The Untold Story of Alan Greenspan


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Alan Greenspan’s 18-year stint as head of the Federal Reserve Bank witnessed some of the most massive upward redistributions of wealth in our nation’s history. It’s now clear that his policies contributed greatly to the transformation of Wall Street from an engine that financed American business to a business-destroying machine—and that Greenspan abetted the hollowing out of the U.S. economy by giving Wall Street and Washington everything they could possibly want.

To take the full measure of Greenspan’s culpability, we need to look beyond the disgraced public persona and see him within the broader sweep of his life and times. In Panderer to Power, author Frederick J. Sheehan delivers the first in-depth, critical biography of the man who, for nearly two decades, served as the world’s most powerful banker.

Beginning with Greenspan’s formative years as a Depression-era kid from New York City, Sheehan traces his subject’s progress from his days touring America as a reed man with the Henry Jerome Orchestra in the 1940s through his emergence as one of America’s first celebrity economists to his ascent through the ranks of power in D.C.

What emerges is a searing portrait of a shameless media hound who ferociously promoted his image as a straight-laced numbers cruncher, a Machiavelli whose political skills far surpassed his skills as an economist.

Drawing upon a vast array of original sources, the author leaves little room for doubt: either the “economic genius of our time” was oblivious to the hazards of his irresponsible policy decisions or he knew full well what he was doing, but chose, as he had throughout his career, to put self-interest above the public good.

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The Untold Story of Alan Greenspan

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  3. 3. PANDERER TO POWER THE UNTOLD STORY OF HOW ALAN GREENSPAN ENRICHED WALL STREET AND LEFT A LEGACY OF RECESSION FREDERICK J. SHEEHAN New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto
  4. 4. Copyright © 2010 by Frederick J. Sheehan, Jr. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. ISBN: 978-0-07-161543-3 MHID: 0-07-161543-1 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-161542-6, MHID: 0-07-161542-3. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. To contact a representative please e-mail us at This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, futures/securities trading, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. —From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decom- pile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, dis- tribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARAN- TEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICU- LAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsi- bility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise.
  5. 5. To my father, who helped and encouraged me to write this book, even when it seemed futile. My confidence and stamina often flagged; his never did.
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  7. 7. Contents Author’s Note ix Introduction to Part 1—Prelude to Power, 1926–1987 1 1 Early Years: The Education of Alan Greenspan, 1926–1958 9 2 The Dark Side of Prosperity, 1958–1967 19 3 Advising Nixon: “I Could Have a Real Effect,” 1967–1973 31 4 President Ford’s Council of Economic Advisers, 1973–1976 47 5 The 1980 Presidential Election: Boosting Carter, Reagan, and Kennedy, 1976–1980 59 6 Parties, Publicity, Promotion—and Lobbying for the Federal Reserve Chairmanship, 1980–1987 71 7 Lincoln Savings and Loan Association, 1984–1985 85 8 “The New Mr. Dollar”: Chairman of the Federal Reserve, 1987 95 Introduction to Part 2—The Pinnacle of Power, 1987–2006 103 9 The Stock Market Crash and the Recession That Greenspan Missed, 1987–1990 109 10 Restoring the Economy: Greenspan Underwrites the Carry Trade, 1990–1994 121 11 Cutting Rates and Running for Another Term as Chairman, 1995–1996 133 vii
