The Financial Times in an editorial chastises the U.S. Federal Reserve bank chairman Alan Greenspan for encouraging speculators, such as those mysterious bodies called hedge funds, to snaffle up bonds recently by cutting interest rates to ward off deflation, only to find that bond prices dropped sharply once it appeared the economic situation in the U.S. was improving. (It is too early to say for sure that things are getting better in the world economy though. Certainly not in Continental Europe).
I do not really have a quick way of picking through the rights and wrongs of the FT’s position. I think it is plainly daft that Greenspan, who remains one of the sharpest economic brains around, would have deliberately set out to con investors. What I do think this episode does, however, is reinforce in my mind the enormous risks of entrusting great economic powers to folk like Dr. Greenspan. In fact, the more highly regarded such men and women are, the more lethal the consequences when they slip up.
Even many folk who consider themselves to be ardent free marketeers can get caught up in near religious reverence for the great central banker. Financial speculators hang on every word. The most bland of statements are parsed for some deeper meaning. I have spent too many hours than I care to remember trying to work out if the statement of X or Y actually suggests that inflation is likely to up, down, or whatever.
The cult of the central banker is one of those belief systems of surprisingly short duration, by historical standards. Maybe in decades to come, we will look back on the era of Alan Greenspan and his ilk rather as we would that of the Medieval Popes. And we will be even more struck when we recall that Greenspan, when a young economics student and friend of Ayn Rand, urged a return to old-style private banking and the unfairly maligned Gold Standard.
…the enormous risks of entrusting great economic powers to folk like Dr. Greenspan
Greenspan is Chairman of the Board of Governors of the US Federal Reserve Board. He doesn’t just go out and do stuff on his own.
Anyway, it’s much like having one guy who’s US Secretary of Defense. Powerful, yes; unaccountable, no.
Maestro Sir Alan might be one of the sharpest economic brains out there, but several years ago he started believing his own hubris.
Thus, he completely decoupled his interest rate/money supply decisions from such solid indicators as price of gold and other commodities and started fine-tuning economy according whatever was his latest bogyman: growth, stock market, consumer spending, lack of consumer spending, employment numbers, unemployment numbers, housing market, and the most mythical of all, the consumer confidence (I might have missed few, would have to reread his speeches). They all were apparently indicators of inflation and we ended up with deflation instead. And we are all pretty aware of the explosive boom and bust in recent years. (Before anybody slay me with ?but it was all the evil dot.com’s doing!?, please note the word “explosive”. I simply maintain that the Fed contributed significantly to the problem, though they never ever acknowledged that, and were very quick to take the credit for the expansion.)
Recently our Maestro seemed to quietly come back to his former semi-official gold-standard policy and there is a chance of a recovery (and the tax cuts will help).
However, this all demonstrates the absolutely frightful power that he has over the psychology of investors and policymakers alike. I attribute this to deeply rooted human need for a power “out there” which would always take care of things.
Some people believe in God. Some in Central Bankers.
George, Greenspan position is as unaccountable as it can be within current political system. You cannot compare it to that of Secretary of Defense. Besides, he pretty much made sure that his Board Directors consist of Yes Man.
He is 77. He still does not have credible successor. He is enamored with his power. And why blame him, we made him our modern God.
However, this all demonstrates the absolutely frightful power that he has over the psychology of investors and policymakers alike. I attribute this to deeply rooted human need for a power “out there” which would always take care of things.
Some people believe in God. Some in Central Bankers.
Excellent.
Just a small point, but I do not think that Alan Greenspan has quite as much universal respect as intimated by your other commenters.
At the time of the ‘dot-com’ crash, I remember being surprised at the volume of comment decrying his mishandling and ‘knee-jerk’ control of the Federal Bank.
He is, however, a very clever man, and no-one is ever totally perfect.
George, Greenspan position is as unaccountable as it can be within current political system.
Well, not quite. Federal judges have a better deal than Greenspan’s four-year term (renewable). And while Donald Rumsfeld has an uncountable number of things he can fiddle with, Greenspan really has only a few (or so I was taught in Civics).
Hmm. Might there not be something to be said for unaccountability, subject to appropriate institutional constraints. A political appointee in every position of power–each seeking to pander to the latest public panic on behalf of his masters–is the last thing we need.
Like a hereditary house of lords, for example?
I tried convincing some friends a few years back that Greenspan is currently what the United States has instead of a constitutional monarch.
You had me there, right up to that clap-trap about the Gold Standard.
As well as checking ability of the national banks to make mischief, the global free market for money has rendered the Gold Standard, and indeed the entire concept of specie-backed money, not merely obsolete, but positively archaic.
The U.S. Federal Reserve Bank is not Federal nor does it have any reserves.
The Fed, as it is called, manufactures money out of thin air and lends it to the U.S. Government and certain banks, for which it demands interest.
The major central banks around the world are interconnected by various “schemes”.
Under the “Gold Standard”, none of these central banks could function.
The Fed is an Act of the U.S.Congress, signed into law by President Wilson…cica 1913.
