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Editorials

Alan Greenspan: The Devil In The Details
By Editors
Jun 16, 2004, 4:15pm

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The senate will soon take up the confirmation hearings for Alan Greenspan to continue to head the Federal Reserve, since his current term ends June 20, 2004. Few outside of the banking industry really understand the role of the chairman or the Federal Reserve but almost everyone understands the poor state of the US economy today. And for that you can certainly blame Alan Greenspan, as well as the the right wing agenda of the current administration. But since it is Alan Greenspan on the hot seat, let us consider a quick review of some of his considerable failures.

The Internet Drop!
A large measure of what fueled the economy in the period of 1990 to 2000 was the Internet and the technological push it gave to industry creativity and productivity. Jobs were plentiful and wages were high. (Granted everyone did not share in this rosy picture but one could argue that the uplifted situation did provide opportunities.) But then the Internet bubble burst and companies went under resulting in massive unemployment, lowered wages and the current state of malaise, certainly made worse by the War in Iraq. Many young people were forced into the military since those were the only jobs available. But why did the Internet bubble burst so enormously and so suddenly, along with the US economy. Blame Alan Greenspan!

From economist James K. Galbraith: (Read in its entirety The man who stayed too long at the end of this article..

" ...he blew it. He knew that the Internet bubble was getting out of hand. He held the power to do something about it without raising interest rates, but he declined to act...

Instead, just before and even after the Internet crash, Greenspan raised interest rates -- unsettling the markets and hitting hard at presidential candidate Al Gore. It was the wrong policy, attacking an inflation for which by then not a shred of evidence remained. And then, as the markets tumbled, Greenspan did nothing for six months. Only in December -- just as George W. Bush was anointed -- did he begin to cut rates. And while that surely helped soften the slump, allowing consumers to continue to borrow and spend through the Bush years, it came too late to save the "new economy" from a fiasco costing millions of jobs.


Tax cuts (for the rich).
If there is one single job the Chairman and the Federal Reserve are supposed to do - it is to protect the economy from dangerous actions, incidents and approaches. (Too often the only issue considered is inflation and though meaningful, it is only a piece of the puzzle and not the whole ecnchillada.) Few remember that Greenspan initially was cool to the issue of tax cuts but was soon brought around by the White House thinking (or perhaps political pressure). Never mind that with a shrinking economy the tax cuts brought on federal deficits of unmanageable proportions. And never mind that this weakened the economy to the point where other nations began referring to the US as bankrupt. And the value of the dollar already vulnerable fell even further. And the balance of payments surged upward. All these problems continue today!
For his inactivity and blatant disregard for the good of society Alan Greenspan should be charged with criminal conduct.


Social Security - Greenspan's Con Job (by William Greider)
Here

"It is not exactly that he lies, but Alan Greenspan certainly ranks among the most duplicitous figures to serve in modern American government. Using his exalted status as economic wizard, the Federal Reserve chairman regularly corrupts the political dialogue by sowing outrageously false impressions among gullible members of Congress and adoring financial reporters. These distortions are not harmless; they become solemn writ for lawmakers and opinionmongers. Greenspan is especially destructive when he opines on public matters outside his supposed expertise as a central banker. His thinking is still anchored by Ayn Rand's brittle social philosophy: Let the strong prevail, let the weak pay for their weakness.

The Fed chairman's recent remarks on Social Security and the federal budget deficits offer a particularly chilling example. In a House budget hearing, he elided the two subjects in a way that produced predictable scare headlines and chin-wagging editorials. The deficits must be dealt with promptly, he warned, because the baby boomers are about to retire. Then Social Security will be in trouble. And so government must cut benefits now, before it's too late. "I am just basically saying that we are overcommitted at this stage," he explained. "You don't have the resources to do it all."

That sounds like manly wisdom. Greenspan was widely praised for courage. He should more properly be pilloried for gross mendacity. He is proposing a con job on ordinary working Americans--a bait-and-switch game on a grand scale--in which the payroll taxes they paid into Social Security over many years will now be diverted to other purposes, including the generous tax reductions G.W. Bush has enacted for the very wealthy and the corporations. It doesn't sound so noble when you put it that way. Greenspan knows these facts but also knows his big lie will probably endure as conventional wisdom..."


Support Of Right Wing Agenda (For The Elimination of All Social Programs)

Greenspan Testimony Highlights Bush Plan for Deliberate Federal Bankruptcy
Here
During his February 25 testimony before the House Budget Committee, Federal Reserve Chairman Alan Greenspan generated sensational national headlines by recommending that President Bush's $1.5 trillion in tax cuts be made permanent while Social Security and Medicare benefits be dramatically cut to achieve long term deficit reduction and a balanced budget.

In spite of the media furor and across the board condemnation by the remaining Democratic presidential candidates, there should be no reason for surprise at Greenspan's remarks. In his capacity as shill for the Bush administration, the Chairman's recommendations make perfect sense, as long as one is not foolish enough to believe the window dressing about a long term balanced budget. Mr. Greenspan is laying the groundwork for a second Bush administration, not a balanced budget. His remarks, and most of the economic policies of the Bush administration, can only be understood against the backdrop of the little remarked right wing agenda of deliberate federal bankruptcy.