  8. 8. viii Contents 12 The Productivity Mirage That Greenspan Doubted, 1995–1997 145 13 “Irrational Exuberance” and Other Disclosures, 1995–1998 157 14 In a Bubble of His Own, 1998 169 15 Long-Term Capital Management: A Lesson Ignored, 1998 181 16 Greenspan Launches His Doctrine, November 1998–May 1999 191 17 “This is Insane!!” June–December 1999 203 18 Greenspan’s Postbubble Solution: Tighten Money, January-May 2000 215 19 The Maestro’s Open-Mouth Policy, June–December 2000 227 20 Stocks Collapse and America Asks: “What Happens When King Alan Goes?” 2001 237 21 The Fed’s Prescription for Economic Depletion, 1994–2002 251 22 The Mortgage Machine, 1989–2007 265 23 Greenspan’s Victory Lap: His Last Years at the Fed, 2002–2006 283 Introduction to Part 3—The Consequences of Power, 2006–2009 301 24 The Great Distortion, 2006 307 25 Fast Money on the Crack-Up, 2006 315 26 Cheap Talk: Greenspan and the Bernanke Fed, 2007 327 27 “I Plead Not Guilty!” 2007–2008 337 28 Greenspan’s Hometown, 2008 349 29 Life after Greenspan, 2009– 361 Appendix: The Federal Reserve System 367 Acknowledgements 369 Index 371
  9. 9. Author’s Note Following are some explanations of how words with broad general meanings are used specifically. Money is used in its broadest form. The distinctions between “money” and “currency” (e.g., the dollar) are not addressed. Bank refers to the large banks. There are about 8,300 federally char- tered banks in the United States. Maybe 300 of these share responsibility for the current financial debacle. If a different type of bank is discussed, it is identified, such as a savings and loan. This also applies to hedge funds and private-equity funds. Most of them stick to their knitting and act honorably. Banks, as they existed when they are first discussed (the 1950s), no longer exist. For instance, at that time, the distinction between commer- cial and investment banks was clear. Now, they cross each other’s lines of business. The easiest description of these businesses is “financial institu- tions.” It is comprehensive, but it is vague. Therefore, firms are described according to the topic under discussion. For instance, Goldman Sachs falls under a discussion of “brokerage firms,” even though it was (until recently) an investment bank. Likewise, Goldman Sachs stands under the “underwriters” umbrella when underwriters are discussed. An economist—in this book—has received a graduate degree, prob- ably a Ph.D., in economics. Most of the economists discussed in this book are the public per- formers from government–academia–Wall Street and appear on CNBC. There are many economists who do very good work, but are not part of ix
  10. 10. x Author’s Note this book. The best are generally unknown to the public, since the only means by which the public would learn of them would be through the publicity they would receive if they joined the performers. Acquisitions, takeovers, buyouts, and leveraged buyouts (LBOs). The vocabulary can be confusing. This book only addresses the peak periods. In the late 1980s, acquisitions (also called takeovers or buyouts) of companies were often in the form of what were called leveraged buyouts. The buyouts during this manic final phase were marked by much more debt financing (bonds, bank loans) than equity financing (cash, stock). The companies leading the buyouts were commonly (though impre- cisely) called leveraged buyout or LBO firms. This period is discussed in Chapter 6. The largest of these “LBO firms” were actually private equity firms (for example, Kohlberg Kravis Roberts & Co. (KKR). The “private” refers to equity not traded on a public exchange. During the culmination of the (circa) 2004-2007 buyout mania, some private equity firms were, once again, using less equity financing and much more debt financing. For all intents and purposes, these deals were LBOs. The media had a difficult time deciding the correct vocabulary (since the amount of equity was so small compared to the amount of debt) and firms such as KKR were called private equity firms, or LBO firms, or sometimes buyout firms. These terms are used interchangeably in Chapter 25. This book stops at the peak. Sort of. Greenspan could not stop talking. He continued his open-mouth policy into 2009. The more he reminded the public of his existence, the more his reputation suffered. This belated condemnation of Greenspan was inseparable from current events. Also, Bernanke’s Federal Reserve is inseparable from the financial terrain that Alan Greenspan bequeathed to him. I have not attempted to describe this postbust period comprehensively, but only incidentally. The book concentrates on the United States and mentions events overseas only as they relate to the United States. The change in how Americans thought and behaved over the past half-century has applica- tions in other countries, but that is a very large topic.
