Let’s Bury Greenspan, Not Praise Him

This week, Alan Greenspan bids a long overdue farewell to the Federal Reserve that he chaired for eighteen years. Praise from his Washington and Wall Street beneficiaries has naturally arrived by the boatload. His monetary policies enabled reckless and seemingly consequence-free deficit spending, helping incumbent politicians repeatedly win re-election; and his expansion of money supply and credit facilitated non-productive financial transactions, all to the benefit of the bankers who arranged them. It should be surprising to no one that he is so popular among these groups. The fact that Greenspan is so highly regarded by politicians and investment bankers is not a sign of how well he did his job however, but of how poorly.

Helping to win elections and fund bonuses comes with consequences, in this case an unbalanced U.S. economy teetering on the brink of economic disaster. During Greenspan's tenure America was transformed from the world's largest creditor to its greatest debtor, from the world's mightiest industrial power to a second rate service provider, and from a nation of responsible savers to one of reckless spenders. Self-sacrifice has been replaced by self indulgence, hard work by paper pushing, and genuine productivity by accounting gimmickry.

In effect, Greenspan helped Americans squander the "mother of all" inheritances. As any philandering playboy can attest, the process is easy and extremely enjoyable. However, it's not something worth bragging about. By focusing on consumption and asset prices, while ignoring debt, production and legitimate wealth creation, the Greenspan era was confused with one of genuine prosperity. To quote the great Ludwig Von Mises, "It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises."

As evidence of his mastery, Greenspan boosters point to what they call the "longest economic expansion in U.S. history," and to his seeming dexterity in dealing with financial crises. In fact, the only thing Greenspan succeeded in doing was delaying the inevitable. By blowing more air into every bubble he encountered, Greenspan succeeded largely by giving himself enough time to get out of Dodge before things got dicey. His long overdue departure would be an event worth celebrating, were it not for the fact that he is being succeeded by someone who may well be even more incompetent.

While the Greenspan Fed was certainly good for bankers and politicians, it was a disaster for the rest of America. In his wake, the long term solvency of America's economy, its financial institutions, and most importantly, the integrity of its currency, all teeter on the brink. Rather than being a maestro, think of Greenspan as the Pied Piper, who led Americans down a path to financial ruin. We all had a blast as the deceptively pleasing tune reverberated in our heads, but reality will set in when the music finally stops.

February 3, 2006

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