Goodbye Maestro Magoo

Seldom has one man received so much credit and done so little to deserve it. Alan Greenspan's last day on the job is tomorrow, January 31, 2006.

I am certain the central bankers have found another person who will not threaten them in new Fed chairman Ben Bernanke. I am even more certain they have found a person with more integrity.

No single person exercises more control over the economy than the chairman of the Federal Reserve with his control over monetary policy. Greenspan was not elected and he didn't need a spotless private life, yet he held office through four administrations, Democrat and Republican. He maintained office simply on the reputation of being an inflation hawk, a reputation he built and maintained to the detriment of millions of Americans.

A great deal of credit for his appointment and longevity goes to his skill in cultivating the power elite. As described in Bob Woodward's book Maestro, few couples are more prominent on the A-list social scene in the nation's capitol than the Fed chairman and his wife NBC White House correspondent Andrea Mitchell.

Perhaps less surprising, but surprising nonetheless, is the portrayal of Greenspan as a master manipulator of the bureaucracy at the Fed. More than one governor has quit in frustration at being unable to influence policy.

As familiar as Greenspan's coke bottle glasses and his deeply furrowed face is his manner of speaking, an obfuscating and convoluted style that he apparently inherited from his father. It goes with him wherever he goes. He is said to have proposed marriage twice to Mitchell before she accepted. She had not understood the first time.

Let's hear it in his own words.

"Economic conditions and considerations addressed by the committee are essentially the same as when the committee met in February. The committee remains concerned that increases in demand will continue to exceed the growth in potential supply, which could foster inflationary imbalances that would undermine the economy's record economic expansion."

That was from March 2001. Seems to make sense in a way, "inflationary imbalances" is kind of a odd way of saying inflation, perhaps. Except there was no inflation. There was never any inflation. The statement accompanied a quarter point hike in the federal funds rate.

Skip ahead a year.

"Our accelerated action reflected the pronounced downshift in economic activity, which was accentuated by the especially prompt and synchronous adjustment of production by businesses utilizing the faster flow of information coming from the adoption of new technologies."

This was accompanied by a lowering of the federal funds rate. It should have read, "I screwed up big time."

Between those two pronouncements, Greenspan's stock tumbled as far as that of any of the dot.com start-ups. Once revered as the architect of permanent prosperity, Greenspan was then blamed for an unnecessary slump, before he was forgotten in the fallout from the tragedy of 9-11. That event, in fact, caught him in Europe where he was begging the EU central banks to lower their interest rates to bail out the economy. He was locked out of the country for three days when air travel was shut down.

Both Greenspan and Bush later took advantage of the terrorist attacks to excuse the subsequent economic downturn. In the past, wars have been identified as good for the economy. This time they were just good for cover.

Let's go over it again. At the beginning of 1999 the American economy was booming, the stock market was booming, help wanted signs were everywhere. The U.S. had barely paused on its upward trajectory as Russia defaulted on its bonds and Asian currencies melted down. We were invulnerable.

Then Alan Greenspan saw inflation in the tea leaves, or said he did, and the Fed began to ratchet up interest rates. Wall Street scratched its collective head. What inflation? The only thing on the horizon was the 2000 presidential election. By the time he stopped, the prime rate stood at 9.5 percent. In real terms it was the highest since the Reagan/Volcker recession of 1981.

The worst of it was that it occurred at the same time as a rise in oil prices and an explosion in energy costs, definite drags on an economy which certainly did not need the additional burden of higher interest rates. Too late, the Fed found out that it was much easier to stop an economy with monetary policy than it is to restart one. The prime rate sat at post-war lows for more than two years, and the recovery is still doubtful.

Prior to its occurrence I would have bet large amounts of money that George W. Bush would not reappoint Greenspan for his last four-year term. W's father, H.W., was no great friend of Greenspan's, blaming him for the slowdown in 1991 which hurt his reelection chances. The elder Bush is quoted as saying, "I reappointed him and he disappointed me."

My amazement wore off quickly when Greenspan strode into Congress and said the budget surplus was a threat to our nation's future. Without support from this so-called economic genius, the Bush tax cuts would likely never have come into being. I posted the nonsensical reasoning last month.

His chairmanship of the Social Security Commission in the early 1980s that raised payroll taxes with the promise of putting Social Security on firm financial footing has been completely discredited by his contributions to the undermining of fiscal integrity in the federal budget, in concert with George W. Bush, and its inevitable toll on the entitlement funds.

As he retires, Greenspan can look out on a sea of red ink, both federal deficits and private debt, and count it as his legacy. He can point to his contribution in keeping the dollar overpriced and thus our trade deficits high. He can say with confidence that he has reduced the Fed's tools for affecting the economy to one, the federal funds rate. Maestro Magoo can know with confidence that he operated in a manner consistent with retaining his job and consistent with nothing else.

Monday, January 30, 2006