  11. 11. INTRODUCTION TO PART 1 PRELUDE TO POWER 1926–1987 [O]peration in securities is not mainly a matter of reasoning at all.… The stock market … is just a bunch of minds—there is no science, no IBM machine, no anything of that sort, that can tame it.1 —Edward C. Johnson II, 1963, President, Fidelity Investments Alan Greenspan’s success was partly due to good timing. He reached maturity at mid-century. His strengths attracted an America in which the process of thinking was changing. Substance was yielding to superfici- ality. Matter surrendered to abstraction. Money was becoming more abstract. In 1900, Americans, and citi- zens of most western European countries, held a currency that was convertible into gold. Americans who distrusted the dollar’s value had the right to trade their paper for gold at a fixed, statutory rate. The value of the dollar fluctuated within a narrow range, and the prices of goods and services were more or less fixed. Today, a dollar is worth whatever we wish it to be. It is a symbol, no longer fixed to a disinterested, inert metal. Inflation is one result. The successful careers of pandering politicians and clever opportunists are another. An object that cost $1 in 1913 (when the Federal Reserve Act was passed) costs $20 today. Inflation of money was integrated into the 1 First Annual Contrary Opinion Foliage Forum,” 1963, from Charles D. Ellis and James R. Vertin (eds.), Classics: An Investor’s Anthology (Homewood, III.: Dow Jones-Irwin, 1988), p. 392. 1
  12. 12. 2 Prelude to Power twentieth-century inflation of words, constant distractions, and media promotion. Thus, there came the worship of celebrities simply because they are celebrities and the success of one pandering politician and clever opportunist: Alan Greenspan. Alan Greenspan grew up in New York City, a metropolis that illumi- nates the changing tendencies and aspirations of Americans. Greens- pan spent his young adulthood near or on Wall Street. In 1945, New York was the largest manufacturing city in the United States.2 It was a city that made things. By 2008, it was no longer a working-class town. Nor was it a middle-income town. In Manhattan, 51 percent of neighbor- hoods were identified as being high-income and 40 percent as being low income.3 Publicity and finance priced out the factories. The chairman of Lever Brothers, a soap manufacturer, explained why, in the mid-1950s, he moved his headquarters to Manhattan: “The platform from which to sell goods to America is New York.”4 Lever Brothers sold an image; the image sold soap. Alan Greenspan also sold an image—productivity—but it was debt that boomed until it was too large to be paid back. From the time Greenspan was named Federal Reserve chairman until he left office, the nation’s debt rose from $10.8 trillion to $41.0 trillion.5 Greenspan usually referred to the debt as “wealth.” This image matched what he was selling—first stocks, then houses. He expanded money and credit; he oozed praise for derivatives. The larger volume of credit shrunk the consequences of immediate losses. It was easy to overlook the areas of the economy that had shriveled and the instability of finance that had compounded over the past half-century. In early 2007, this massive inflation of paper claims, many of which were claims on abstractions rather than on mate- rial assets, tottered, then collapsed. The first to go was the subprime mortgage market. Credit creation filled the void of falling production. In 1950, 59 percent of U.S. corporate profits were from manufacturing; 9 percent were from 2 Robert A. M. Stern, Thomas Mellins, and David Fishman, New York 1960: Architec- ture and Urbanism between the Second World War and the Bicentennial (New York: Monacell: Press, 1995), p. 19. 3 Sam Roberts, “Study Shows Dwindling Middle Class,” New York Times, June 26, 2006. 4 Stern et al., New York 1960, p. 61. 5 Figures from end of years he entered and left office. “Beginning of office” is December 31, 1987, from Federal Reserve Flow of Funds Account; “end of office” is December 31, 2005.
  13. 13. Prelude to Power 3 financial activities. During the past decade (2000–2008), 18 percent of profits were from manufacturing and 34 percent were from finance.6 After graduating from New York University in 1948, Greenspan took a job at the Conference Board. He received a master’s degree from NYU in 1950; then studied economics under Arthur Burns at Columbia Univer- sity. The two became lifelong friends. Arthur Burns served as chairman of the Council of Economic Advisers under President Dwight Eisenhower. He would become Federal Reserve chairman under President Richard Nixon. Greenspan headed President Gerald Ford’s Council of Economic Advisers (CEA) when Arthur Burns was Federal Reserve chairman. In 1953, investment advisor William Townsend recruited Greenspan; the pair formed an economic consulting firm, Townsend-Greenspan & Co. When William Townsend died in 1958, Greenspan became the sole owner. Greenspan is sometimes described as a disciple of Ayn Rand’s Objectivist philosophy or as a libertarian. However, he may not even have understood what Rand was talking about. Nathaniel Branden, who was closest to Greenspan’s mind during this period, reflected decades later: “I wondered to what extent he was aware of Ayn’s opinions.”7 Alan Greenspan’s contributions to group discussions were meager. Alan Greenspan was not philosophical; he was practical and, either by nature or by design, vague, remote, and impenetrable. Greenspan used his Randian acquaintances to climb the political lad- der. He joined Martin Anderson’s policy research group during Richard Nixon’s 1968 campaign for the presidency. Anderson, who traveled in Objectivist circles, later introduced Greenspan to Ronald Reagan. Greenspan was riding the wave of the growing influence of accred- ited economists. By the late 1950s, Greenspan’s stock market predic- tions and economic forecasts were quoted in Fortune and the New York Times. His forecasts were usually wrong, as are those of most econo- mists. Accuracy was less important than publicity.8 6 Bureau of Economic Analysis (BEA) National Income and Product Accounts (NIPA) Table 6.16B,C,D. Income by industry has been so erratic over the past decade that the totals for 2000–2008 are averaged as a comparison to 1950. 7 Nathaniel Branden, My Years with Ayn Rand, (San Franciscio: Jossey-Bass, 1999) p. 160. 8 The pervasiveness of publicity was to smother American life, but it was not new; the old may have been even bolder than today. From the pitch to sell the movie Alimony in 1924: “Brilliant men, beautiful jazz babies, champagne baths, midnight revels, petting parties in the purple dawn, all ending in one terrific smashing climax that makes you gasp.”
