One of the many themes coursing through Shakespeare’s Hamlet is the Prince of Denmark’s transformation from a man of thought into a man of action. For most of the play Hamlet is building a case against Claudius (for the murder of his father) and debating his options in the form of memorable soliloquies. In the end, and after Hamlet ‘catches the conscience of the King’, an unpredictable killing spree ensues, spawned by the hand of the now murderous but once procrastinator Hamlet.
During Alan Greenspan’s charmed tenure as Federal Reserve Board Chairman the audience, which in this case was investors instead of playgoers, queried when the Fed would act. And while 18-years of anticipation wrought some instances of unpredictability, for the most part Greenspan proceeded in a very pedestrian manner: He collected inflationary evidence (which seemed almost non existent during much of his tenure) and occasionally tightened monetary policy. In the later years, he collected deflationary evidence and loosened monetary policy accordingly. In short, Greenspan was largely a man of inaction that followed the Wall Street script.
The major exception to Sir Greenspan’s tale of inaction was his response to crisis type events. For example, following the 1987 crash, the Asian crisis, LTCM, and the 2000 stock market bust the usually unhurried Greenspan reacted with great zeal by loosening monetary policy and/or promising future liquidity (some have also suggested that the Fed used direct intervention to keep stock prices from collapsing and to keep gold from skyrocketing, but that is another story). The bailout/easy money policies in response to would be tragedies (Y2K included) are to some Greenspan’s greatest trait, and for others his tragic flaw.
There are parallels between Hamlet and Greenspan. Both laboriously gathered evidence in the quest for truth. Where Hamlet wanted to identify his father’s killer, Greenspan wanted to identify a sound money policy. However, there is also a key difference. Whereas Hamlet finally acted on the basis of his conscience, Greenspan acted against it. This is why the one engenders a degree of sympathy from the audience despite his delayed action. This is also why the other will likely be vilified should his easy money policies prove a destructive influence in the future.
Greenspan may be a knight but he’s no prince
There are those who differ with the conclusion that Greenspan was a man of inaction and instead argue that he adeptly kept up Volcker’s good inflation-fighting work and tactfully allowed the 1990s economy to run faster and further than anyone thought possible. What these pro-Greenspan cheerleaders myopically forget is that the worlds second largest economy, Japan, suffered through a ‘lost decade’ during the 1990s , that China and India were not large enough and/or strong enough economies to dramatically impact commodity prices during most of Greenspan’s tenure, and that US dollar hegemony was rarely, if ever, in question. Accordingly, under these rather fortuitous set of circumstances Greenspan’s Fed had a great deal of leniency when conducting policy - they rarely had to worry about traditional forms of inflation running amuck. As for the argument that Greenspan was somehow responsible for the 1990s economic boom – the longest US expansion on record – Sir Alan built no must-have consumer products, he didn’t create the internet, he didn’t tell 35 million Americans to throw their savings at stocks, and he had very little to do with falling long-term interest rates (he couldn’t even get long-term interest rates to rise over the last 2-years). In other words, the argument that Greenspan’s policies helped facilitate an economic boom in America is akin to saying Mr. Bush was solely responsible for the 2000 stock market bust. The fact is, Greenspan was dealt an exceptionally good inflation hand by Volcker, and the business innovation boom of the 1990s was already well en route when Greenspan caught on to the ‘new economy’ theme in the late 1990s, or right before the bust.
At the other end of spectrum, many anti-Greenspan pushers contend that all the Fed did was print lots of money. While this viewpoint holds some truth to it, it should be remembered that while the excessive printing of money, or, to paraphrase Greenspan, ‘the confiscating of wealth through inflation’, is a reckless policy in the long-term it is a potential [artificial] boon in the short. The verdict is still out on if the Greenspan asset boons can be maintained, but until the bust or prolonged adjustment arrives, 18-years of steady growth (spurred by debt or otherwise) is nonetheless impressive. As for the 1990s mania, although the stock market bust erased more than $7 trillion in wealth, the argument could be made that by not attacking the stock market bubble in 1996 – when Greenspan first contended that raising margin rates would pop the bubble – he allowed for a more profound period of growth and creativity to emerge. We don’t necessarily buy into this argument, but it could be made.
