6 Ways Greenspan Caused the Current Economic Crisis

Fiona King of CurrencyTrading.Net just forwarded an excellent blog that she posted concering Alan Greenspan's role in the current economic crisis. I disagree with her policy prescription, but most of her analysis is accurate. Her policy prescription (which is to increase financial regulation) will lead to more of the same problem. But King's blog is excellent.

The problem with more regulation is that, as Enron demonstrated, regulation is an infinite regress. Unscrupulous actors (be they government officials or corporate executives) find ways around the regulation, and the regulator (if not corrupt, which they usually are) has to increase control. But increasing control terminates economic actors' freedom and flexibility. Freedom and flexibility are necessary to growth. Without the ability to respond to market change and to innovate, the economy stagnates. The end result is a controlled system that is like North Korea's or Cuba's at worst and Europe's at best. Stagnant growth is associated with innovation's being forestalled by regulators, corruption, exclusion of people of low socio-economic status from economic opportunity and declining living standards. Regulation solves nothing. It creates poverty.

Moreover, King accepts the explicit purpose or ideological rationale for the Fed and misconstrues its underlying purpose. The Federal Reserve is a wealth transferral device that serves financial interests at the expense of workers (see Howard S. Katz's book Paper Aristocracy for a detailed discussion of this point). The idea that a small amount of inflation will help workers but a large amount of inflation will hurt them is fallacious. A small amount of inflation will transfer a small amount of wealth from producers to investors and bankers, and a large amount of inflation will transfer a large amount of wealth from producers to investors and bankers. Greenspan inflated alot, and alot of wealth has been transferred. Warren Buffett, George Soros and the folks who have bought up Greenwich, Connecticut and the Dakotas have grown wealthy while the average worker has seen flat wages. That is what the Fed will do so long as it is permitted unrestrained freedom to inflate the money supply.

It is the Fed that needs to be regulated through a metallic standard. Any other system leads to abuse and wealth transferral from poor to rich. How many decades of this do progressive-liberals need before they accept that their idea has failed?

The Greenspan Fed has done what the Fed does in a big way. In the 1920s, the Hoover Fed reacted stupidly to the banking crisis of that era, and the depression resulted. In the post World War II period, the Fed has generated inflation, and the result has been flat real earnings since the mid 1970s and reduced innovation. As the federal government responds by transferring even more wealth from producers to Wall Street and commercial banks, such as respecting the Bear Stearns bailout, the public becomes poorer and the assets of multi-millionaires and billionaires are protected.

There is no other purpose of the Fed. The idea that the few percent reduction in unemployment that results from short term stimulus really is the Fed's purpose is naive.

King points out that in response to the technology stock bubble (which, I add, also resulted from the Greenspan Fed):

"The Fed, under the leadership of Dr. Greenspan, moved quickly to slash its bechmark Federal Funds Rate to 1%, the lowest level in nearly 50 years. At the time, Dr. Greenspan was acclaimed by economists for mitigating business cycle volatility and returning the economy back into a period of rapid growth. In hindsight, however, this period of easy money may have enabled the run-up in housing prices that caused the current housing crisis...This in turn resulted in a weak dollar..."

King adds that Greenspan failed to stop incompetent lending strategies by the financial community that had been authorized by the Home Ownership and Equity Protection Act of 1994. As well:

"the inability of the financial system to absorb the shock from the unexpectedly high default rate on subprime loans. This failure to anticipate can be traced back to 1998, if not earlier, when the Federal Reserve spearheaded a bailout of Long Term Capital Management (LTCM), a large hedge fund which lost nearly $5 Billion trading complex securities. Some would say that this created a moral hazard situation, whereby banks became comfortable taking larger risks because of the foreknowledge that they would be bailed out if their bets went sour."

King adds that Greenspan was indifferent to asset bubbles. All of this is accurate. Although this analysis is accurate, I am concerned that the prescription that results is more of the same policy pattern that caused this problem. Regulation created the Fed. The Fed caused the asset bubble because of inflation. American workers have seen decreased opportunities and flattening real incomes because of the Fed's inflation and because of regulation.

