Ellen Frank :
(©Dollars and Sense, April 2000)
Saint Greenspan?
So extravagantly has the media been lauding Alan Greenspan, one would
almost think he had been nominated for sainthood rather than a fourth term
as
chair of the Federal Reserve. To hear the business press tell it, Saint
Greenspan has single-handedly engineered both the U.S. economic boom
and the soaring U.S. stock market.
Yet not only is Greenspan not responsible for recent U.S. prosperity, but
much of what is wrong in the world economy today can be traced to his
door. Under his leadership, the Fed (which controls the key interest rate
that
banks pay to obtain funds) has placed the vested interests of banks and
bondholders above the interests of workers or even the stability of the
economy. Since Greenspan became chair in 1987, the Fed has repeatedly
indicated that its first and foremost goal is to raise interest rates as
high as
possible, whenever possible, so long as bank profits aren't endangered.
Unlike his predecessor Paul Volcker, Greenspan has not yet toppled the
economy in order to safeguard the wealth of the financial elite, but he
has
certainly come close. Since his premature reappointment, media
retrospectives have cited Greenspan for wisely cutting interest rates during
the recession of 1991. They fail to note, though, that it was tight money
and
high rates that had done the economy in. Former president Bush still blames
Greenspan for the recession that scuttled his reelection bid.
The recession in 1991 set off waves of bank failures, which forced the
Fed to
cut interest rates in 1992 and 1993. No sooner had the large banks
recovered, though, than the Fed raised interest rates once more, doubling
short-term rates over the course of 1994. Soon real (inflation-adjusted)
interest rates reached historic highs. Higher mortgage and debt service
payments sent national income flowing to the finance sector – by mid-decade,
New York had the most unequal income distribution of all the 50 states
– and
set the stage for nearly four years of declining wages and stagnant family
incomes.
How quickly we seem to have forgotten that it was Greenspan who, during
much of the 1990s, insisted that an unemployment rate of 6% was "natural,"
Greenspan who threatened to hike interest rates each time an unemployed
worker got a job. On Greenspan's watch, the Fed has not only willfully
ignored its legal mandate to promote full employment, it has even quietly
pushed legislation that would eliminate altogether its statutory obligation
to
workers.
Greenspan's craven lobbying on behalf of financial markets, and his stubborn
refusal to accomodate wage growth, have emboldened conservatives at the
Fed. Fed policy discussions today revolve not around whether to raise rates,
but when and by how much. Further increases in interest rates are presented
as so inevitable, that the Fed no longer even bothers trying to justify
them.
When he raised interest rates in 1994, Greenspan was fond of blaming the
high rates on Clinton and the federal budget deficit. But when Clinton
declared this past year that the largest surplus in history would surely
cause
interest rates to fall, Greenspan's Fed announced the first of four interest
rate
increases.
Greenspan's inattention to anything beyond the parochial needs of financiers
has caused harm throughout the world. Greenspan was a forceful advocate
of
financial deregulation and "liberalization" of international monetary policies
that so damaged the indebted countries of the third world. The discredited
policies endorsed by Greenspan and pushed by the IMF fueled the
destructive financial speculation that shook world markets just two years
ago.
While Greenspan is praised for cutting rates in 1998 to avert a financial
meltdown in the US, he lost no time in pushing them back up again this
past
year. These high interest rates have greatly exacerbated the problems of
indebted countries, whose interest costs vary directly with short-term
U.S.
interest rates. Thanks in no small part to Greenspan, most of the emerging
markets are still reeling under crushing debt burdens and punishing interest
rates.
Since Greenspan's reappointment, the Fed announced a further interest rate
increase and is widely expected to raise rates aggressively in 2000, a
boon to
Wall Street, but a bust to virtually everyone else. We'd better start praying
that Saint Greenspan doesn't derail the economy.