Explaining Greenspan - Disciple of Ayn Rand or George Bush?
From Deborah White,
Your Guide to Liberal Politics: U.S..
Mar 9 2005
Economic Genius Declared Hack by US Senator
Alan Greenspan is “one of the biggest political hacks in Washington” declared Democratic Senate
Leader Harry Reid this week to Judy Woodruff of CNN.
Princeton economist Paul Krugman wrote in the New York Times that Greenspan is a “three-card
maestro” with a “lack of sincerity” who, “by repeatedly shilling for whatever the Bush
administration wants, has betrayed the trust place in the Fed chairman….”
Who is Alan Greenspan and why are people criticizing him? Alan Greenspan is Chairman of the
Federal Reserve Board (FRB). He has served on the FRB since 1987 when he was appointed by
President Reagan. His current term expires in January 2006. He is not eligible for another term.
Dr. Greenspan served on advisory boards for Presidents Nixon, Ford and Reagan.
Greenspan was born and educated in New York City, where he earned a BA, MA and, 27 years
later in 1977, a PhD in economics.
After earning his MA in 1950, Greenspan became a 20-year associate of famed philosopher Ayn
Rand, author of books "The Virtue of Selfishness,""Atlas Shrugged" and more. Greenspan wrote for
Rand’s newsletters and authored a chapter for a Rand book.
Understanding Ayn Rand is key to interpreting Greenspan. Rand espoused a radical philosophy of
individualism and self-interest. She had a dislike for religion and compulsory charity, which she
believed fostered resentment of individual success.
Ayn Rand created a doctrine of rational hedonism, supported by unfettered capitalism and the rights
of successful individuals at the expense of the community. A devout atheist, She taught that charity
is not a virtue.
She believed in the elimination of most state regulation except for crime control and the judiciary.
In "Capitalism: The Unknown Ideal", Rand uses the word “altruists” to describe forces of evil that
burden the beleaguered American business community.
When Ayn Rand said that government has no obligation to the less fortunate, she became an icon to
ultra-conservatives. She's been labeled a Social Darwinist who believed nature intended for the
successful (strongest) to survive, and, unregrettably, the remainder might not survive.
In the 1970s, Alan Greenspan worked in his own well-connected consulting firm. Before joining the
FRB in 1987, Greenspan served as director for numerous corporations, including Mobil
Corporation, Morgan Guaranty Trust Company and JP Morgan & Co. Inc.
In his prime, Greenspan’s economic acumen was widely honored. He was awarded dozens of
accolades and honorary degrees. He advised many first-rate think-tanks. He was regarded as the
leading authority on US domestic economic policy.
Greenspan solidified his standing as the Great Economic Guru during the Clinton administration.
He advised President Clinton, who listened, to reduce the federal deficit, causing a drop in long-
term interest rates. That led to demand for new mortgages, increased consumer spending, an
expanding economy and a robust stock market. Clinton rode the wave of Greenspan economics and
20 million new jobs, leaving a healthy budget surplus.
Then George W. squeaked into the presidency.With the Bush election, Alan Greenspan’s economic
advice grew puzzlingly partisan and his track record became mysteriously spotty.
Just like that of General Colin Powell’s previously sterling advice, above-reproach reputation and
spotless track record.
In his second term, George W. has required all inner circle members to sign written oaths pledging
loyalty to the President and his ideas. It’s unknown if such an oath was required in any form during
his first term.
In 2001, Greenspan gave crucial support to Bush’s tax cuts for the rich, when virtually no one,
except ultra-conservatives, endorsed the concept. Those tax cuts are responsible for today’s
disastrous budget deficit.
In 2005, Greenspan is the lone economic voice urging Americans to adopt the program that George
Bush desperately desires……Bush-style privatization of Social Security.
Alan Greenspan says he supports privatization of Social Security despite his admissions that:
1. Social Security will not increase overall national savings.
2. Private accounts will do nothing to save Social Security.
3. Greenspan does not endorse borrowing trillions of dollars to finance Social Security
What’s the deal with Alan Greenspan in the 21st century? Why is he defying his own pat wisdom?
The plain truth is…we don’t know. But here are a few suggestions.