King's prescription is even more regulation. I disagree.

Ratio of Democrat to Republican Donors at Brooklyn College

Huffington Post lists political donors by employer. The information is publicly available on the World Wide Web. I am not breaching confidentiality by copying the data.

The folks at the American Association of University Professors keep claiming that there is no imbalance between Democrats and Republicans in universities. They claim that the professoriate represents a balanced range of views. That is of course absurd.

The top of the Huffington Brooklyn College list states:

$16,093 was given by people who identified their employer as "Brooklyn College".
$0 to Republicans
$16,093 from 25 people to Democrats

The summary states that it all went to Democrats. However, that is inaccurate, as there is one Republican donor on the list. Me. If you look down the list you will see that I gave $540 to John McCain. I am the only Republican donor on the list. With 25 on the list, the politically interested faculty appears to be 4% Republican and 96% Democratic.

Moreover, the amounts contributed to the Democratic Party are surprisingly large. For example, Professor Leo Zanderer donated $4,600 to Christopher Dodd. Professor Madelon Rand donated $1,950 to Hillary Clinton in the first quarter of 2008. Librarian Howard Spivak donated $1,000 to Hillary Clinton. Professor Barbara Winsolow gave $2,000 to Howard Dean.

My question, friends, is: why does the heading of the list say that there are no Republican donors at Brooklyn when it lists me as having given $540 to John McCain?

Brooklyn College Political Donations

Leo Zanderer Professor Brooklyn College Christopher Dodd $4,600
Madelon Rand English Instructor Brooklyn College Hillary Clinton $1,950
Howard Spivak Director, Academic Information,Brooklyn College Hillary Clinton $1,000
Gail Gurland Professor Brooklyn College Hillary Clinton $600
Mitchell Langbert ASSOCIATE PROFESSOR BROOKLYN COLLEGE John McCain $540
Philip Thibodeau Professor Brooklyn College Barack Obama $465
Ellen Wayne Professor Brooklyn College John Edwards $450
Renison Gonsalves Updated Q1/2008 Hillary Clinton $420
John Van Sickle Professor Q1/2008 Barack Obama $400
Donald M Levine Professor Brooklyn College Updated Q1/2008 Barack Obama $391
Lindley Hanlon Professor Brooklyn College Updated Q1/2008 Barack Obama $308
Michael Hipscher Teacher Brooklyn College Updated Q1/2008 John Edwards $300
Matthew Moore Professor Brooklyn College Updated Q1/2008 Barack Obama $300
Mac Wellman writer/professor Dennis Kucinich $300
Andrew Meyer Professor Brooklyn College Q1/2008 Barack Obama $272
Sonia Murrow College Professor Brooklyn College Q1/2008 Barack Obama $250
Barbara Winslow University professor Brooklyn College Howard Dean $2,000
Charlene Forest Professor Brooklyn College Updated Q1/2004 DNC $500
Joe Fodor writer Brooklyn College Updated Q1/2004 DNC $500
Ellen Wayne College Professor Brooklyn College Updated Q1/2004 DNC $450
Clement Mbom Professor Brooklyn College Updated Q1/2004 DNC $408
John Van Sickle Professor Brooklyn College Q1/2004 John Kerry $375
Kathleen Axen Professor Brooklyn College Updated Q1/2004 DNC $300
Matthew Moore Brooklyn College Updated Q1/2004 DNC $300
Peter Wayne College Professor Brooklyn College Updated Q1/2004 John Kerry $250
Len Fox college professor Brooklyn College Q1/2004 DNC $250
Todd Holden Professor of Physics Brooklyn College Updated Q1/2004 DNC $250
David Bloomfield Educator Brooklyn College Q1/2004 John Kerry $250
Roni Natov English Professor Brooklyn College Updated Q1/2004 DNC $250
Daniel Mufson Assistant Professor Brooklyn College Updated Q1/2004 Howard Dean $250
Steven Jervis Brooklyn College Updated Q1/2004 John Kerry $200
Corey Robin professor Brooklyn College Updated Q1/2004 Howard Dean $200
Charles Ayes Architect Brooklyn College Updated Q1/2004 John Kerry $200
Len Fox College Professor Brooklyn College Q1/2004 John Kerry $200
Frederick Gardiner Professor Brooklyn College Q1/2004 John Kerry $200
Mac Wellman Professor Brooklyn College Updated Q1/2004 Dennis Kucinich $200
Gary Giardina Physician Assistant Brooklyn College Updated Q1/2004 DNC $150
Daniel Mufson Assistant Professor Brooklyn College Updated Howard Dean $150
John Van Sickle Professor Brooklyn College Updated Q1/2004 Howard Dean $100
Allison Dean Professor Brooklyn College Updated Q1/2004 Howard Dean $60