If Greenspan is the constitutional monarch of the US, who takes over when he snuffs it? He seems to have so much influence one wonders how the US financial system will cope when the sands of time ultimately claim this King of Money.
Or is the US Federal government currently working out ways to extend the lives of central bankers, indefinitely? 🙂
Kevin L. Connors writes:
As well as checking ability of the national banks to make mischief, the global free market for money has rendered the Gold Standard, and indeed the entire concept of specie-backed money, not merely obsolete, but positively archaic.
But isn’t this global free market for paper fiat money the exact reason why Eurocrats, and other forms of tapeworm, are so desperate to create the Euro currency, so they can inflate to their hearts’ content within trade-protected borders?
And then, almost inevitably, if we in Britain don’t kill the Euro by staying with the pound, a future US group of Democ-rats will align the dollar with the Euro, when they next get to wreck the US economy, to create something like a global “Eurodollar” currency, and then a “UNDollar”, a single global world paper fiat money, under the control of a single super-central bank.
And then we’ll all enter a Argentine-style global financial hell.
Give me the archaic obselete gold standard every time. Paper fiat money’s only been going 100 years, or so. I think it needs to go for a few hundred more before it claim a pedigree as good as gold, something which lasted from around 800BC, as money, through to 1900AD.
And which I believe will almost certainly return again when humanity is living in different solar systems, and trading between them, using gold or platinum, as the universal currency again, if not sooner. Maybe a lot sooner, perhaps if the UNdollar comes into existence, then about ten years or less after that, after some really nasty Weimar style crack-up.
I think we need more currencies not less! If someone has the gold, or the silver or any other “precious thing” they should be allowed to print their currency, and trade with it, competing against the central government currency, to allow easy conversions.
Producer Price deflation IS the boom, the bust is the malinvestment that caused the over supply.
If you can understand this the economy makes alot more sense!
Andy Duncan, I was with you there right up to the point where your space obsession suddenly intruded.
Living in other solar systems indeed – what a load of mince.
Spot on about the gold standard though.
Don’t pawn all the jewellery yet, at least, not for paper money.
Andrew Duffin writes:
Living in other solar systems indeed – what a load of mince.
I’m curious. Do you think this is not going to happen? Or do you think it so remote it’s not worth considering?
OK, it won’t be in our lifetimes, but seeing as we were throwing rocks at each other 10,000 years ago (or building Atlantis, if you read the right books :), I’d say we’ll be outta here within the next coupla thousand years, maybe even the next 200.
This short 200,000 year birthing spell on Earth, for modern humanity, is only an interlude. It’s 5 million years since we split from the gorillas and the chimps. Most of the next 5 million will be spent in other solar systems. And we will be using precious metals as trading currency.
Or dilithium crystals, of course! 🙂
It points out the herd instinct of an investor class unwilling or unable to do their own work as they go wandering over the cliff while letting someone else do their thinking for them. A fool and his money…
The whining tone of the FT article pissed me off. I mean, the idea that hedge funds etc were “misled” by Greenspan, as if they were unable to think for themselves. The “victim culture” seems to be spreading to Wall Street, the City and elswhere. What are they going to do, file a class action suit against the Fed?
Absolutely agree, Rob.
The freedom to issue your own currency, to be priced by market assessment of your notes as solid or soft, is an often overlooked and powerful liberty.
Let the hundred florins bloom.
A few points to consider:
i) the Fed is a quasi-private institution, not a proper branch of the US government. It is immune to freedom of information act requests, for example.
ii) George Peery wrote – ” while Donald Rumsfeld has an uncountable number of things he can fiddle with, Greenspan really has only a few”
True, but the ability to fiddle with the money supply is an enormous power. It can, for example, finance wars, or alter presidential election results, or destroy the fabric of society (e.g. the Weimar Republic in 1920s Germany, Latin America in the 1980s).
iii) “The major central banks around the world are interconnected by various “schemes”. Under the Gold Standard, none of these central banks could function.”
What “schemes” are these? In any case, under a bone fide gold standard, central banks would cease to exist – that is the whole point.
iv) “As well as checking the ability of the national banks to make mischief, the global free market for money has rendered the Gold Standard, and indeed the entire concept of specie-backed money, not merely obsolete, but positively archaic.”
Hardly – during the heydey of the Gold Standard in the 19th century, the international capital markets were noticeably freer than they are now. In any case, this alleged global “free market” in money (which is reguarly subject to central bank manipulation in the money and currency markets) has not prevented the Fed from inflating a stockmarket and then bond market bubble in the last few years alone. Take a look at the purchasing power of the dollar since 1913 – far from being checked, that looks like a disastrous decline to me. In addition, over the last few decades there have been numerous cases of national central banks hyperinflating merrily, seemingly ignorant of the much-vaunted checks of the international capital markets.
Central banking is basically central government planning of money. Its results are likely to be as efficient as central government planning of railways, postal services, or law enforcement. Even various Fed governors (including Lord Greenspunk himself) have admitted they are unable to predict the rate of inflation or the optimal rate of interest better than the markets, and one was quoted as saying it was “bizarre” to believe that they could.