37 Sharon L. Crenson, “Rotating Rooms, Yacht Berths Spur Dubai, Moscow Apartment Boom,” Bloomberg, April 25, 2007.
38Paul Goldberger, “Past Perfect: Retro Opulence on Central Park West,” New Yorker, August 27, 2007.
39 Goldberger, “The King of Central Park West,” Varity Fair, September 2008.
The Bottom
Some of the rich must think it is 1930. Protestors have marched in front of 740 Park Avenue—not because Steven Schwartzman is in the penthouse, but because Henry Kravis also lives in the building.42 In Greenwich, “For Sale” signs are illegal. If they were allowed, the New Yorker suspects that Greenwich might look like “a giant and very expensive tag sale.”43
The lower 99 percent have made many mistakes of their own. The cry for “growth” since the 1950s has taken mutant forms. Maricopa, Arizona, is an example. A 40-mile commute from Phoenix, it had a population of 600 in the early 1990s. “[By] 2005, three new people moved to Maricopa each hour.”44 More than one-third of the mortgages were subprime. In June 2009, 1,042 houses were in foreclosure and up for auction at $172. (That is not a misprint.)45
Phoenix, Arizona, is a case in point. It is a city in the middle of the desert. The population has grown from 100,000 in 1950 to nearly 3,000,000 today. The temperature in Phoenix at night is now 12 degrees hotter than in surrounding rural areas.46 There are days when Phoenix uses more energy than New York City.47
40 Ibid.
41 Ibid.
42 Andrew Ross Sorkin, “Henry Kravis in Focus as Buyout Backlash Spreads,” New York Times, December 6, 2007.
43 Nick Paumgarten, “A Greenwich of the Mind,” New Yorker, August 25, 2008.
44 Sanartha M. Shapiro, “The Boontown Mirage,” New York Times, April 6, 2008.
45 At least, according to foreclosures.roost.com. on June 23, 2009: “There are 1042 homes that are up for auction at an average auction price of $172.”
David Rosenberg, then Merrill Lynch’s chief North American economist, observed, “[T]he bottom line is that all those McMansions [the 4,000 or 5,000-square-foot houses] that were bought during this housing boom are going to go the way of the 1973 Lincoln Continental.” Rosenberg went on to say the “housing bubble was the most overowned, overleveraged and oversupplied real-estate market ever and its unwinding will take years.”48
The McMansions are and will continue to draw energy like a 1973
Lincoln Continental. The average new house had grown from 1,500
square feet in 1970 to nearly 2,400 square feet in 2004; 90 percent of new houses in 2004 were equipped with central air conditioning.49 The houses were getting bigger, but they were not big enough. Rentable selfstorage space has risen by 740 percent since 1985, with over 20 square feet of storage space per U.S. household.50 To carry all the stuff, cars grew: the average weight of a passenger vehicle increased from 3,236 pounds in 1996 to 4,021 pounds in 2003.51 It was not only stuff that needed more room, Americans grew. In 2006, the obesity rate of 16-year-old boys in the United States was the highest in the world; American girls had to settle for second place, behind overweight Cypriots.52
The Great Impoverishment
Many Americans need to diet, but many others are being starved, thanks to the Federal Reserve. This failed institution deserves blame for “the Great Impoverishment.” Monetary policy has operated like a jackhammer opening a pickle jar. Over the past two decades, the Fed funds rate was cut from 9 percent to 3 percent, raised from 3 percent to 6.5 percent, cut from 6.5 percent to 1 percent, raised from 1 percent to 5.25 percent, and (most recently) cut from 5.25 percent to zero. This was Federal Reserve Chairman Ben S. Bernanke’s “Great Moderation.” A History of Interest Rates, which catalogs interest rates since Mesopotamian times, shows no such precedent except in times of hyperinflation, total war, and social disintegration.53
46 Patricia Gober, Metropolitan Phoenix: Place Making and Community Building in the Desert (Philadelphia: University of Pennsylvania Press, 2005), pp. 50–51.
