The economic consequences of Mr Greenspan

Nora Connolly 

Image © IMF Photograph/Stephen Jaffe

Dedicated to David Wright who is about to celebrate his 50th birthday.

Alan Greenspan the former chair of the Federal Reserve has just published a book an occasion that allows time for reflection. In his pomp he was known as Saint Alan and the economic consensus he helped shape, today appears unruffled and widespread. The austerity programme followed by the UK government recently commended by Greenspan, a supporter of George Osborne. One of the important ingredients for economic success according to Mr Greenspan (speaking several years ago) is the need for `growing worker insecurity which reduces pressure for compensation and decent working conditions` the UK government is following that piece of advice to the letter. Meanwhile in the USA wealth resides in the hands of a tiny fraction of the population a `section so small that the census doesn’t even pick it up…a tenth of a percent of the population`. This has political implications because power is held in limited hands and helps explain the ideological hinterland of Barack Obama, a centrist amid a right wing consensus. Unsurprisingly there has been no Obama New Deal. Given this situation, one need not wonder why adherence to the market continues unabated. Even though the crash of 2008 is considered worse than 1929, but in the 1930s a new consensus emerged, while today a conservative orthodoxy dominates.  

The political and economic consensus shaped by the Republican Party during the 1920s underwent a total reappraisal after the Wall Street Crash in 1929. Herbert Hoover`s name synonymous with economic incompetence; Hooverville’s, Hoover-blankets and Hoover-flags. While in office Hoover stubbornly adhered to his economic principles but in the face of an unprecedented economic crash he eventually altered course. It was a painful intellectual journey, moving from voluntarism, toward direct government intervention. He supported the passage of the Glass-Steagall Act and set up the Reconstruction Finance Corporation and the Home Loan Bank Board. Hoover a strong believer in `State Rights` and rugged individualism did little to help the unemployed, a position viewed as rank hypocrisy when he refused to help Arkansas farmers and the Bonus Army in 1932.

However, a precedent was set and it was one which Roosevelt followed when he initiated the first New Deal of 1933-1935. Roosevelt was no left wing radical and his first priority was to fix the capitalist system, whilst having some regard for those who had suffered during the Republican crash. Roosevelt quickly set up the Federal Emergency Relief Administration, Civilian Conservation Corps, the Civil Works Administration, the Homeowners Loan Corporation, the Agricultural Adjustment Act and the National Industrial Recovery Act. This was just the start of the New Deal a set of measures that shaped a new consensus.

This remained intact until the 1980s although during the 1970s the economy shifted toward financialisation. The election of Ronald Reagan brought the New Deal Consensus to an end his `supply-side economics` a return to `trickle-down economics` also known as `voodoo economics`. Acceptance of this bipartisan conservative agenda was complete with the arrival of Bill Clinton and his `new Democrat` critique of the Welfare system which also focussed on financial de-regulation. An agenda which Hoover would have felt very comfortable with, although ironically Clinton`s tenure saw the repeal of the Glass-Steagall Act.

The crucial linchpin in this bipartisan approach is Alan Greenspan, who became Federal Reserve Chairman under Ronald Reagan in 1987, a position he held until 2006. Alan Greenspan was recently interviewed by Evan Davis, it`s a discussion worth listening to. Although his answers are somewhat mumbled and it’s difficult at times to ascertain his meaning. The discussion often fractious, as this question from Davis about concerns linked to massive debt prior to the crash illustrates:

ED: A lot of people were worried about leverage.

AG: The point is towards the end. Remember the market was not concerned with the leverage of debt and the way we know this is that through 2007 the actual derivatives for sub-prime contracts were selling at par. Meaning that people still believed that – the issue of too much debt is a retrospective view.

ED: No, No, No. The market wasn’t worried about it but it was the job of the people overseeing the market and overseeing the economy to say WOW we have had an explosion in debt we have very high leverage institutions banks now forty-times over leverage compared to their assets, this is mad and we have to stop it somehow.  

The discussion then focussed on a cautious speech Greenspan made near the end of his time at the Federal Reserve. This was to illustrate that given his position at the Fed he was forced to use guarded technical language in order not to cause panic. Doing so it`s argued, whilst he was concerned about the trajectory of the economy (in a speech where he pondered about the contraction of yield spreads). But unfortunately Davis didn’t counter balance this by focussing on policies implemented much earlier than the cited speech. For example the decision to repeal the Glass-Steagall Act. How does Greenspan justify this in light of the crash and the trillions of dollars paid to bail out those doyens of rugged individualism in Wall Street?

Instead the discussion entered the following territory:

ED: Why is that you the most exalted central banker the world has seen for a century…

AG: I couldn’t help that…

ED: No you couldn’t help that but in your book you describe the worst financial crash, the worst financial crisis ever probably…

AG: Yes…

ED: The worst financial crash occurs one year, two years after you leave office…

AG: Three [laughs] yeah, so…

The discussion then moved to the rise of crony capitalism. We get a definition of what the term means and it’s conceded that it`s alive and well in the USA and UK. An obvious point given the policy of too big to fail, which Greenspan wants to end.  This akin to closing the stable door once the horse has bolted. This part of the conversation allowed Davis to highlight that Greenspan remains largely unaltered in his view of government regulation. But Greenspan insisted that this is not the case. He argued that he is calling for more regulation of bank capital and if this results in the breaking up of the big banks then so be it because the policy of too big to fail is `absorbing the savings of the economy`.

We discover that Greenspan is in sympathy with the Republican Tea Party faction but he doesn’t like the methods they employ. Asked if he supports their wider programme, Greenspan says no, that he is `not a socialist`. A bizarre response which deserved clarification – the point ignored or missed by Davis. We also discover that Greenspan is in regular contact with George Osborne and a big supporter of the UK austerity programme – `worked much better than I thought it would`. Greenspan seemed surprised that there hasn’t been a spike in unemployment levels in the UK. Indeed, both Davis and Greenspan marvelled at this. Clearly, they have not heard about the UK`s flexible labour market and the prevalence of casualisation. Added to which is a severe programme of welfare cuts pressuring claimants off the dole to move into jobs where no contract of employment exists where the rights of a `worker` are minimum.  Meanwhile the super rich are saturated in money protected by the state in the form of tax breaks or if required a bail out, making a mockery of that great oxymoron of our time, free-market.

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