  14. 14. 4 Prelude to Power Greenspan observed Federal Reserve Chairman William McChesney Martin Jr. lose the fight against inflation. In 1957, Martin warned the Sen- ate that the current inflation problem that had persisted since World War II had been fostered by “economic imbalances,”9 of which the heaviest hit were those who could not protect the value of their income or their savings10—the “little man”11. Martin predicted that those with “savings in their old age would tend to be the slick and clever rather than the hard- working and thrifty.” This was a foresighted summary of the period from 1957 to the present. Greenspan seemed to understand that permanent, underlying infla- tion supported asset prices. In 1959, he told Fortune that an “artificial liquidity in our financial system” could power “an explosive speculative boom.” According to the Fortune reporter: “Once the Federal Reserve was set up, Greenspan reasons, the money supply never really got short. With one eye necessarily cocked towards politics, the Fed has always maintained a more than adequate money supply even when speculative booms threaten.”12 The stock market rose from 1950 to 1966. The rise was validated by the booming economy, but around the time Greenspan spoke to Fortune, fancy finance was playing an expanding role. The conglomerate craze, technology stock bubbles, and the huge growth of institutional money management (mutual funds and hedge funds) would end in tears, but for- tunes were made. By 1969, Greenspan was a millionaire.13 Greenspan described his specialty to Martin Mayer as “statistical espionage.”14 Mayer would later discuss Greenspan’s technique at greater length: “the book on him in that capacity was that you could order the opinion you needed.”15 Richard Nixon was introduced to Greenspan during the 1968 cam- paign. The candidate’s evaluation: “That’s a very intelligent man.”16 9 William McChesney Martin, Statement, Before the Committee on Finance, U.S. Senate, August 13, 1957, pp. 9–10. 10 Ibid., p. 15. 11 Ibid., p. 23. 12 Gilbert Burck, “A New Kind of Stock Market,” Fortune, March 1959, p. 201. 13 Justin Martin, Greenspan: The Man behind Money (Cambridge, Mass.: Perseus, 2000), p. 65. 14 Martin Mayer, New Breed on Wall Street: The Young Men Who Make the Money Go (New York: Macmillan, 1969), p. 82. 15 Martin Mayer, The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry (New York: Charles Scribner’s Sons, 1990), p. 140. 16 Martin, Greenspan, p. 69.