47 Dan Roberts, “Phoenix Gives Its Newcomers the American Dream They Can Afford,” Financial Times, September 28, 2005.
48 James Quinn, “Green Ashes and Black Swans—The Alan Greenspan Legacy, Part II,” The Cutting Edge, September 29, 2008.
49 U.S. Census Bureau, C-25 and Characteristics of New Housing.
50 Self Storage Association Fact Sheet; www.selfstorage.org.
51 Joshua T. Johnson, Motor Vehicles, Appendix N, Table 3, Weight of material in a typical family vehicle, 1978 to 1996.
52 Economist Handbook of Facts and Numbers, 2009. Profile Books Ltd., 2008.
Our age of turbulence has shackled Americans to financial markets to a degree that was—literally—unthinkable a generation ago. A large proportion of Americans knew nothing about the stock market or the concept of a bond or the structure of a mutual fund. They were perfectly content to save and watch their dollars accumulate. Such proposals as “stocks for the long run” were directed at a small segment of the population. The Federal Reserve—or, rather, central banking as a whole—is not the sole cause of disturbances, but neither is it what it pretends to be.
Alan Greenspan condemned asset inflation during the 1950s and 1960s; by the 1990s, he claimed that it didn’t exist, and even if it did, there was nothing that the Federal Reserve could do, since it could not recognize a bubble. The oldest generation was not up to running these personal hedge funds; it earned 1 percent on money market funds and ate cat food.
Ben Bernanke has driven short-term interest rates below zero (after subtracting price inflation) to refloat the financial system that the Fed has overindulged and mismanaged at every turn. Now, suffering another asset deflation—following another asset bubble—the Federal Reserve is driving the young and old to cat food.
Only Congress can dissolve the Federal Reserve. It is time to do so. 53 Sidney Homer and Richard Eugene Sylla, A Profile of Interest Rates, 4th ed. (Hoboken, N.J.: Wiley, 2005).
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29
Life After Greenspan
2009—
Alan Greenspan is an old friend. He has devoted unfailing and broadly successful attention to his own career—he’s wonderfully avoided any action that might seem to make him responsible for a slump, but that does not rule out the possibility.1
—John Kenneth Galbraith (1999)
Alan Greenspan was the forerunner of a type, a type that has come to dominate public life in the United States. Economists are running national policy, proposing to solve a crisis that was anticipated by some Americans from all walks of life, but apparently not by any of the celebrity bankers and economists. Ben Bernanke is Federal Reserve chairman. Larry Summers (see Chapters 11 and 22) is the director of President Obama’s National Economic Counsel. Timothy Geithner (see Chapter 22) is secretary of the treasury (and not an economist). People magazine recently named Geithner to its annual list of the “50 most beautiful people.”2 These are the most highly regarded minds in an administration that spent over $1 trillion more than it collected during fiscal year 2009.3 Alexis de Tocqueville foresaw that a democratic
1 William Keegan, “Sitting Out the Party with Galbraith,” Guardian Unlimited, July 4, 1999.
2 “Barack’s Beauties,” People, May 11, 2009, p. 89.
3Martin Crustinger, “Budget Deficit Tops $1 Trillion for First Time,” SFGate.com, July 13, 2009.
361
age could elevate a dwarf who appears on top of a huge wave, and gives the impression he is riding and governing it.4
Too much money produced by the Federal Reserve at subsidized interest rates will not solve the problem of too much money produced by the Federal Reserve at subsidized interest rates. Extending more loans to those who could not meet their monthly mortgage payments will not solve the problem of extending too much money to those who could not meet their mortgage payments. Not understanding the problem that has accumulated since they were children, our leaders are compounding the costs that must be paid.
The solution must lie in reducing the debt and eliminating the institutions that, through either ignorance or arrogance, ignored their responsibilities.
No matter who holds those positions today, it is doubtful that the decisions made would differ. Other top candidates are products of the same institutions, and, as we could see during the subprime meltdown, they could not see what was happening even after they were run over by a hearse. They are apparatchiks for our time, a decay of aptitude and spirit matched by a parallel decay in Federal Reserve chairmen—from William McChesney Martin to Alan Greenspan.
Another parallel is to capitalism itself. From its earliest days it has developed in conformity to current tendencies of democracies and their governments. What might we expect from here?
