December 6, 2016
Two years ago, Alan Greenspan humiliated America’s financial and political establishment by publicly highlighting the US dollar’s secondary role. "Gold is a currency,” Greenspan said, at a Council on Foreign Relations conference. “No fiat currency, including the (US) dollar, can match it."
The comments by Greenspan - a former US Federal Reserve chair, Ayn Rand disciple, jazz musician and one of the country’s top economists - were a shot across the bow of one of America’s primary foreign policy priorities: enforcement of the dollar’s role as the global reserve currency.
If the rest of the world stops accepting unbacked US paper and debt in exchange for real goods and services, the country’s financial power and standard of living would tank by orders of magnitude.
Greenspan’s comments threatened that primacy.
It wasn’t just what Greenspan said that mattered, but where he said it. The Council on Foreign Relations is a pillar of US establishment thinking.
The council describes itself as an “independent, nonpartisan think tank whose researchers cover significant issues shaping today's international agenda.” A quick look at its board, however, shows that at least half have visible connections to central banks, financial institutions, and hedge funds.
The man who knew
There was no way this august body was going to let Greenspan’s comments stand. Last month, the financial establishment struck back, with the release of The Man Who Knew: The Life and Times of Alan Greenspan , a CFR-financed book that blames Greenspan for allowing financial bubbles to inflate during his tenure at the central bank, thus enabling the 2008 financial crisis.
Written, researched, and documented by a multi-million-dollar team of Council of Foreign Relations staffers, assistants, and interns, and headed by Sebastian Mallaby , a former journalist, the book cites evidence pulled from Greenspan's PhD thesis that he was well aware of the dangers that asset bubbles present.
The Maestro, as the former Fed chair was known during his nearly two decades in office, “was the man who knew,” not the man who “acted,” Mallaby writes.
That disingenuous charge, while partially based in reality, enables establishment players to set up Greenspan as the fall guy for a possible future crash, thus deflecting attention from the CFR and its backers. To understand why, it helps to take a step backward.
Hampered by a debt-growth model
The US economy that Greenspan inherited when he took over the Fed chairmanship in 1987 was already considerably hampered by hidden fragilities. These included too-big-to-fail financial institutions, massive debts - many of which were compiling off the books - and the legacy of a slew of bailouts ranging from Continental Illinois to the City of New York.
A precedent had long been set. Starting with the abandonment of the gold peg in 1971, America adopted the debt-growth model, in which system-wide borrowing and unfunded liabilities growth – at a rate that out-paced GDP growth - were needed to avoid sending the economy into persistent recessions.
Bailouts and continued asset growth – even back then – were already needed to keep the system stable. Everyone knew what had happened to Paul Volcker, the previous Fed chair, who had tried to stem the accumulating sclerosis and was pushed out of office for his troubles.
Those who needed reminders had only to watch the fates of David Stockman (who pushed for spending cuts), Paul O’Neill (who opposed tax cuts) and Brooksley Born (who argued that derivatives should be regulated) and others who made similar attempts.
In fact, the best conceivable result that any Fed chair could hope for by the time Greenspan took office, just weeks before the 1987 stock market crash, would be to slow debt growth and maintain system stability as long as possible, in the hopes that the political climate would change and reforms – particularly entitlement reforms - could be enacted [i].
How has the US fiat money system held together for so long?
Many in the sound money community - notably Bill Bonner at the Daily Reckoning, but also Ron Paul – have openly wondered how the US financial system has held together for so long. Whatever his faults – and there were many - Greenspan’s skills during his two decades as Fed chair had a lot to do with it.
Mallaby’s questionable thesis and the book’s numerous deficiencies mostly escaped reviewers at The Economist , the Washington Post, and Financial Times (three papers where Mallaby previously worked).
Despite this, the Council on Foreign Relations’ attack on Greenspan remains a useful guide to how the US establishment views recent monetary policy history [ii].
Mallaby’s staffers combed the archives relentlessly to dig up dirt on Greenspan. In addition to Greenspan’s PhD thesis, which the Maestro had previously kept secret and which Mallaby got him to hand over, they also managed to retrieve a dozen economic lectures that Greenspan gave during his days in Ayn Rand’s circle.
Less useful was Mallaby’s obsession with Greenspan’s private life, and his prying into the stories about every girl the Maestro dated, every skirt he looked at, and every gay bar his band played in during his days as a jazz musician.
Fabrication and misattribution of quotes, omission of key information, ignorance of basic financial concepts
Part of Mallaby’s effectiveness in making The Man Who Knew such an entertaining read stems from his platform as Senior Fellow for International Economics at the Council on Foreign Relations. Shorn of his obligations to adhere to journalistic standards, he was free to use tools many of his former colleagues would shun.
