Worldly Philosophers Club

The Worldly Philosophers, Vol.1, Number 19	September 30, 2007
THE Worldly Philosophers Club For Individualists Who Seek Worldly Wisdom

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ALAN GREENSPAN:
A LIFE OF IRRATIONAL EXUBERANCE
By Mark Skousen

In this issue . . . -

	How Greenspan became the most powerful man in the world
	Did he abandon his mentor, Ayn Rand, and radical individualism?
	Greenspan’s blunders and triumphs
	Is there more to life than making money?

"Compromise on public issues is the price of civilization, not an abrogation of principle."
-- Alan Greenspan, 2007

Dear Worldly Philosophers,

I’ve had my share of encounters with Washington’s power brokers, including Presidents Carter, Reagan, Clinton, and George W. Bush. I’ve met Fed chairmen Paul Volcker (Carter-Reagan), Alan Greenspan (Reagan-Bush-Carter-Bush), and the current leader, Ben Bernanke. In my judgment, Volcker stands tall, both physically (he stands 6 ft. 9 inches) and intellectually. He was the best Fed chairman because he had the guts to break the ingrained inflationary psychology of the 1970s--no easy task. With inflation raging at double digits, the dollar in the tank, and foreigners dumping Treasury bonds and buying gold by the tonne, Volcker made the gutsy decision to impose the harsh medicine of controlling the money supply and letting interest rates rise freely.

In his latest memoirs, Alan Greenspan called Volcker’s decision "the most important change in economic policy in fifty years." But the transition to a disinflationary environment was costly: 21% interest rates, 11% unemployment, a bear market on Wall Street, and a brutal recession in the early 1980s. It cost Jimmy Carter the election. Greenspan writes, "Doing what Volcker did took exceptional courage."

Maestro or Compromiser?

Greenspan was the world’s most powerful government leader from 1987 until 2006. He was paid $8.5 million advance for his book, "The Age of Turbulence" -- the second highest advance ever for a non-fiction book (Bill Clinton got $10 million). It was released last week, and I bought one of the first copies.

He candidly confessed that while Fed chairman he deliberately obfuscated his remarks before congressional committees, calling it "Fedspeak." He didn’t want to spook Wall Street, so he refused to answer certain questions. "I had to be careful not to upset the markets," he said. (Wall Street went into a brief nosedive when he warned that investors suffered from "irrational exuberance" in 1996.)

A Tale of Two Crises

In his book, Greenspan admitted that the stock market crash on October 19, 1987 was an "extraordinary baptism of fire." (For me, it was my 40th birthday, a day of relaxation for me and my subscribers, as we sold out of stocks six weeks earlier and were 100% in cash!) It came only months after becoming chairman under Reagan. "We were on the edge of a world-wide financial collapse," he said. It was "scary." The president of the New York Stock Exchange told him that he was about to close the world’s largest stock exchange, and the commodity exchanges in Chicago came close to closing down as well. Greenspan acted decisively and promised a gigantic injection of cash and government credit to support the financial institutions, and that saved the day. But for the next ten days, he said, "it was touch and go."

The other major crisis was the terrorist attacks in New York and Washington in 2001. Again, Greeenspan described the scene as "scary." Again, under emergency powers, he instructed the Federal Reserve to inject new liquidity -- some $40 billion worth -- in a matter of days to stave off any panic selling. Still, the economy plummeted quickly and Greenspan and other government officials worried that the global financial economy would spiral out of control.

Greenspan didn’t admit this, but he panicked! Despite his quiet demeanor in front of congress and television, his stomach was churning during these crises. He rashly slashed interest rates sharply in 2002, and cut rates time and time again, all the way down to 1%. He feared that the United States was going the way of Japan -- a long, drawn out slow-growth economy.

But then came the first of Greenspan’s surprises. He confessed, "I was surprised how quickly the economy stabilized. I learned then that the economy was more flexible and resilient than I ever imagined." It was good news for a change. The United States was no Japan! He realized that he had overreacted to the crisis by cutting interest rates too much, and in 2005-06, he rapidly raised rates.

If Greenspan were a betting man, he would have undoubtedly loaded up on stocks in 2003-04. But as Fed chairman he couldn’t…..Most people on Main Street loaded up on real estate instead, creating a bubble of historic proportions.

One Word of Warning: Beware of Black Swans!