Capitalism as practiced in the late nineteenth century was a rigid affair. It was inseparable from the international gold standard. Both were inseparable from personal discipline. When Alan Greenspan wrote his gold-standard diatribe in 1966, he was not referring to the then-current Bretton Woods arrangement.5 He was discussing the pre-1914 international gold standard. Whether one lived in Hungary or California, the national currency could be redeemed for a fixed amount of gold. The people could decide for themselves if they trusted their government. They also had to live with strict limits on credit: it was a world with little sympathy (or, at least, little money) for those who were down on their luck. And it was not a world for mad financial conquest.
4 John Lukacs, A New Republic: A History of the United States in the Twentieth Century (New Haven, Conn.: Yale University Press, 2004), p. 425.
5 There are calls today for a return to a Bretton Woods gold standard. This is posed as an agreement that worked for nearly 30 years (1944–1971). However, it was already failing in the 1950s. It was failing because the United States did not live within the limits imposed on the reserve currency. It was able to fail because, as with the CDO trade, there were no market prices. Only governments could redeem currency for gold. This led to subterfuges, which were hidden from the people when it was thought better to do so.
In 1934, Simone Weil, a young French philosopher, expressed how capitalism had changed. She wrote, in Sketch of Contemporary Social Life: “[C]apital increase brought about by actual production … counts for less and less as compared with the constant supply of fresh capital.”6 She made this observation without the advantage of having participated in a leveraged buyout. Here, Weil hints at how the word liquidity has evolved.
In 1950, an American household’s liquidity was its bank account, not its credit line. The bank’s liquidity was its cash and certain deposits, not its (assumed perpetual) access to credit. The bank’s profits were slow (interest earned minus interest paid) and built up over time. (An analogue exists to the industrial company.) More recently, profits were instant. Because of bank-deposit insurance, a depositor does not consider whether a bank holds gold or confederate dollars in reserve. That being so, banks do not make such distinctions either. Money—inseparable from credit in the mind—will always be as accessible as the air we breathe.
Weil described the more material world of the late nineteenth century: “To increase the size of an undertaking faster than its competitors, and that by means of its own resources—such was, broadly speaking, the aim and object of economic activity. Saving was the rule of economic life; consumption was restricted as much as possible, not only that of the workers, but also that of the capitalists themselves.”7
Partly, the limits on consumption were attached to the monetary standard of the day. Debts were ultimately settled in reference to the fixed price of gold. Today, accounts are settled in dollars, and more dollars are printed every minute. There is no ultimate settling of accounts. When we are not required to settle our accounts, the size and price of houses have no limits.
6 Simone Weil, The Simone Weil Reader, ed. George A. Panichas (New York: David McKay Company, 1977), p. 34.
7 Ibid., p. 33.
Capital is no longer fixed; balance sheets are now flows. This is true for the producer and the consumer. The producer depends upon the consumer’s free-flowing balance sheet. The parties must think alike. If a house were still a home, home-equity withdrawal would not exist. (Quoting again the August 25, 1957, edition of the New York Times: “Times have changed. Owning a house is no longer so important as being able to use it while paying for it.”8) The moorings were loose on each side of the transaction.
Weil described how “saving is replaced by the maddest form of expenditure. The term property has almost ceased to have any meaning; the ambitious man no longer thinks of being owner of a business and running it at a profit, but of causing the widest possible sector of economic activity to pass under his control.”9 Weil concluded that this struggle for economic power was far less about building up than conquering.10 In 2009, the consequences of this conquest destruction are the abandoned housing developments that line I-5 from San Diego, through Bakersfield, Stockton, and on to Sacramento.
Capitalists no longer save; profits are not needed to raise capital; the term property has lost its former meaning; workers labor for a new owner each year. How will this end? Quoting Weil: “[T]he state tends more and more, and with an extraordinary rapidity, to become the center of economic and social life.”11 In 2009, Alan Greenspan proposed that the state nationalize U.S. banks.12 In 2009, Jeffrey Immelt, chairman of General Electric, wrote: “The interaction between government and business will change forever. . . . [T]he government will be … an industry policy champion; a financier; and a key partner.”13 Now, General Electric is using government guarantees to sell bonds. This cooperation is not new. General Electric President Gerard Swope helped construct the National Recovery Act at the time Simone Weil wrote Sketch of Contemporary Social Life.14 She was 25 years old. Weil was a philosophy teacher at the time.
