Alan Greenspan’s downfall

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