The reality of Greenspan’s tenure seems to be someplace in the middle. Clearly Greenspan is not responsible for vigorously fighting inflation (his current ‘measured’ campaign of tightening is one of the softest and most blatantly predictable attacks on inflation in history), but at the same time he should not be endlessly ridiculed for using US dollar hegemony to his advantage. Quite simply, he made the easy choices. Rather than single-handedly engaging in a noble and protracted battle against non-traditional inflationary adversaries he took the path of least resistance like a compliant soldier. If he couldn’t provide justice at least he could help provide temporary order.
Good(k)night Greenspan, hello doppelganger
Market participants want Bernanke to follow Greenspan’s lead. More specifically, investors want Bernanke to leave well enough alone and bailout the markets when a crisis arrives. The argument that anyone on Wall Street cares about sound monetary policies is ludicrous: Wall Street, and most investors for that matter, care about near term economic growth, corporate profits (manipulated or otherwise), and stock price/asset price appreciation. From what we can tell at this point, if an economic slow down arrives Bernanke will be as, if not more, aggressive at easing monetary policy than Greenspan.
On the surface Bernanke would seem to have little choice but to follow the script Greenspan authored. After all, if Bernanke strived to achieve sound money policies and/or stem some of the growing imbalances from cannon-balling into even larger potential disasters the US economy would go through a difficult period of adjustment. With US savers, pension funds, and, most importantly, foreign central banks more heavily involved in the US financial markets than at any time in history the phrase ‘difficult period of adjustment’ is not something anyone wants to hear. For that matter, with politicians not apt to care about financial and economic strength/weakness beyond elections, US monetary policy increasingly under the global microscope, and US dollar hegemony threatening to come under attack, a Fed Chairman that volunteers a painful adjustment will not be a Fed Chairman for very long. Quite frankly, Volcker was able to take the ‘tough love’ approach when fighting inflation more than 20-years ago because making a bad inflationary situation worse was so crazy an idea it just might work (if it didn’t who would care, times were already bad). Following Sir Greenspan people want an encore of good times, not a soothing economic depression.
Unfortunately the policy of ignoring bubbles, imbalances, and prudent market regulation will result in even more fantastic financial blowups, and, ultimately, serve to speed up the transition away from the US dollar. This conclusion begs the question: are Greenspan and Bernanke nothing but loose canons allowing the monetary policy to run wild for the sake of artificially boosting near term growth? Perhaps. But perhaps also the Fed, as they did when dealing with the 1990s stock market mania, is quietly preparing a plan of attack for dealing with the demise of US dollar hegemony (i.e. keep printing until the currency blows-up). Planning for such a job Bernanke, called the smartest Fed Chairman ever, is imminently more qualified than Greenspan. However, no Fed Chairman is likely to endorse such a plan until the worst of times arrive.
If the market’s a stage, Greenspan is its best actor
When enough evidence was collected to leave little doubt that Claudius killed Hamlet’s father, Hamlet did act. When Greenspan had all the evidence any sane person would need to conclude that the 1990s stock market was in the greatest bubble ever he forget his senses and actually endorsed the ‘new economy’ platform. Despite his flaws Hamlet acted sincerely. If you recap Greenspan’s tenure, the contradictions add up to hypocrisy.
With thanks to old essays, FOMC minutes, and answers to questions from Ron Paul, we sometimes were able to catch the conscience of Greenspan. During these rare episodes of clarity we witnessed a bailout banker still intellectually attached to the gold standard, an inflation dove well aware that asset bubbles were increasingly and dangerously influencing the US economy, and a money pusher with a theory that financial floods arrive once every 50-years. In hindsight the expectations placed upon Greenspan won out over his actual beliefs - Sir Alan started ignoring the price of gold, implicitly condoned the growth of asset bubbles, and regularly had a hand in bailing out markets, currencies, and companies during periods of creative destruction. Some have called the contradictions apparent in Greenspan a riddle spun by the master to keep the markets on edge. We wonder why a banker should need to be master manipulator in the first place.
Ironically, whereas Hamlet spent a great deal of time contemplating revenge for his fathers death, Greenspan spent most of his time as Federal Reserve Chairman contemplating how to keep Claudius on the throne: Rather than slaying wild speculative forces, his efforts were directed at bailing the markets out. Suffice to say, funding bailouts is the easiest thing in the world to do when the paper you are printing is the US dollar. This is all Greenspan did. He did it well.
Hamlet’s ultimate departure was bewailed by Horatio with the cry of “Good night sweet prince.” Greenspan, lacking the same nobility and resolve of purpose is likely to be accorded mute silence by the Bard.