Progressive-Liberal Economists Murder Children

Economist Ben Bernanke


Weep and pray for children in nations with food shortages, who have been starved by the progressive-liberal Fed policies of the Greenspan and Bernanke Fed. For the past three decades progressive-liberal economists have advocated creation of money, that is, liquidity or credit, to stimulate real estate investment. This misallocation of resouces inhibited food production by transferring resources away from commodities production to construction.

Keynesian progressive-liberal economists have caused a global food shortage. Too little food being produced and the transfer of land to developers mean that agriculture cannot adjust to increasing demand. The Fed's actions, in response to the claims of Keynesian economists, are starving children. The economists are murderers because they have induced the world's banking community to engage in policies that have starved children. Now, their chief concern is that the starvation not impede Wall Street's profit picture.

Recently economist James Galbraith responded to my blog about his television appearance, claiming that higher interest rates would be a catastrophe. But the policies that the Fed has adopted, i.e., creation of money by lending it to hedge fund managers and commercial banks at public expense, has resulted in starvation around the world. Keynesians don't view the starvation that their policies have caused to be a catastrophe. Only a decline in Wall Street's profit picture is a catastrophe to them. Starving children is a detail of no economic consequence to their models.

Woodrow Wilson's Constitutional Government in the United States

Woodrow Wilson. Constitutional Government in the United States. New Brunswick, NJ: Transaction Publishers, 2004. (Original published 1908). 236 pages.

Woodrow Wilson's Constitutional Government in the United States is a great treatise. Wilson had been a fine political science professor before becoming president of Princeton, governor of New Jersey and then president of the United States. Wilson was a Democrat, but he shared some views with the Mugwumps, the Republicans who supported Democratic candidate Grover Cleveland in 1884. Wilson closely read Walter Bagehot and he supported the gold standard in the late nineteenth century. In 1896 he bolted the Democratic Party to support the National Democratic candidate John Palmer. As a proponent of sound money, that year of William Jennings Bryan's "cross of gold speech" Wilson opposed Bryan's free silver candidacy. The National Democrats were libertarian in orientation and favored not only reduced tariffs and the gold standard, but limited government as well. The first year of his presidency Wilson established the income tax and the Federal Reserve Bank, but these laws were not so statist as they sound. Many Mugwumps (who were largely free market and pro-gold) supported the Federal Reserve Bank because they thought it would be better to have an expert agency regulating the currency than to have Congress creating greenbacks. The gold standard that was in place in 1913 and for nearly two decades thereafter limited the Fed's ability to expand the monetary base and create the kind of inflation that we have had since the 1930s and especially since Richard M. Nixon's presidency, which Wilson would have opposed. Likewise, the income tax was an unknown concept in 1913, and he could not have anticipated its extension. Until 1913 federal tax revenue was raised chiefly by tariffs, and Wilson repealed most of the tariffs in the same law that established the income tax. Moreover, the income tax applied to about one percent of the population in 1913. He could not have foreseen the degree to which subsequent administrations extended it.

