fire raids in 1945 that destroyed Tokyo, which had been the world’s third largest city.

As a result, the West Coast’s most important ocean shipping port and commercial center ceased to function. Or so it seemed.

But while the fires were still burning, Amadeo P. Giannini was aggressively seeking out his Bank of Italy’s small-business customers whose firms had been wiped out by the disaster, even though his bank’s storefront headquarters in the city’s North Beach section had also been devastated by the quake and fire. Giannini is surely one of the nation’s capitalist heroes, whose influence on the take charge actions by New York City’s J.P. Morgan during the Panic of 1907, is greater than most people realize. Yet his name is largely unknown to most Americans.

Working from a salvaged plank placed across two barrels in the middle of a North Beach street, Giannini helped each of his customers estimate how much it would cost to restart his business. He noted the amounts next to each business owner’s name in his black pocket notebook and told each one that the Bank of Italy was granting him a loan for the full amount, which he could begin drawing on the next morning.

Giannini’s gutsy entrepreneurial actions (which soon extended to small-business owners who had not previously been Bank of ltaly customers) effectively shamed the leaders of San Francisco’s larger and more aristocratic banks to cease their paralyzed hand-wringing and get to work making increasing numbers of new loans to their own business customers.

The result was a massive expansion in San Francisco’s money supply. This free-flowing liquidity fueled a burst of new business activity. San Francisco’s homeless were hired to clear away the debris and virtually non-stop construction began on new buildings to house the city’s people and businesses.

By the opening of San Francisco’s Panama-Pacific International Exhibition (and world’s fair) in 1915, the city had been rebuilt and few signs remained of the 1906 disaster.

San Francisco’s quick-march reconstruction shows what intelligent management of a society’s money supply can accomplish when the chips are really down. Especially under the leadership of a savvy banker like that son of Italian immigrants who wasn’t afraid to roll his sleeves up and get to work and whose Bank of Italy grew into the modern giant (and recent recipient of a federal bailout) Bank of America.

Books on the history of organized crime often go out of their way to remind readers that the ultimate mental befuddlement of people like Chicago’s AI Capone and New Jersey’s Willie Moretti can be attributed to syphilis, a classic symbol of southern Europeans’ moral weakness and presumed inability to control their sexual desire. We can be forgiven for wondering if their mental deteriorations would be attributed, more politely, to Alzheimer’s disease or senile dementia had they not been of ltalian descent.

As a nation, we continue to be imprisoned by foolish myths and enchantment tales about immigrants,” “foreigners,” and others, like Giannini, who lack the names and physical features of “good Americans.” In the process, we rob ourselves of their talents and drive, which we desperately need and which inevitably costs us -big time.

originally published: April 5, 2014

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Month: April 2014

Alan Greenspan’s downfall