Loyalty, felt or enforced, to President George Bush’s political goals;
Loyalty to Wall Street friends who will benefit richly from Social Security privatization;
80 years old this week, in likely his last year with significant policy-making power, perhaps Dr.
Greenspan wants to take this final chance to strike a blow for Ayn Rand and her philosophy of
rewarding the “successful."
Ayn Rand and Charles Darwin would be proud. George Bush, too.
Making sense of Bernanke
Jul 20th 2006 | WASHINGTON DC
From The Economist print edition
Inflation data point one way, but the Fed chairman seems to
point the other
THE circumstances were not auspicious. Less than two hours before Ben Bernanke, chairman of
America’s Federal Reserve, made his semi-annual report to Congress on July 19th, new data
showed that American inflation, yet again, was unexpectedly high. The core consumer-price index
(CPI), which excludes food and energy, jumped 0.3% in June and is now 2.6% higher than it was a
year ago, well above the maximum with which Mr Bernanke is thought to be comfortable.
Given the fuss that he and his colleagues have recently made about such “unwelcome” rises in
inflation, many economists expected a nasty June inflation report to seal another rise in short-term
interest rates when the central bankers next meet on August 8th. Michael Prell, a former head of
research at the Fed, said a 0.3% inflation figure would make it “hard” not to tighten. And that is
exactly what financial markets expected—for about 90 minutes. After the CPI figures were
released, futures markets raised their expectation of an August rise from 60% to 90%.
Pretty soon, however, Wall Street had a wholly different view. Share prices rose and bond yields
and the dollar fell as investors listened to Mr Bernanke and decided the Fed might not tighten policy
much more after all. Judged by the futures market, the odds of a rate hike in August fell back,
ending the day at around 70%.
Was this another flip-flop from a man who has developed a reputation for confusing financial
markets by sounding alternately hawkish and dovish? Or was Wall Street reading too much softness
into the Fed chairman’s comments?
The answer is a bit of both. Mr Bernanke’s testimony was carefully balanced. He repeated his line
that recent rises in inflation are “of concern” and he told lawmakers several times that unexpectedly
high inflation was the single biggest risk to America’s expansion. He was fairly optimistic about
growth. Although the housing market was slowing, Mr Bernanke pointed out that other areas,
including exports and non-residential construction, were picking up. His forecast was that the
economy would slow, but to roughly its trend rate of growth. This was not a testimony, in short, that
ruled out further rises in short-term interest rates.
But nor did Mr Bernanke show any signs of panic about inflation. Quite the opposite. There was no
mention of June’s consumer-price figures. The updated economic forecasts published alongside Mr
Bernanke’s testimony show that the Fed expects inflation to slow, but that for at least the next 18
months consumer-price inflation will remain higher than the central bankers forecast in February
and, most important, above their informal target of between 1% and 2%. The Fed now expects its
preferred inflation gauge, the deflator for personal consumption expenditures excluding energy and
food, to rise by 2.25-2.5% this year and by 2-2.25% in 2007. No sign there, in other words, that the
Bernanke Fed is in any great hurry to get inflation back within range.
If Mr Bernanke’s aim this week was to create room for manoeuvre and give the Fed the option to
pause in its rate-tightening, he achieved it—but at the price of some coherence. If the economy is
slowing only modestly, as his words suggested, his relaxed attitude to inflation seems odd,
especially after recent months’ inflation figures.
One possibility is that Mr Bernanke is less bullish than he lets on. The Fed has lowered its
expectations for GDP growth in 2006 to 3.25-3.5%. That implies a sharp slowdown in the second
half of the year, to a rate well below 3%. The other is that he is simply not worried enough.
Emerging markets and interest rates
Bernanke has it easy
Aug 3rd 2006
From The Economist print edition
Developing countries have their own monetary headaches
SPUTTERING platinum smelters and dwindling diamond deposits do not rank highly on the list of
concerns of the world's “big three” central bankers—Ben Bernanke, chairman of the Federal
Reserve, Jean-Claude Trichet, president of the European Central Bank and Toshihiko Fukui,
governor of the Bank of Japan. Both, however, feature in the latest inflation report of the South
African Reserve Bank, which, as The Economist went to press, was expected to raise its benchmark
interest rate by as much as half a percentage point, to 8%, having already raised it by the same
amount in June.