Greenspan sends a warning sign to all investors. He said that every crisis that the Fed faced in his 18 years as Fed chairman was "unpredictable." The October 1987 crash, the 1997 Asian currency crisis, the 2001 terrorist attacks -- they all were like "black swans," to use Nassim Taleb’s term for unforeseeable events. Greenspan’s conclusion: "Because we cannot forecast these events, we must be prepared to deal with them when they occur."

What does the Fed do to get prepared? Ben Bernanke, the current Fed chairman, has set up a "crisis center" to anticipate potential global problems, including a currency crisis, a housing collapse, another terrorist attack, or a sharp rise in inflation. The Crisis Center has been busy during the summer of 2007, dealing with the mortgage meltdown and credit crunch.

What should YOU do to get prepared? I say use protective stops to get you out in times of a stock market collapse; buy gold and silver coins for survival protection; and keep a large position in cash…..If Alan Greenspan and his successor Ben Bernanke are preparing for future "black swans," maybe you should too.

Greenspan’s Blunders and Triumphs

Greenspan faced his share of crises and panics, and his solution was fairly consistent: whether it was a stock market crash (1987), the Asian currency crisis (1997), Long-Term Capital Management collapse (1998), the Y2K computer glitch (1999), or the terrorist attacks (2001), he simply recommended the obvious: bailout the monetary system by injecting lots of liquidity! Ben Bernanke is doing the same.

On the positive side, despite seven changes in monetary policy during his 18-year reign, Greenspan did manage to continue the disinflationary environment -- interest rates and inflation rates (CPI) were significantly lower when he left office than when he took office. Whether that trend can continue is a big question, given the penchant to reinflate and bailout troubled industries from time to time. I wouldn’t be selling my gold any time soon.

Greenspan, the Worldly Philosopher

Despite his weaknesses and selling out to the Establishment, Greenspan was a self-starter and go-getter who came from a middle class neighborhood in Brooklyn. His parents divorced when he was young, and he got his first taste of finance through his father who was a "customer’s man," as they called stockbrokers in those days.

He was rejected for military service during World War II, and became a tenor-sax player with the Henry Jerome Band. He was the band’s intellectual. During breaks, instead of heading to the greenroom to smoke and drink, he spent his time reading books, especially financial books such as Reminiscences of a Stock Operator, the story of Jesse Livermore. "I also read every book I could find about J. P. Morgan." Morgan was in many ways America’s first private central banker who bailed out the U. S. Treasury two times in the 1890s and Wall Street during the Panic of 1907.

Greenspan went on to get his Ph. D. in economics from Columbia University, where his faculty adviser was Arthur F. Burns. Burns later became chairman of the Fed during the Nixon administration. Clearly, Greenspan had a destiny to head up the world’s most powerful bank.

The Maestro did overwork himself in the City in the early years, and got involved in a marriage that didn’t work out. But it was this first marriage that introduced him into Ayn Rand’s radical individualist group, ironically called "The Collective." During this time, Greenspan wrote a series of articles supporting capitalism and the gold standard. Libertarians have noted the hypocrisy of Greenspan who abandoned his Randian roots when he became an insider and central planner. In the Wall Street Journal, James Grant calls it a "fantastic irony" to see Greenspan go from a gold-standard Libertarian to federal interest-rate fixer. "It is might strange work for a ‘libertarian Republican" and former worshipful member of the inner circle of the radical individualist Ayn Rand."

Greenspan’s answer: "Compromise on public issues is the price of civilization, not an abrogation of principle." He did frequently attack Congress for overspending and overtaxing, and occasionally he urged Congress to abolish the capital gains tax. But that was the extent of his radicalism.

Greenspan frequently compromised his principles. His biggest blunder was his refusal to entertain partial or complete privatization of Social Security when he headed up the blue-ribbon panel to reform Social Security in 1982, when bankruptcy was threatening. He wouldn’t even consider this radical proposal -- even as Chile, under the influence of Milton Friedman and the Chicago Boys, was the first country to implement this real solution to a flawed public pension system. Instead, Greenspan "compromised" by expanding the tax base of Social Security and dramatically raising payroll taxes. It was one of the few blights on President Reagan’s 8-year presidency.

Good living, AEIOU,

Marcus Aurelius

P. S. I'm starting to line up our speakers, all worldly philosophers, at next year's FreedomFest, including Jeremy Siegel (tentative), the Wizard of Wharton and author of the bestseller, "Stocks for the Long Run," and Bill Jenkinson, baseball aficionado and author of the fascinating book, "The Year Babe Ruth Hit 104 Home Runs." First 100 to sign up receive a free American Eagle silver dollar! Call Tami Holland at 1-866-266-5101, or go to www.freedomfest.com.