  15. 15. Prelude to Power 5 Greenspan was nominated by Nixon as Council of Economic Advisers chairman in 1973. Gerald Ford was president when Greenspan passed his confirmation hearing in 1974. This was an ideal time for a publicity-minded economist to enter gov- ernment. It was the same year that Time introduced People magazine. Greenspan, who had cultivated the press for years, maneuvered his portrait on to the front cover of Newsweek—the first economist to gar- ner such attention.17 Greenspan set an example that flattery could get one anywhere. The United States had been buying more than it produced since the 1950s. The dollars piled up overseas, and creditor nations demanded that the United States redeem dollars with its gold reserves. The U.S. government abandoned its promise to buy dollars for gold in 1971, when it dropped the gold standard. The dollar then traded at whatever people believed it to be worth, which wasn’t much. By the late 1970s, doubters prevailed. The period was plagued with higher inflation and a bewildered society. Many kept up by trading jew- elry or houses. In 1980, the New York Times spoke to the economist: “Alan Greenspan, the economist, has asserted that the translation of home-ownership equity into cash available for consumer spending is perhaps the most significant reason why the economy in 1975–1978 was consistently stronger than expected.”18 When the Nasdaq crashed in 2000, the Federal Reserve chairman remembered this lesson. After Ford left office, in January 1977, Greenspan was a celebrity back in New York. He ran Townsend-Greenspan, but he seemed to exert his greatest efforts outside the office. He dated Barbara Walters, a television personality. He was a regular in the Times’s “Evening Hours” and “Notes on Fashion” columns. Greenspan is classified as a Republican. In practice, however, his flat- tery was nonpartisan. When Ted Kennedy ran for the Democratic nom- ination in 1980, Greenspan hosted a breakfast for the Massachusetts senator in New York with “key Wall Street figures.”19 At the 1980 Republi- can convention, Greenspan almost corralled Ronald Reagan into offering him the position of treasury secretary. 17 Ibid., p. 127. 18 John H. Allan, “Thrift Adrift: Why Nobody Saves,” New York Times, February 17, 1980. 19 Steven Rattner, “The Candidates’ Economists,” New York Times, November 18, 1979, p. F1.
  16. 16. 6 Prelude to Power Greenspan remained in the public eye during the early Reagan years. He was called a “superstar” (New York Times) on the speak- ing circuit, making 80 speeches a year for up to $40,000 a speech.20 He joined corporate boards. He spent most of his time in Washington. Martin Anderson, who both worked in the Reagan White House and had introduced Greenspan to politics back in the 1960s, remembered: “I don’t think I was in the White House once where I didn’t see him sit- ting in the lobby or working the offices. I was astounded by his omni- presence.… He was always huddling in the corner with someone.”21 His record as an economic forecaster was unimpressive. Senator William Proxmire castigated the nominee at Greenspan’s Federal Reserve confirmation hearing in 1987. Proxmire recited Greenspan’s economic predictions as CEA chairman. His Treasury bill and inflation forecasts were the worst of any CEA director.22 There was little left of Townsend-Greenspan when he became Fed- eral Reserve chairman.23 Proxmire had another concern with Greenspan’s nomination. The senator thought that the growing concentration of financial power and solvency of the financial system was heading down a dark road, toward “increased concentration of banking.” 24 Proxmire’s fears proved cor- rect. Two decades later, the highly concentrated financial system is semi-insolvent. Nobody contributed more to the concentration of finance than Alan Greenspan. As Federal Reserve chairman, Greenspan, who had recently resigned as a director of J. P. Morgan to take the post, permit- ted Morgan to underwrite debt, then equity—the first time either had been permitted by a commercial bank since 1933. Luckily for Greenspan, his nomination preceded the public denoue- ment of Lincoln Savings and Loan and of Charles Keating. Greenspan had been hired by Keating to persuade the Federal Home Loan Bank of San Francisco that Lincoln was in good shape. Greenspan succeeded 20 Martin, Greenspan, pp. 139, 276. 21 Jerome Tuccille, Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker (Hoboken, N.J.: Wiley, 2002, pp. 157–158. 22 Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 41. 23 Tuccille, Alan Shrugged, p. 154. 24 Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 60.
  17. 17. Prelude to Power 7 even though Lincoln was one of Michael Milken’s top three junk-bond customers among savings and loans (S&Ls).25 The rise of Milken—and of Greenspan—was attuned to the hec- tic financialization of America in the 1980s. “Maximizing shareholder value” turned out to be a veil for loading corporate balance sheets with debt, a much cheaper and faster route to growth than from retained profits. The market would not have accommodated such indiscretions 30 years earlier. The capital foundations were growing unstable. Greenspan could (and would) salute the economy’s flexibility. The economy was, in fact, vulnerable to collapse and needed constant infusions of money and credit to sustain it. Hands trembled at the word “recession,” and right- fully so: balance sheets—government, corporate, and personal—were no longer constructed to weather a storm. This was capitalism with little respect for capital. An error-prone but malleable Federal Reserve chairman was a pre- dictable choice for the most influential financial position in the world. 25 Barrie A. Wigmore, Securities Markets in the 1980s, Vol. 1 (New York: Oxford University Press, 1997), p. 286.
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