Wilson had begun to identify himself as a "progressive" during his tenure as New Jersey governor, but his reforms were not especially interventionist or statist in nature. He introduced primary elections, which were an affront to the preexisting boss system. He also established a workers' compensation law, but workers' compensation is as much a realignment of common law liability principles as an employee benefit or regulatory program. His progressivism was conservative.

Wilson's writing is more articulate and subtle than Herbert Croly's or Theodore Roosevelt's, and his ideas are more refined and sophisticated than either's. In contrast to Roosevelt, who was a Republican predecessor to the New Deal Democrats, Wilson's ideas were informed by Burke as well as Bagehot. He not only believed in preserving existing institutions, but also retained a suspicion of big government as well as big business. He was a progressive in that he advocates, in Constitutional Government in the United States, a Darwinian as opposed to what he calls a Newtonian theory of government. That is, he believed that the federal government needed to be reformed to enable some changes. This idea may not have been wrong in principle but it was wrong, in my view, in terms of fundamental errors Wilson made in failing to anticipate the results of the reforms he made as president. However, subsequent generations of conservatives as well as progressive-liberals rely on Wilson's ideas about government. It would be better to throw out government altogether, but unless you've joined the Libertarian Party you probably owe a debt to Wilson's thinking.

Wilson's writing is somewhat flowery but it is eloquent and clear. The book can be read in one or two sittings yet it packs a considerable punch. It contains many beautiful theoretical insights about government. It is probably among the best of the Progressive works on government, and if any one work of the Progressive era might be said to shine a flattering light on the Progressive movement, this is it. The trouble, of course, is that the folks calling themselves "progressives" today are not Wilsonian progressives and have little if any interest in Bagehot, Burke or Wilson.

The United States is fortunate that Wilson and not Roosevelt won in 1912, although Wilson's best efforts were subsequently overturned by his fellow Democrat, Franklin D. Roosevelt, in the 1930s. It is evident that the roots of the Democratic Party's rejection of freedom begins with Roosevelt. The New Deal was an ahistorical response to exigencies and circumstances that occurred in the early 1930s and had absolutely nothing to do with Wilson's ideas. Wilson was not a predecessor of Franklin D. Roosevelt. The one president who can claim that title was Theodore Roosevelt, a Republican.

Wilson argues that there are four stages of evolution of government. In stage one government is the master of the people. In stage two government is no longer master by force but remains master because of superior sagacity. In stage three the leaders of the people confront mastery and agitate to control it. In stage four the people's leaders become the government. The American constitutional government is an example of stage four, but Wilson prefers the British parliamentary system to the American separation of powers, which he believes to be a more primitive model. Wilson admires Hamilton, whom he feels was more comfortable with giving government power than with the system of checks and balances which inhibits government action and leads to the party system, which in his view is associated with corruption and failure of democracy. The party system and bossism was necessitated by American constitutional government because the division of powers made it impossible for the different branches to coordinate their thinking without some integrative device. In management theory this idea is called differentiation and integration, and it was first articulated in the 1960s by Lawrence and Lorsch. Wilson noticed the differentiation and integration problem with respect to the federal government in the first decade of the twentieth century, fifty years before Lawrence and Lorsch.

Wilson believed that there are crucial regional and social differences among Americans that lead to the need for decentralization. He writes (p. 49-51):

"our state governments are likely to become, not less, but more vital units in our system as the natural scope and limits of their powers are more clearly and permanently established...

"...Not only are the separate and independent powers of the states based upon real economic and social differences between section and section of an enormous country, differences which necessitate adaptations of law and of administrative policy such as only local authorities acting in real independence can intelligently effect; but the states are our great and permanent contribution to constitutional development. I call them a great contribution because they have given to the understandings upon which constitutional government is based an intimacy and detail, an adjustment to local circumstances, a national diversity, an immediate adaptation to the variety of the people themselves, such as a little country may perhaps dispense with but a great continent cannot...They have been an incomparable means of sensitive adjustment between popular thought and governmental method, and may yet afford the world itself the model of federation and liberty it may be in God's providence come to work...