The connection between tight monetary policy and troubled quarries and furnaces may seem a bit
murky. But such is the lot of a central banker in an emerging economy, where troubles brew in
remote places then break with unpredictable force. Platinum, palladium, gold and diamonds account
for almost a quarter of South Africa's exports. But mining output struggled last year and shrank by
about 6% in the first five months of this year. South Africa's lacklustre exports are one reason why
its merchandise trade deficit was the worst on record in the first quarter and not much better in the
second. The trade gap put downward pressure on the rand, which has, in turn, put upward pressure
on prices. Hence the increase in interest rates.
South Africa's central bank is not alone in spreading its wings and sharpening its talons. The
Czechs, Indians, Slovaks, Israelis, Hungarians and Turks all raised rates last month. Like their
counterparts in Pretoria, central bankers in these countries face their own idiosyncratic challenges to
price stability. In Israel, for example, the central bank wants to know how much slack remains in
the job market. But how to calculate that, when the Israeli army might any day call up its reserves,
which represent about 18% of the labour force?
These peculiarities aside, the central bankers share some common complaints. Their lives have all
been complicated by Mr Fukui's recent triumph over deflation and Mr Bernanke's rearguard action
against inflation. Thanks in part to their efforts, money is now harder to come by. Investors thus
became less willing to throw it at emerging-market assets. As a result, currencies fell in May and
June, stoking inflationary pressures.
Turkey's central bank has waged the fiercest fight. It has raised rates by as much in two months as
the Fed has in two years. In December 2005, it set itself the target of reducing annual inflation
steadily from 7.7% to 5% by the end of this year. By June, however, annual inflation was running at
over 10%. Has Turkey been overheating? The economy grew by 6.4% in the year to the first
quarter, the stockmarket boomed and the current-account deficit widened. Perhaps most telling,
Harvey Nichols plans to open a luxury store in Istanbul.
But the central bank lays the blame elsewhere. In an open letter, explaining the breach of its target,
it bemoans higher oil, food and gold prices. Most of all it blames the lira, which fell by 23% against
the dollar between May 5th and June 23rd. Were it not for this currency mischief, the bank
calculates, annual inflation would have been a pardonable 8.6% in June.
The central banks of both Turkey and South Africa have promised not to allow faster inflation to
persist. But so far, it seems, only South Africa's commitment is much believed. Despite the fall in
the rand, South Africans expect their central bank to keep inflation within its target range of 3-6%
this year and next—after all, it has done so successfully since September 2003. The weaker lira has,
however, “disrupted inflation expectations” in Turkey, the central bank admitted in the minutes of
its July meeting, released this week. According to its latest survey, Turks now think inflation will
exceed 8% in a year, and be over 6% two years hence.
Forint or against it
As investors become pickier, keen to distinguish one emerging market from another, they may
begin to see Hungary in the same light as Turkey and South Africa. It too runs a big current-account
deficit, which the IMF thinks will exceed 9% of GDP this year. Indeed, on fiscal matters, the
comparison is rather to Hungary's disadvantage. Turkey may labour under heavy public debts, but it
is at least running a heroic budget surplus, before interest payments, estimated at 6.4% of GDP.
South Africa now runs a modest fiscal deficit, but its stock of debt is quite manageable. Hungary,
on the other hand, has both high debts (almost 60% of GDP in 2005) and a wide budget deficit.
Nouriel Roubini, of Roubini Global Economics, calls it an “accident waiting to happen”.
Curious then, that the Hungarian forint has so far escaped the traumas visited on the rand and the
lira, falling by 10.7% from peak to trough this year. Inflation remains at just 2.8% but Hungary's
central bank is not taking any chances: it raised interest rates by half a percentage point on July
24th, after a quarter-point increase in June.
Mr Roubini offers three possible explanations. Perhaps the markets are complacent—but surely the
turmoil of May and June woke them up? Maybe Hungary is shielded by its prospective membership
of the euro—but a tie to the D-mark did not save the Italian lira or the pound sterling in the early
1990s. Or the markets may be giving the benefit of the doubt to a new government, which has
unveiled plans to put public finances in order.
