February 21, 2017
When the history of these times is written, former Fed Chair Alan
Greenspan will be one of the major villains, but also one of the
greatest mysteries. This is so because he has, in effect, been three
He began public life brilliantly, as a libertarian thinker who said
some compelling and accurate things about gold and its role in the
world. An example from 1966:
An almost hysterical antagonism toward the gold standard
is one issue which unites statists of all persuasions. They seem to
sense – perhaps more clearly and subtly than many consistent defenders
of laissez-faire – that gold and economic freedom are inseparable, that
the gold standard is an instrument of laissez-faire and that each
implies and requires the other…
…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. If there were, the government would have to make its holding
illegal, as was done in the case of gold [in 1934 under FDR]. If
everyone decided, for example, to convert all his bank deposits to
silver or copper or any other good, and thereafter declined to accept
checks as payment for goods, bank deposits would lose their purchasing
power and government-created bank credit would be worthless as a claim
on goods. The financial policy of the welfare state requires that there
be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against
gold. Deficit spending is simply a scheme for the confiscation of
wealth. Gold stands in the way of this insidious process. It stands as a
protector of property rights. If one grasps this, one has no difficulty
in understanding the statists’ antagonism toward the gold standard.
Awesome, right? But when put in charge of the Federal Reserve in the
late 1980s, instead of applying the above wisdom — by for instance
limiting the bank’s interference in the private sector and letting
market forces determine winners and losers — he did a full 180,
intervening in every crisis, creating new currency with abandon, and
generally behaving like his old ideological enemies, the Keynesians. Not
surprisingly, debt soared during his long tenure.
Along the way he was instrumental in preventing regulation of credit
default swaps and other derivatives that nearly blew up the system in
2008. His view of those instruments:
The reason that growth has continued despite adversity,
or perhaps because of it, is that these new financial instruments are an
increasingly important vehicle for unbundling risks. These instruments
enhance the ability to differentiate risk and allocate it to those
investors most able and willing to take it.
This unbundling improves the
ability of the market to engender a set of product and asset prices far
more calibrated to the value preferences of consumers than was possible
before derivative markets were developed. The product and asset price
signals enable entrepreneurs to finely allocate real capital facilities
to produce those goods and services most valued by consumers, a process
that has undoubtedly improved national productivity growth and standards
He cut interest rates to near-zero in the early 2000s, igniting the
housing bubble – which he was unable to detect along the way. He even
made it into the dictionary, as the “Greenspan put” became the term for
government bailing out its Wall Street benefactors.
From this the leveraged speculating community learned that no risk
was too egregious and no profit too large, because government – that is,
the Fed – had eliminated all the worst-case scenarios. Put another way,
under Greenspan profit was privatized but loss was socialized.
Greenspan retired from the Fed in 2006 and, miraculously, began
morphing back into his old libertarian self. A cynic might detect a
desire to avoid the consequences of his past actions, while a
neurologist might suspect senility. But either way the transformation is
breathtaking. Consider this from yesterday:
(Kitco News) – It would be best not to be short-sighted when it comes to gold; at least that is what one former Fed chair says.
“[T]he risk of inflation is beginning to rise…Significant increases
in inflation will ultimately increase the price of gold,” noted Alan
Greenspan, Federal Reserve chairman from 1987 to 2006, in an interview
published in the World Gold Council’s Gold Investor February issue.
“Investment in gold now is insurance. It’s not for short-term gain, but for long-term protection.”
However, it is really the idea of returning to a gold standard that
Greenspan focused on — a gold standard that he said would help mitigate
risks of an “unstable fiscal system” like the one we have today.
“Today, going back on to the gold standard would be perceived as an
act of desperation. But if the gold standard were in place today, we
would not have reached the situation in which we now find ourselves,” he
“We would never have reached this position of extreme indebtedness
were we on the gold standard, because the gold standard is a way of
ensuring that fiscal policy never gets out of line.”
To Greenspan, the reason why the gold standard hasn’t worked in the past actually has nothing to do with the metal itself.
“[T]here is a widespread view that the 19th Century gold standard
didn’t work. I think that’s like wearing the wrong size shoes and saying
the shoes are uncomfortable!” he said. “It wasn’t the gold standard
that failed; it was politics.”
One of the nice things about the information age is that public
figures leave long paper trails and can’t therefore easily escape their
pasts. Greenspan’s past, being perhaps the best documented of any
central banker in history, will haunt him forever.
But hey, at least he’s going out a gold bug.
John Rubino runs the popular financial website DollarCollapse.com. He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.
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