Greenspan is a Failure, Tell your congressman NOT to confirm his appointment!
Anyone who bends to political pressure and who serves in a position of trust should be removed from office and certainly not rewarded with increased government employment. (Especially given the consequences of his actions!) Alan Greenspan has disregarded sound economic thinking and betrayed the good of the US for the good of a few in government and business. He lacks clarity, vision and understanding.
This is not a minor appointment. This has to do with the future of this country and its citizens. Reappointment is a vote for more policies of failure and increased separation of rich and poor. It goes against the very policies of equality that this country was founded on and supported for over two hundred years.
This is worth fighting for!

***************************************************************************

The man who stayed too long
Don't believe the headline writers -- higher interest rates won't beat inflation. But Alan Greenspan's successor might.
Reprinted from here!

Ed Note: This link to Salon requires either a subscription or submitting to an ad but since the article is reprinted in its entirety here, there is no need to go there to read the article.

- - - - - - - - - - - -
By James K. Galbraith

May 20, 2004 | Alan Greenspan plays the role of economist, on TV especially, better than any public official who ever lived. But that doesn't mean he is one.

Here is a man who spent the first half of his central-banking career fighting an inflation that did not exist. In so doing, the chairman of the Federal Reserve triggered the stock market crash of 1987, the recession of 1990-1991 and a "preemptive strike" on the dead beast in 1994. He had one period of glory, the late 1990s, when by doing nothing for four years he managed to bring on full employment without inflation. This was against the almost-unanimous received wisdom of the "real" economists, it should be said, and for this Greenspan should always be honored.

But then he blew it. He knew that the Internet bubble was getting out of hand. He held the power to do something about it without raising interest rates, but he declined to act. Let me quote myself here, speaking at the White House Conference on the New Economy in early April 2000:

"For its part, and instead of setting off to fight an inflation that is a pure product of academic imaginations, the Federal Reserve Board could control margin lending. Raising margin requirements is the direct approach to a stock bubble, more targeted than raising interest rates and more effective than jawboning the lenders. If a crash comes, sooner or later, a failure to have acted on margins will weigh on the record, and not for the first time."

Instead, just before and even after the Internet crash, Greenspan raised interest rates -- unsettling the markets and hitting hard at presidential candidate Al Gore. It was the wrong policy, attacking an inflation for which by then not a shred of evidence remained. And then, as the markets tumbled, Greenspan did nothing for six months. Only in December -- just as George W. Bush was anointed -- did he begin to cut rates. And while that surely helped soften the slump, allowing consumers to continue to borrow and spend through the Bush years, it came too late to save the "new economy" from a fiasco costing millions of jobs.

Greenspan has done two other key favors for Team Bush. In 2001, he famously spoke against his own convictions, expressed privately to former Treasury Secretary Paul O'Neill, that without triggers making them conditional on the vanishing surplus, the Bush tax cuts were "irresponsible." (Now he denies having said this, but there is no reason to believe him.) And in recent weeks he has tried to slit the throat of the Social Security program, calling for benefit cuts while supporting making Bush's tax cuts permanent. John Edwards correctly called this an "outrage" at the time, and John Kerry said, "We're simply not going to do it." But Greenspan is a stalking-horse for the next term of President Bush.

Chairman of the board of governors of the Federal Reserve System is truly a wonderful job. Not only is it at the center of power, money, prestige and mystery, but the occupant can do no wrong. He is always praised for the good times, never blamed for the disasters. Nowhere else in American public life is there a position so similar to that of the pope. Or, perhaps, to the president of Mexico, back in the old days: a high priest while in office -- and a complete nonentity as soon as the sash is removed.

Greenspan knows this, of course. For what other reason would he, at 78, choose to linger on in his marble palace? He has survived, after all, the Internet bubble and crash, and four years of stagnation since then. We are in that brief, happy moment that follows the onset of war and that often precedes elections: The country's growth rate is fairly high, and even employment has been rising these past two months. Now, for the first time since Greenspan was last reappointed in 2000, retirement would not imply admission of defeat.

Not only this, but the future isn't rosy. High oil and gas prices are percolating through our structure of costs, generating low-grade but perceptible systemic inflation. The dollar continues to fall against the euro. Meanwhile, China is quite sensibly converting some of its dollars into a strategic petroleum reserve. This and other stockpiling will work to keep oil prices up (always allowing for that promised gift from the Saudis of a few months' price cut just before the election) while further driving the dollar down.

Greenspan is already telling us, as clearly as he ever does, that the Fed will shortly repeat the mistakes of the last oil price shock, back in the 1970s. Faced with inflation -- even just a small amount -- it will raise interest rates. This is called "fighting inflation." The headline writers will say so endlessly, until you almost think it is true. But the effect is just the reverse. As higher rates drain funds from many companies, they will respond by raising their prices even more. Only much later, when the effect of high interest rates is to clobber demand, growth, employment and commodity prices, will inflation finally decrease.