If so, the government impressed the markets more than the IMF, which publicly cast doubt on the
wisdom and credibility of Hungary's strategy. Temporary expedients would temporarily appease the
markets, the fund said, but the country would remain vulnerable.
No amount of monetary rectitude can save a country from fiscal recklessness. Indeed, hard money,
which preserves the real value of domestic debts, may only serve to hasten the day of reckoning.
Central bankers in emerging economies must hazard faltering exports, vengeful currency markets
and political tensions. But nothing troubles a central banker more than a profligate finance minister.
American interest rates
Missing a wingbeat
Aug 10th 2006
From The Economist print edition
Is the great monetary migration finally over? And will the
landing be soft?
JEFFREY LACKER has held a vote on the rate-setting committee of America's Federal Reserve for
less than a year. But on August 8th he did something no committee member has done since June
2003: he voted against the chairman, Ben Bernanke. Mr Lacker, head of the Richmond Fed, thought
his fellow central bankers should raise interest rates for the 18th time in a row. Instead, they decided
to pause in their long migration back to a temperate monetary policy, holding the federal funds rate
This split decision was accompanied by a statement that might most charitably be described as
“deliberative”. The Fed admitted core inflation was high (2.4% in the year to June, according to its
preferred measure); it probably won't remain so, but if it does the Fed will start tightening again,
falling in behind the man from Richmond.
The Fed has long relied on three things to keep price pressures in check: quiescent labour markets,
fat profit margins and its own credibility. It remains sure of the last, but can no longer count on the
For most of this recovery, for example, workers have been industrious without becoming
avaricious. They have justified higher pay per hour by producing more stuff per hour, so that unit
labour costs have risen only gradually. In many of its previous statements, the Fed gave thanks for
these “ongoing productivity gains”.
That phrase did not appear in this week's statement, however, because the gains did not appear in
this week's figures. Productivity grew at an annual pace of just 1.1% in the second quarter, not
nearly enough to offset a recent acceleration in pay. As a result, unit labour costs rose by a worrying
4.2% (see chart). For all the fuss about oil, labour is the commodity with the biggest impact on
inflation, accounting for two-thirds of production costs.
The Fed hopes that companies will be slow to pass these higher labour costs on to consumers. Their
profit margins are, after all, unusually wide at the moment. But labour compensation is now
growing almost as quickly as nominal GDP, suggesting that workers, having accepted a surprisingly
small share of the national cake in recent years, are getting hungrier.
In his congressional testimony last month, Mr Bernanke gave warning of the dangers of an
“inflationary psychology”. If people suspect that faster inflation is here to stay, they will anticipate
it in their wage claims and their price-setting, thus confirming their own suspicions. Are the fatter
pay packets of the first six months of this year evidence of such a psychology?
Mr Bernanke clearly thinks not. His willingness to hold rates, even when one of his colleagues
thought he should raise them, shows his confidence in his own credibility—he does not feel the
need to prove his inflation-fighting mettle to his doubters. Indeed, for all the chatter about
“Helicopter Ben”—a man willing to throw money from the skies to keep prices from falling—the
broader public seems to trust him. According to the University of Michigan's July survey, America's
consumers expect the prices they pay to rise by 3.2% over the next 12 months. This is smaller than
the rise they expected in May or June, and smaller than the actual increase (4.3% in headline
consumer prices) they experienced in the 12 months to June.
Mr Lacker clearly thinks the Fed should do more to make this relatively happy forecast come true.
But Mr Bernanke thinks that the central bank may have already done enough. The slowdown in
growth evident last quarter was not an accident. It was due in part to the rate increases that the Fed
voted for many meetings ago.
The Fed's latest projections, unveiled last month, foresee growth of 3.25-3.5% this year and 3-
3.25% next, slow enough, it thinks, to stop core inflation rising much further. Unfortunately, the
American economy, though it flies with strong wings, is not very good at smooth landings. In the
space of 12 months from February 1994, Mr Bernanke's predecessor raised rates from 3.25% to 6%
in a successful effort to stabilise inflation without increasing unemployment. In 2000, he tried the
same trick, raising rates from 5.75% to 6.5%. By March of the following year, the economy was in
a recession few had expected.
