The Blob Celebrates Alan Greenspan

Former Federal Reserve Chairman Alan Greenspan died last June 22 at age 100. Next Monday, the Council on Foreign Relations (CFR), of which he was a longtime member, is having a members-only celebration of Greenspan, in which “panelists who worked alongside him discuss his legacy and contribution to the American economy and society.”

Opening the panel will be former Treasury secretary and Clinton economic chief Robert Rubin, who is also former chair of CFR. Rubin epitomizes the Wall Street-Washington revolving door, having been a senior executive of Goldman Sachs before serving under Clinton, and then returning to Wall Street as a top Citigroup official—having used his government posts in between to promote the deregulation that allowed Citigroup to be both a commercial and investment bank.

Next, two of the close allies of Rubin and Greenspan will discuss the great man’s contributions—former Treasury Secretary Tim Geithner, who previously served as president of the New York Fed, and former Deputy Treasury Secretary Roger Altman. Closing remarks will be made by Michael Froman, the current CFR president. Froman is a Rubin protégé and former top trade official under Obama. David Rubenstein, co-chair of the giant private equity firm the Carlyle Group and current board chair of the CFR, will preside.

The Council on Foreign Relations provides a revealing window on how the American establishment governs. For starters, every one of these panelists is a Democrat, while Greenspan was a far-right Republican whose hero was Ayn Rand. But no matter, Democrats and Republicans can agree on deregulating finance. That speaks volumes about the Wall Street capture of recent Democratic presidencies and the neoliberal bipartisan consensus that continues to reign when it comes to capital.

The one man (and they are all men) missing from this cozy group is Larry Summers, whose fall from grace in a sexual harassment scandal has made him persona non grata virtually everywhere, even among his oldest friends. Summers filled out the famous 1999 Time magazine cover story along with Greenspan and Rubin as The Committee to Save the World. That article did not point out that the world needed saving because the deregulatory policies of the same three created a crisis of third-world currency speculation and crash, which in turn required a Washington bailout. 

Since the panel is unlikely to call attention to Greenspan’s serial policy fiascoes, here is a brief refresher:

Greenspan was appointed Fed chair by President Ronald Reagan in 1987. After Bill Clinton was elected president in 1992, Clinton wanted to undertake an economic stimulus with public investments. Greenspan met with Clinton and explained that a stimulus would be the wrong medicine. 

Rather, said Greenspan, Clinton should cut the deficit. That would reassure the bond market. Greenspan would do his part by lowering interest rates. More investment and recovery would ensue. Clinton famously complained that his policies were being held prisoner by “a bunch of fucking bond traders.” In fact, they were being held hostage by Greenspan. 

Clinton reluctantly went along, duly cutting the deficit at the expense of his public investment plans. But Greenspan did not keep his part of the deal. The Fed, worried about inflation, raised interest rates. 

In the late 1990s, Greenspan did cut rates. The rate cuts served to inflate the dot.com bubble. Short-term prosperity followed, and budget balance became an article of faith among Clinton’s economic team. But then came the dot.com crash.

As the financial economy became ever shakier in the early 2000s, Greenspan kept interest rates very low lest the bubble pop. This policy, and the speculative strategy among traders that it fomented, became known as the Greenspan put. The term comes from the options market. A “put” gives the option holder the right to sell the underlying stock at a set price, so it creates a floor under the trader’s losses in a down market.

Greenspan kept bailing out Wall Street with bond purchases and rate cuts. In 1996, he famously warned against “irrational exuberance” in financial markets but refused to rein it in. And in 1999, testifying before Congress, Greenspan declared, “Bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgement that hundreds of thousands of informed investors have it all wrong.”

But in fact, markets were manipulated by insiders and did price securities all wrong. Low interest rates needed to be combined with much tighter financial regulation to prevent a corrupt cycle of bubble and crash. But Greenspan, as an Ayn Rand acolyte, was totally opposed to financial regulation, seconded by Rubin and Summers.

There was one law still on the books that could have headed off the subprime collapse, called the Home Ownership and Equity Protection Act of 1994. It mandated that the Fed regulate all mortgage lending and explicitly prohibit deceptive, abusive, and unfair lending practices. But Greenspan, despite the pleadings of other Fed governors, refused to enforce it, preferring to trust markets to regulate themselves. The collapse followed. Greenspan was prudently gone, having retired in 2006.

In sum, Greenspan got just about every important thing wrong. He did one thing right. As chair of the 1981 bipartisan Commission on Social Security Reform, he worked with Democrats Tip O’Neill, the House speaker, and Robert Ball, former Social Security commissioner, on a grand compromise to shore up the system’s finances. Greenspan later said that he didn’t think we needed Social Security at all.

It will be interesting to see if the Greenspan acolytes at the CFR event acknowledge any of the negatives. It’s a closed event, for CFR members only. Somehow, I expect that details will leak out. But like Trump, the Wall Street elite is beyond embarrassment.