Born of the parents that soon divorced after his birth, the bespectacled master central banker Alan Greenspan carries the baggage of a chequered reputation in the backdrop of 2008 crisis. When talking about him, people take to the two sides of the argument — some calling him “an antiregulatory zealot”, some respecting him as the “growth-oriented president of the Fed.” But almost all of them put at least “some blame” on his shoulders for invoking the crisis. Having a great love for numbers, he opted for blind economic growth based on numbers alone. On the day of reckoning, he tried to save his skin using the same kind of ambiguity with which he addressed a number of congressional sessions. David Faber concludes his book And Then the Roof Caved In with the following paragraph: ‘Greed is the fuel that makes our capitalist system run. It is a powerful emotion. When I asked Alan Greenspan about it, he agreed, then he gave me a sideway look from that famous 82-year-old face and said: And you are going to outlaw that? Go ahead and try it.’
That was the style of the most irrepressible and the longest-serving top man of the Fed. He would never admit his shortcomings and seldom allow you to understand him clearly. His post crisis comments on his failure to see the dark side of the financial innovations of his era sounded like the bark of a university professor admonishing his students for not timely reminding him of the coming long off-days to enable him to reschedule his class lectures. A Milton Friedman and Anna Schwartz disciple, he aggressively believed in fast-paced economic growth giving little attention to the aftermath of such foolhardiness. He was good at numbers but bad at counting the destructive waves developing in the sea of turbulence he created. Here are few comments he attracted after the launch of his book The Age of Turbulence:
‘The most powerful man in the world ‘ It is as though the oracle has suddenly grabbed a microphone and started to gossip.’
He wielded more power than the president he worked for. He was in the command room of the world economy for longer than any other single figure. ‘One word from him can still send markets into freefall.’
‘When Alan Greenspan cleared his throat the world economy trembled.’
Such positively charged comments were the norm when he was at the helm. The tone started to change from admiring to acerbic as the meltdown started to unfold. The damage was colossal, and so the criticism was out of proportion. No doubt, he worked within the boundaries of the free market system, but more often than not he was found acting from the peripheries rather than the centre of the system. He got drunk with the new but throat-slitting wine of Chicago School of economics and finance. The famous Friedman mantra ‘go shopping’ found the center place on his policy drawing board. He never stopped to think for a moments that everything had its limits and ‘shopping’ was no exception. The oracle of ‘interminable consumption’ demanded an endless stock of consumption money. The stock was created through such innovations as ‘equity refinancing’ and finally through 24/7 printing of nice-smelling fresh dollars. The abolition of the Bretton Woods system during 1971-73 afforded endless opportunities to first overextend the size of paper money and then multiply it through the banks’ lending system. We don’t exactly know the volume of global money that has deluged the world markets during Alan and Ben eras. We can only draw rough estimates from the staggering fact that China, which owned as foreign reserves just $100 billion in 1996, now holds roughly $4 trillion in the same account. Why the United States has been withholding information on the size of broad money (M2) since 2006 should not be difficult to understand for anyone interested in economic numbers.
The crime of the master central banker is his failure to realize that the size of real sector economy cannot and did not expand in line with the hyper increase in the size of global money stock. As a rule, the lion’s share of new money always goes to the haves. The have-nots have to face the consequences of a meteoric rise in the wealth of the elites ‘ the skyrocketing inflation and a radically shrunk size of their bread.
Charles Schumer thought of Ben Bernanke ‘as somewhat Buddha-like.’ That is sheer injustice to the master financial Buddha, Alan Greenspan. There are sure two modern Buddhas. They have doled out hunger and poverty to the masses of nations that are meagerly developed and at the same time ruled by a class of corrupt elites.
What makes these modern-day central bankers so arrogant and irresponsible? The answer may be traced in the operational history of Fed. Since its very inception in December 1913, the Fed is known to have performed its function with varying degrees of restraint and adventurism depending on the amount of authority ‘ and the will to use or abuse it ‘ vested in the top man of the Fed. Steven Solomon writes in his book The Confidence Game:
In the 1973 final collapse of the Bretton Woods world monetary system into unmanaged floating exchange rates gave central bankers far more authority over national monetary and exchange rate policies.
In the same book, ex-German Chancellor Helmut Schmidt is quoted to have said:
As long as the Bretton Woods institutions and the system of fixed but adjustable parities were the law of the world, then the role of the central bankers was a limited role. Since its fall, their freedom and independence to act has become enormous. Under the Bretton Woods system, it was the government’s responsibility for the domestic economic policy mix and exchange values. Nowadays, more than formerly, it is in the central bankers hands to determine the international fate of one’s own currency.
The bottom line is: the modern day central banker will act as exuberantly and as arrogantly as the government regulations will allow. If another economy gets hurt in the process, so it be. The effect on “another” economy would depend on its own economic strength and ability to divert the crisis to another part of the world. There would have been no 1929 depression, had the then central bankers enjoyed the same powers to swiftly generate extra liquidity as they do now. Their inability to do that then saved the world from pains that would have been more excruciating than they really proved to be. The process of global devastation was simply delayed.
The credit to manage and overcome the 2008 crisis goes to none. To buy toxic assets with the zero-cost fresh hoard of dollars is no space-management science. What matters most is the dents caused by that fresh hoard of dollars in weaker economies resources.