Mr Lacker, an inflation hawk, was the first to break formation with the new Fed chairman. But in
the difficult months to come, he may find some doves peeling off in the opposite direction.
The Federal Reserve
Difference of opinion
Dec 13th 2006 | WASHINGTON, DC
From The Economist print edition
The economy, the Fed and the markets
THE outcome was never in doubt. On December 12th America's central bank kept short-term
interest rates unchanged at 5.25%. What mattered was the statement accompanying the Federal
Reserve's decision. Although Ben Bernanke and his colleagues gave a nod to the slowing economy
(noting that the cooling of the housing market had been “substantial” and that recent economic
indicators had been “mixed”), they repeated that they still considered inflation a bigger worry than
That is not what Wall Street has been thinking. According to the latest Blue Chip monthly survey,
four out of five financial forecasters reckon the central bank's next move will be to cut the federal
funds rate. Some once-optimistic seers have been busy cutting their growth forecasts. The price of
fed-funds futures suggests that financial markets see a 20% chance of lower interest rates by April.
This had been close to 70%, but unexpectedly strong growth in jobs and then retail sales in
November has caused some in the markets to think a rate cut less likely.
The central bankers are simultaneously more cautious and more optimistic than many on Wall
Street. With core inflation still well above the 1-2% rate they unofficially deem appropriate, Mr
Bernanke and his colleagues are genuinely worried about price pressure. Although fuel costs have
fallen sharply, core consumer prices, which exclude the volatile categories of food and energy, still
rose by 2.8% in the year to October. (November's figures will be released on December 15th.) The
Fed's preferred price gauge, the core personal-consumption deflator, went up by 2.4% in the year to
October, only a little short of the fastest pace for a decade. With inflation still too high, cautious
central bankers see scant reason for abandoning their hawkish rhetoric.
Below-trend is your friend
By the same token, the officials are less concerned by the risk of a slowdown than their counterparts
on Wall Street are. Not only do the central bankers expect the economy to grow below its trend rate
in the short term; they want it to. That is because a period of below-trend growth will help dampen
inflationary pressure by increasing the amount of slack in the economy. Fed officials worry that
labour markets, in particular, are too tight. In their July forecast the central bankers expected an
average unemployment rate of between 4.75% and 5% for the fourth quarter of 2006 and 2007, well
above today's 4.5%. Modestly higher joblessness would be welcome. That unemployment has not
risen suggests the economy has not slowed much below its trend rate of growth.
If prudence is telling the central bankers to stand pat, so is their optimism. The Fed is not among
those who believe that America's unexpectedly deep housing bust will drag the rest of the economy
down. In a recent speech Mr Bernanke made it clear that he saw little sign of the housing recession
spreading elsewhere. A stream of weak statistics in subsequent days, particularly a report hinting
that manufacturing was in recession, suggested that his optimism might be misplaced.
A more recent lot of numbers, however, pointed the other way. Although manufacturing may be in
trouble, the services sector, which is much bigger, is still looking strong. November's employment
report was unexpectedly rosy. Despite net job losses in construction and manufacturing, the overall
number of jobs rose by 132,000 and total job growth for the previous two months was revised up,
too. Far more industries were adding workers than losing them. The unemployment rate rose by a
whisker, from 4.4% in October to 4.5%, but this was the result of an increase in the number of
people looking for work, not a lack of jobs. America's labour-force participation rate rose to a near
With the labour market so strong, and inflation still uncomfortably high, the central bankers were
sensible to sound hawkish this week. But the gloomier views on Wall Street may yet be proved
right. Cheery jobs figures today do not preclude trouble tomorrow, since firms do not shed workers
the instant demand slows.
Construction is an extreme case in point, largely because it takes several months to build a house.
Although employment in the building industry has fallen by over 20,000 in each of the past two
months, the drops are modest compared with the collapse in construction spending. The fall in
permits issued for new houses suggests there may be many more job losses ahead (see chart).
