The Business Cycle and the Federal Reserve

Alan Greenspan

If the world financial oligarchy, (the likes of Bank of America, JP Morgan Chase, Wells Fargo, and their foreign counterparts) are the Nazis of our time, determined on global economic domination with global economic collapse as their legacy, then Alan Greenspan is their Adolf Eichman. A diligent foot soldier making sure that everything was running smoothly. Diligently making sure all the switches are pulled and the tracks were clear in run up to the largest financial disaster ever witnessed.

The Maestro

Greenspan (often called the maestro while at the FED) had an early start at obfuscation. During the crash of 1973 / 74 when the DJIA (Dow Jones Industrial Average or DOW for short) declined by 44% Greenspan offered this to the world on January 17, 1973 just as the slide was starting; "The danger is that business may get too good too soon. Up to now there has been a strong element of business and consumer caution that has helped to keep the recovery under control. There are signs, though, that the caution is diminishing."

Charles Keating's Influence Peddler

However his true role is not as an oracle for the masses but as an influence peddler and fixer for the corrupt and wealthy in the financial industry. In 1985 Charles Keating (yes the very same Keating of the Keating five scandal) hired Greenspan to write a position letter to Ed Gray, chief of the FSLIC (Federal Savings and Loan Insurance Corporation). Greenspan was arguing for less regulation on the Savings and Loan industry. He had this to say about Lincoln Savings and loan in particular, "a strong institution that poses no risk to the FSLIC." He described Lincoln's management as ''seasoned and expert in selecting and making direct investments…".

Lincoln was not the only saving and loan Greenspan singled out as model citizens of the financial industry. Of the 17 S&Ls which Greenspan had commended 16 would go out of business within four years. Lincoln Savings and Loan was seized by the FSLIC on April 14, 1989. Just before Lincoln met its end, Greenspan's Federal Reserve Board had taken the unusual step of extending a loan of $98 million to Lincoln Savings and Loan, which was not a commercial bank and not a member of the Federal Reserve System.

Greenspan nominated for FED chairman

FED Chairman

It was as chairman of the Federal Reserve Board where Greenspan would be given the power to set the course for a financial disaster on a monumental scale. Alan Greenspan was appointed by Ronald Reagan to take over the FED from Paul Volker in June of 1987. He served as FED chairman from August 11, 1987 to January 31, 2006. One of his first acts as FED chairman was to raise the discount rate by a half point on September 3rd. On October 19, 1987 the DJIA declined by 508 points, which up until recently was both the largest point and percentage decline in its history.

Alan Greenspan would eventually tire of raising interest rates, but not before it was estimated that the average worker saw their weekly earnings decrease by about 6%. [ 1 ]

He presided over the Saving and Loan fiasco which bankrupted 2200 institutions, cost taxpayers around $200 billion and for many people their life savings.

Starting to believe that he was the financial genius that the press had given him credit to be Greenspan started to notice some problems in the banking industry in 1990. He noted, "all too many problems in the banking system, problems that have been growing of late as many banks, including many larger banks, have been experiencing a deterioration in the quality of their loan portfolios.... " [ 2 ] The obvious solution to this was not more regulation but a rapid lowering of the Fed funds rate. From it's peak of 9 7/8% in early 1989 the rate dropped to 3.5% by December 1991. And that was just the beginning. Greenspan lowered the rate to 3% and kept it there until February 1994. This was all to help the banks avoid bankruptcy by allowing them to borrow from the FED at 3% and buy US Treasury securities paying 7% (the long bond).

Interest rates go up

During the Clinton years Alan Greenspan was especially worried. The FED chairman thought full employment, rising wages and economic growth over 2.5% per year were all highly dangerous because they might interfere with speculation. So right after the 1993 deficit reduction which were supposed to bring rate down Greenspan raised interest rates.

Interest rates come down

The stock market wobbled a little in 1994 but then started upward as the dot com technology boom began. During this time Greenspan raised interest rates but the boom kept happening. As the market raced upward from 1995 to 2000 Greenspan decided it was time to lower interest rates. Because was we all know "irrational exuberance" just loves cheap money.

The stock market wobbled a little in 1994 but then started upward as the dot com technology boom began. During this time Greenspan raised interest rates but the boom kept happening. As the market raced upward from 1995 to 2000 Greenspan decided it was time to lower interest rates. Because was we all know "irrational exuberance" just loves cheap money.

Greenspan Bubble

Greenspan Depression

The Internet bubble pops

The NASDAQ peaked at 5048 lost 78% of its value by October 2002. The S&P 500 49% from its March 2000 high to its October 2002 low. During this time Greenspan championed more one sided deregulation.

You should remember the phrase "once in a century" he will use it again but not as the chairman of the FED.

One sided deregulation

One thing is clear that when the interests of banks are threatened Greenspan can move quickly and decisively abandoning the obfuscation he was noted for. In 1994 the General Accounting Office (GAO) released a report which was the result of a two-year study of the derivative industry. The GAO recommendation was to put derivatives under the scrutiny of federal regulators. This attack of the free market system was quickly dealt with by Greenspan. He testified to the Subcommittee on Telecommunications and Finance of the House Energy and Commerce Committee, chaired by Edward J. Markey, "There is no presumption that the major thrust of derivatives activities is any riskier, indeed it may well be less risky, than commercial lending." There you have it. All is well in the banking industry. It is if you are one of the few pulling down multi million dollar bonuses.

What Greenspan learned from engineering the dot com bubble is not clear. Maybe it was how to engineer the next bubble that would be even larger. The derivative bubble based on home mortgages many of which were a fraud handed to the consumer written by the banks. His unabashed support for an unregulated private derivatives market gave rise the $155 trillion dollars in toxic derivatives that are threatening a repeat of the Great Depression.

The Internet bubble was just a warm up

Like all bubbles this one also popped. The world largest bubble (to date) burst on August 2007. By that time Alan Greenspan the master of timing was long gone from the FED. It would happen on someone else's watch.

On October 23, 2008 Greenspan was asked to testify before the House Government Oversight and Reform committee. "We are in the midst of a once in a century credit tsunami (requiring) unprecedented measures;…This crisis has turned out to be much broader than anything I could have imagined;…fears of insolvency are now paramount;…significant layoffs and unemployment are ahead;…marked retrenchment of consumer spending" as well;…containing the crisis is conditional on stabilizing home prices;…at best, it's "still many months in the future;" There it is again that phrase "once in a century" so easily tossed about by the maestro.

So what do you do when you have accomplished so much for your corporate masters? Unlike Adolf Eichman Alan Greenspan wrote a book. Not a textbook on the folly of one-sided deregulation. But a self serving autobiography of how carefully he charted a course for the FED and the nations financial system. It is a wonder his arm is not in a sling for being broken by patting himself on the back. . Here's to hoping he will end up selling apples on a street corner.

[ 1 ] Economic Report of the President 1997, pg. 352

[ 2 ] Financial Times, September 14, 1990