"Constitutional government can exist only where there is actual community of interest and of purpose, and cannot, if it be also self-government, express the life of any body of people that does not consititue a veritable community. Are the United States a community? In some things, yes; in most things, no. How impossible it is to generalize about the United States!"

In his discussion of the presidential branch of the American constitutional system, Wilson emphasizes the Darwinian nature of government. Our government was founded by Whigs who, in his view, followed a Newtonian model. Rather, he argues (p. 57), "living political consitutions must be Darwinian in structure and in practice". The nature of the presidency depends on the individual occupying it, in Wilson's view. Although the Whig model is Newtonian, it is elastic. The Whigs who wrote the constitution may have believed that the president was only a legal executive, executing policy and applying the law. Instead, Wilson argues, the president had become "the leader of his party and the guide of the nation in political purpose, and therefore in legal action." The president must embody "the character and purpose (the public) wishes it to have". The president may still function as an executive, but he was becoming "more and more a political and less and less an executive officer" (p. 67). He is the leader of his party. "No one else represents the people as a whole, exercising a national choice; and inasmuch his strictly executive duties are in fact subordinated, so far at any rate as all detail is concerned, the President represents not so much the party's governing efficiency as its controlling ideals and principles" (p. 68).

The chapters on the House of Representatives, the Senate and the Supreme Court are all insightful and brilliant. He argues for an evolutionary view of the Court's role (p. 158-68):

"Expanded and adapted by interpretation the powers granted in the Constitution must be; but the manner and the motive of their expansion involve the integrity, and therefore, the performance, of our entire system of government...if they had interpreted the Constitution in its strict letter, as some proposed, and not in its spirit, like the charter of a business corporation and not like the charter of a living government, the vehicle of a nation's life, it would have proved a strait- jacket, a means not of liberty and development but of mere restriction and embarrassment. I have spoken of the statesmanship of control expected of our courts; but there is also the statesmanship of adaptation characteristic of all great systems of law since the days of the Roman praetor; and there can be no doubt that we have been singular among the nations in looking to the courts for that double function of statesmanship, for the means of growth as well as for the restraint of ordered method."

For me, a professor of management, the most intriguing chapter is the penultimate one on "the states and the federal government". Wilson writes that (p. 173):

"It is clear enough that the general commercial interests, the general financial interests, the general economic interests of the country were meant to be brought under the regulation of the federal government, which should act for all; and it is equally clear that what are the general commercial interests, what the general financial interests, what the general economic interests of the country is a question of fact, to be determined by circumstances which change under our very eyes, and that, case by case, we are inevitably drawn on to include under the established definitions of the law matters new and unforeseen, which seem in their magnitude to give to the powers of Congress a sweep and vigor certainly never conceived possible by earlier generations of statesmen, sometimes even almost revolutionary even in our own eyes...

"Almost every great internal crisis in our affairs has turned upon the question of state and federal rights. To take but two instances, it was the central subject-matter of the great controversy over tariff legislation which led to attempted nullification and of the still greater controversy over the extension of slavery which led to the war between the States...

"The principle of the division of powers between state and federal governments is a very simple one when stated in its most general terms. It is that the legislatures of the States shall have control of all the general subject-matter of law, of private rights of every kind, of local interests and of everything that directly concerns their people as communities, and that Congress shall have control only of such matters as concern the peace and commerce of the country as a whole." (p. 175)

"Which parts of the many sided processes of the nation's economic development shall be left to the regulation of the States, which parts shall be given over to the federal government? I do not propound this as a mere question of choice, a mere question of statesmanship, but also as a question, a very fundamental question, of constitutional law...

"...The war between the States established at least this principle, that the federal government is, through its courts, the final judge of its own power...Its power is to 'regulate commerce between the States,' and the attempts now made during every session of Congress to carry the implications of that power beyond the utmost boundaries of reasonable and honest inference show that the only limits likely to be observed by politicians are those set by the good sense and conservative temper of the country...