Economists at Goldman Sachs expect housing-related employment to fall by 1.5m-2m in the next
couple of years. Unless employment growth in the rest of the economy speeds up and absorbs some
of the surplus, the overall jobless rate will soon rise, perhaps rather further than the central bankers
The Federal Reserve's Chairman
Hitting his stride
Feb 1st 2007 | WASHINGTON, DC
From The Economist print edition
Ben Bernanke has won respect. Will he now push reform at
AFP A year older, a year wiser
WHEN Ben Bernanke succeeded Alan Greenspan as chairman of America's Federal Reserve a year
ago this week, Wall Street's commentariat had two questions. Would “Helicopter Ben” prove to be
a credible inflation fighter? Many bond traders remembered him as the Fed governor who had once
mused about preventing deflation by dropping money from the sky. And at what pace would the
former Princeton professor push the Fed towards adopting a formal inflation target, an idea he had
long championed? One year on, the answers seem to be “yes” and “slow”.
After a rocky start, Mr Bernanke has won inflation-fighting credentials (see chart below). Last May
was a low point. The new Fed chairman told congressmen that the central bank might pause its
interest-rate increases even if inflation was rising. Bond markets took this to mean that a pause was
imminent and inflation hawks began to fret. He compounded the mess by confiding to a journalist
that the markets had misinterpreted him.
Though serious, that setback proved short-lived and the chairman's reputation has steadily risen
since last summer. That is largely because his judgments have proved correct: notably, to stop
tightening in August with rates at 5.25% yet retain a hawkish bias despite the housing recession.
Inflationary pressure has abated and, as Mr Bernanke argued, the economy has seemed to shrug off
the housing market.
Two months ago financial markets were sure that the Fed, for all its hawkish talk, would soon cut
rates. But as the statistics have strengthened, Wall Street has fallen into line with Mr Bernanke. Far
from heading for recession, preliminary figures released on January 31st showed output rose at an
annual rate of 3.5% in the last three months of 2006, above the economy's trend pace. On the same
day, the Federal Open Market Committee (FOMC), the central bank's policymaking body, said it
was once again holding rates at 5.25%. Although it acknowledged that inflation figures have
improved “modestly”, it kept its hawkish bias.
Meanwhile, Wall Street is gradually getting used to the style of the Bernanke Fed, which seems to
be more democratic than the Greenspan model. Mr Bernanke has altered the format of the FOMC's
discussions to encourage debate. Don Kohn, the Fed's vice-chairman, is particularly influential: he
gave the speech that has had the biggest impact on the markets in the past six months. Dissent is
tolerated: Jeff Lacker, president of the Federal Reserve Bank of Richmond, disagreed with the
decision to halt tightening in August and dissented at every subsequent FOMC meeting until his
stint as a voting member ended in December.
This collegial approach is one reason why the Fed has moved more slowly towards inflation
targeting than many outsiders expected. Although several governors agree that such a target makes
sense in principle, they are loth to change a system that seems to be working well. Mr Kohn, a
sceptic, is in charge of a special committee to guide the deliberations. It seems in no hurry. Nor are
the external circumstances auspicious. With the Fed's preferred price gauge, the deflator for
personal consumption expenditures excluding oil and food, still above the 1-2% that is widely read
as an informal goal, the central bankers have not been keen on making a target explicit.
The change of control in Congress has slowed progress too. Democrats are particularly suspicious
of inflation targeting, fearing it would compromise the Fed's other statutory goal, that of
maximising employment. Barney Frank, the chairman of the House Financial Services Committee,
has grave doubts about the idea.
Internally, rapid turnover has made matters harder. The FOMC is full of new faces. Besides Mr
Bernanke, three Fed governors have arrived in the past year and one seat is still vacant. One of the
newcomers, Frederic Mishkin, is a well-known advocate of inflation targeting. There is change at
the regional reserve banks too. Charles Plosser, a former economics professor, became president of
the Philadelphia Fed in August. Jack Guynn retired from the Atlanta Fed in October; his successor
has not yet been named. The presidents of the Boston and Chicago Feds, both voting members this
year, recently said that they would be stepping down. Though they are far from agreeing to an
explicit inflation target, the central bankers are discussing other ways to improve transparency. One
option is to release more frequent economic forecasts. The central bank now publishes projections
for growth, inflation and unemployment twice a year, based on estimates by board members and
regional reserve banks. Possible changes include issuing quarterly forecasts with a more detailed
description of the economic outlook. A baby step, perhaps, but in the right direction.