8 John Lukacs, Outgrowing Democracy: A History of the United States in the Twentieth Century (Garden City, N.Y.: Doubleday, 1984), p. 115.
9 Weil, The Simone Weil Reader, p. 34.
10 Ibid.
11 Weil, The Simone Weil Reader, p. 34.
12 Krishna Guha and Edward Luce, “Greenspan Backs State Control for Banks,” Financial Times, February 18, 2009.
13 General Electric, 2008 Annual Report, Letter to Shareowners; released early March 2009.
The Greenspan Legacy
Alan Greenspan adapted his talents to a period of flux, flow, and weakness in the moral fiber of the nation. He could say anything because there were no fixed parameters. Greenspan’s creation of endless credit— for any and all, in good times and bad, for the rich and the bankrupt—is building to a culmination.
Alan Greenspan was caretaker during a transient period, a time when democracies could inflate and buy the middle class with uncollateralized credit, not backed by goods and services. During the twentieth century (roughly speaking), impossible promises by governments were accepted by the people, between a period of hard money that ended in 1914 and a future and protracted period of bumbling and experiment. Greenspan was attuned to the illusion that he orchestrated. In 1996, Federal Reserve Governor Larry Lindsey bemoaned a problem related to inflation. Chairman Greenspan told Lindsey that he had a solution: “We just have to make our dollar bills smaller and smaller to reflect the loss of purchasing power. The total amount of paper would be the same.”15
Given today’s credit collapse, the virtues of Greenspan’s endowment— monetary inflation and endless credit—must be rethought, but not yet. This is a world with no intentions of paying its bills or paying for its mistakes. Vague and vanishing currencies serve many interests. The inflation of the past century will explode in the new century.
14 William E. Leuchtenburg, The Perils of Prosperity, 1914–1932 (Chicago: University of Chicago Press, 1958), pp. 41–42.
15 FOMC meeting transcript, July 2–3, 1996, p. 55.
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APPENDIX
The Federal Reserve System
T
he Federal Reserve Act was passed in 1913; the body first met in August 1914. Literalists insist that the Federal Reserve is not a central bank; scholars insist that the Federal Reserve is a federal agency independent of political control. These distinctions blur actual practices.
The Federal Reserve is the only authorized issuer of currency in the United States. The president nominates all Federal Reserve governors. Many tussles between politicians and the Federal Reserve are discussed in this book. Except during the early Volcker years, the politicians won.
The Federal Open Market Committee (FOMC) decides the Federal Reserve’s monetary policy. It consists of seven governors (in Washington) and five regional presidents. There are 12 geographic regions in the Federal Reserve System. The presidents rotate terms on the FOMC. FOMC meetings sent Americans into apoplexy during Greenspan’s tenure: “Is he going to tighten or loosen? How much?” This referred to the federal funds rate, also known as the fed funds rate or the funds rate. What is it? An explanation starts with the banks and runs back to the Fed.
Banks must hold “bank reserves.” This is money that banks draw upon to meet withdrawal requests and that acts as a safety net when bad loans accumulate.
Bank reserves are held with the Federal Reserve. Each day, let us say, all banks look at their reserve position. Some find that they are now holding more reserves than they need, some have fallen below their minimum threshold.
This is where the “Fed funds” market develops. The banks trade reserves among themselves to reach an optimal level. The Federal Reserve coordinates these trades.
When the FOMC decides to lower rates (synonymous with “easing” or “loosening” money), the Federal Reserve transfers additional money into the Fed funds market. (The banks sell Treasury bills to the Fed and receive dollars. The banks then have more money to lend.) If the current rate is 5.0 percent, and the FOMC decides to cut the rate to 4.5 percent, the Fed adds money into the market until it rebalances supply and demand at 4.5 percent. This is not a stationary rate. When the “Fed funds rate is 4.5 percent,” the banks trade funds at approximately that rate. The Federal Reserve continually adds or subtracts funds to hold the rate at around 4.5 percent.
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