"The proposed federal legislation with regard to the regulation of child labor affords a striking example. If the power to regulate commerce between the States can be stretched to include the regulation o flabor in mills and factories, it can be made to embrace every particular of the industrial organization and action of the country. The only limitations Congress would observe, should the Supreme Court assent to such obviously absurd extravagances of interpretation, would be the limitations of opinion and circumstance...

"...Uniform regulation of the economic conditions of a vast territory and a various people like the United States would be mischievous if not impossible. The statesmanship which really attempts it is premature and unwise. Undoubtedly the recent economic development of the country, particularly the development of the last two decades, has obliterated many boundaries, made many interests national and common, which until our own day were separate and local....

"The United States are not a single, homogeneous community. In spite of a certain superficial sameness which seems to impart to Americans a common type and point of view, they still contain communities at almost every stage of development, illustrating in their social and economic structure almost every modern variety of interest and prejudice, following occupations of every kind, in climates of every sort that the temperate zone affords. This variety of fact and condition, these substantial economic and social contrasts, do not in all cases follow state lines. They are often contrasts between region and region rather than between State and State...

(p. 182)"We are too apt to think that our American political system is distinguished by its central structure, by its President and Congress and courts, which the Constitution of the Union set up. As a matter of fact, it is distinguished by its local structure, by the extreme vitality of its parts. It would be an impossibility without its division of powers...America...has come to maturity by the stimulation of no central force or guidance, but by an abounding self-helping, self-sufficing energy in its parts, which severally brought themselves into existence and added themselves to the Union...Communities develop not by external but by internal forces. Else they do not live at all. Our commonwealths have not come into existence by invitation, like plants in a tended garden; they have sprung up of themselves, irrepressible, a sturdy, spontaneous product of the nature of men nurturing in free air.

"It is this spontaneity and variety, this independent and irrepressible life of its communities, that has given our system its extraordinary elasticity...The distribution of the chief powers of government among the States is the localization and specialization of Constitutional understandings; and this elastic adaptation of constitutional processes to the various and changing conditions of a new country and a vast area has been the real cause of our political success.

(p. 186)"No two states act alike. Manufacturers and carriers who serve commerce in many States find it impossible to obey the laws of all, and teh enforcement of the laws of the States

As I have previously blogged, what intrigues me most about Wilson is his emphasis on the potential for states' rights as a biological evolution out of what in his view was the mechanistic federal system. Sadly, his ideas were ignored by the subsequent Republican administrations, which were conservative (i.e., Harding and Coolidge) and conservative-progressive (Hoover). Roosevelt's reforms made government too rigid to adopt Wilsonian progressivism with respect to decentralization. Subsequently, conflicts concerning civil rights made it impossible and inappropriate to give weight to his ideas (as my friend Norma Segal has pointed out, Wilson's upbringing was very much pro-Confederacy and Wilson stands accused of racism (see Jonah Goldberg's article in the Christian Science Monitor.

Wilson's emphasis on the importance of evolution of government puts him in the same category as the other progressives, but today's conservatives have largely adopted the progressivism that Wilson pioneered. The ideological differences between Taft and Wilson versus today's "conservatives" are non-existent. Wilson had at least the familiarly with Burke as any conservative of today and was enamored of Burke. He repeats Burkean ideas throughout this book. Today's conservatives are progressives, not conservatives in the 19th century sense. Today's libertarians are much closer to that. For instance, today's conservatives have adopted a Keynesian monetary stance. No 19th century conservative, including Wilson, would have supported abolition of the gold standard. Keynesian economic ideas, which were advocated throughout the 19th century, were crackpot to 19th century conservatives. Today's conservatives have backed Keynesian presidents since Richard M. Nixon in 1971. This is not progress. It is stupidity.

Wilson's emphasis on state's rights has important implications for today's political milieu. We have forgotten his insights and Wilson scholars do not emphasize them. But similar kinds of ideas are well known in the management field