These include the fabrication of quotes (one which cites Ronald Reagan talking about Frederic Bastiat, an obscure French libertarian thinker, sounds particularly preposterous), misattribution of sources (notably a key Greenspan quote on gold), and omission of key information that does not suit his arguments.
In a style perfected by the Economist magazine (where his wife, the charming Zanny Minton Beddoes, remains the editor), Mallaby leads readers through a swamp of conflicting arguments, carefully chosen to steer them to the Council on Foreign Relations’ management’s inevitable conclusion: that government - and more specifically the US central bank - ought to have more power.
Laying the blame for the 2008 financial crisis at Greenspan’s feet, The Man Who Knew thus sets the stage for future Fed chairmen to not only manage interest rates and employment levels, but to demand formal power to manipulate asset prices, too (The Fed has already been doing this on a de facto basis since the Bernanke reign).
But how convincing is that indictment? Incredibly, for a journalist who worked for 13 years at the Economist, Mallaby appears to have a poor grasp of basic financial concepts. He conflates millions and billions, the difference between “earnings,” and “earnings growth,” and omits America’s unfunded liabilities from his analysis. Whether a country is accumulating hundreds of millions of dollars in debts per year, or trillions - off the balance sheet - matters.
Was Rubin behind the Greenspan hatchet job?
Robert Rubin and the other financial establishment players, who control the Council on Foreign Relations’ board, will be particularly pleased with Mallaby’s deflection of public attention from the role that repeal of Glass-Steagall legislation played in the 2008 crisis.
This crucial error, which enabled banks to use FDIC guaranteed funds for speculative purposes during a time of grossly insufficient capital requirements, paved the way for the emergence of the “too big to fail” financial institutions, which ignited the contagion.
Indeed, one person that Mallaby demonstrates no sign of having interviewed is Rubin himself, a former US Treasury Secretary and the man responsible for spearheading the overturn of Glass-Steagall [iii]. This omission – which recalls the “dog that did not bark” in the old Sherlock Holmes tale - stands out because Rubin is nominally Mallaby’s boss [iv].
In all fairness to Mallaby, the former journalist provides a clue as to what happened. Prior to publishing the book, he was forced to submit it for approval to a slew of editors and proofreaders, including two “anonymous” CFR readers, who made various changes to his text. One of these, Mallaby must have suspected, was Rubin himself. In this reading of events, Mallaby presumably self-edited any comments about Rubin before submitting his final draft.
Ignorance of Greenspan’s record on gold
Where Mallaby slipped into unprofessionalism or incompetence (it’s hard to say which because neither he nor the Council on Foreign Relations responded to detailed requests for comments) was in his omission of any mention of Greenspan’s defining 1966 essay Gold and Economic Freedom. In this magisterial work, the Maestro cites, in no uncertain terms, his philosophy on gold (and, by default, the consequences of its abandonment) as backing for the monetary system.
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value,” Greenspan wrote. “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process [v].”
Increasingly, the victims of this “confiscation” are foreign governments, who are obliged to hold increasingly-debased US dollars, which are the world’s reserve currency.
Mallaby’s omission of Greenspan’s CFR event comments and Gold and Economic Freedom insights enables the Council on Foreign Relations to downplay the impact of this public disparagement of this key US foreign policy priority. In fact, Greenspan’s Gold and Economic Freedom ideas, which he continued to affirm (sometimes subtly, sometime less so) long after he left the Fed, leave no room for confusion where he stands on the yellow metal.
The ultimate irony was that not only was Greenspan The Man Who Knew ; he also appears to have known a lot more than Mallaby, his biographer, was able to discern.
[i] Mallaby makes a crucial error by assuming Greenspan’s move into public life, amounted to a repudiation of the “eccentric spell,” Ayn Rand cast on him. Rand was primarily a philosopher (not merely an economic thinker) whose philosophy, in essence, viewed “Man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement as his noblest activity, and reason as his only absolute.” Nothing in Greenspan’s work at the Fed, and afterwards - during which he had to be very careful about what he said - suggested that he stepped away from those values.
[ii] Mallaby, despite his numerous faults, blind spots, naivete regarding the US financial system, and constraints, is a fabulous writer and The Man Who Knew is a wonderfully entertaining read. It is precisely these qualities which make the work such an effective hatchet job.
[iii] Greenspan’s support of Rubin’s efforts to repeal Glass-Steagall, during a time of weak capital requirements for banks, appears questionable in retrospect.
[v] Mallaby includes a partial quote from the essay, but misattributes it to a secondary source.