Stock prices rose in 2003 in part because the dollar was falling. Hence U.S. transnational corporations could convert their euro earnings into more dollars, making their earnings look terrific. (No doubt, the administration's cutting the tax rate on dividends also helped.) A rise in rates and the dollar will unravel this effect. And higher rates may also hit the banking sector, depreciating banks' assets (including mortgage-backed securities) while increasing their costs. Will banks respond, as they did in 1994, by increasing their lending? It's doubtful: Pent-up demand for new loans does not appear to be there, as it was 10 years ago.

The outlook, therefore, isn't for another noninflationary boom. It's for stagflation -- the combination of low performance and rising prices some of us dimly remember from the Vietnam War. Thanks to Iraq and his own longevity, Greenspan is now likely to go out on a sour note: the man who stayed too long.

Greenspan will probably retire in 2006, according the arcane rules governing his tenure. But there is one good thing about this reappointment now. It means that President Kerry will be able to place his own man or woman in the job relatively early in his term. But then Kerry will still face the dilemmas Greenspan bequeathed: How to restore the tax system Greenspan helped unravel. How to protect Social Security from the unrelenting Cassandras of whom Greenspan is the ringleader. And how to maneuver between the devil of stagflation and the deep sea of a sinking dollar.

Chairman of the board of governors of the Federal Reserve System is truly a wonderful job. Not only is it at the center of power, money, prestige and mystery, but the occupant can do no wrong. He is always praised for the good times, never blamed for the disasters. Nowhere else in American public life is there a position so similar to that of the pope. Or, perhaps, to the president of Mexico, back in the old days: a high priest while in office -- and a complete nonentity as soon as the sash is removed.

Greenspan knows this, of course. For what other reason would he, at 78, choose to linger on in his marble palace? He has survived, after all, the Internet bubble and crash, and four years of stagnation since then. We are in that brief, happy moment that follows the onset of war and that often precedes elections: The country's growth rate is fairly high, and even employment has been rising these past two months. Now, for the first time since Greenspan was last reappointed in 2000, retirement would not imply admission of defeat.

Not only this, but the future isn't rosy. High oil and gas prices are percolating through our structure of costs, generating low-grade but perceptible systemic inflation. The dollar continues to fall against the euro. Meanwhile, China is quite sensibly converting some of its dollars into a strategic petroleum reserve. This and other stockpiling will work to keep oil prices up (always allowing for that promised gift from the Saudis of a few months' price cut just before the election) while further driving the dollar down.

Greenspan is already telling us, as clearly as he ever does, that the Fed will shortly repeat the mistakes of the last oil price shock, back in the 1970s. Faced with inflation -- even just a small amount -- it will raise interest rates. This is called "fighting inflation." The headline writers will say so endlessly, until you almost think it is true. But the effect is just the reverse. As higher rates drain funds from many companies, they will respond by raising their prices even more. Only much later, when the effect of high interest rates is to clobber demand, growth, employment and commodity prices, will inflation finally decrease.

Stock prices rose in 2003 in part because the dollar was falling. Hence U.S. transnational corporations could convert their euro earnings into more dollars, making their earnings look terrific. (No doubt, the administration's cutting the tax rate on dividends also helped.) A rise in rates and the dollar will unravel this effect. And higher rates may also hit the banking sector, depreciating banks' assets (including mortgage-backed securities) while increasing their costs. Will banks respond, as they did in 1994, by increasing their lending? It's doubtful: Pent-up demand for new loans does not appear to be there, as it was 10 years ago.

The outlook, therefore, isn't for another noninflationary boom. It's for stagflation -- the combination of low performance and rising prices some of us dimly remember from the Vietnam War. Thanks to Iraq and his own longevity, Greenspan is now likely to go out on a sour note: the man who stayed too long.

Greenspan will probably retire in 2006, according the arcane rules governing his tenure. But there is one good thing about this reappointment now. It means that President Kerry will be able to place his own man or woman in the job relatively early in his term. But then Kerry will still face the dilemmas Greenspan bequeathed: How to restore the tax system Greenspan helped unravel. How to protect Social Security from the unrelenting Cassandras of whom Greenspan is the ringleader. And how to maneuver between the devil of stagflation and the deep sea of a sinking dollar.

salon.com

- - - - - - - - - - - -

About the writer
James K. Galbraith is Salon's economics correspondent. He teaches at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin.

***********
Update 6/21/04:
Greenspan confirmed by Senate
Fed chairman approved for fifth term by unanimous voice vote; interest rate meeting looms.

June 18, 2004: 5:23 AM EDT

WASHINGTON (Reuters) - The U.S. Senate has voted to confirm Alan Greenspan for a fifth and final term as chairman of the Federal Reserve, clearing him to serve at the U.S. central bank into 2006.

The Senate backed Greenspan's renomination by voice vote without opposition late Thursday, just days before his fourth term was set to expire.

The Senate vote also comes on the eve of what is widely expected to be the first interest rate increase by the Fed in four years.
More

Ed Note: Oh well, get ready for hard times!

*******************

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