Sunday, 1. April 2012
Book Review — Frederick J. Sheehan’s Panderer to Power
Written on the heels of the worst financial and economic crisis since the Great Depression, Frederick Sheehan’s critical biography, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (2010) provides us with good lessons for the future.
Some perspective can be had from the fantasy classic Lord of the Rings. Frodo, the hobbit, is on his quest to reach Mount Doom and destroy the Ring of Power. Having made it substantially through his mission, but weighed by fatigue and fear for what lies ahead should he continue, Frodo asks Gandalf, a wise and powerful wizard, to take the Ring from him and complete the quest. Gandalf says “No.”
“With that power I would have power too great and terrible. And over me the Ring would gain a power still greater and more deadly. … Do not tempt me! … Yet the way of the Ring to my heart is by pity, pity for weakness and the desire of strength to do good.”
Well, why did Alan Greenspan take the Ring? Did he just take it when offered, or did he pursue it? Greenspan certainly ended up in a powerful position, as Chairman of the Board of Governors of the Federal Reserve System – heading our nation’s central bank. The Fed conducts monetary policy, regulates and supervises banks, serves as a ‘lender of last resort,’ and provides critical payment services for the financial system. These responsibilities are, well, significant. Consider monetary policy, where we have a law directing a committee of 12 people at the Fed to control the aggregate amount of money and credit used by over 300 million other people.
Coming on the heels of the worst financial and economic crisis since the Great Depression, Panderer to Power provides a valuable, critical biography. Alan Greenspan led an institution that advertised its ability to stabilize the financial system – both before and after our recent financial meltdown. Biography is a form of history, and as Santayana said, “Those who cannot remember the past are doomed to repeat it.” In light of recent years, Sheehan’s biography helps us understand and remember the past, and underscores critical things to watch for in the future.
Speaking of learning from history, Robert Higgs had a fun Facebook post a few days ago. It opened with “Al Capone is supposed to have said, ‘You can get more with a kind word and a gun than you can with a gun alone.’ ” Higgs briefly described the power of the Medici family in early Europe, and after mentioning how their means of ascension included banks as well as kind words, Higgs cited the Medici family motto — “money to get the power, power to keep the money.”
In a world based more closely on free market principles than the one we have today, the best way to “get more” is to serve more of your customers with better goods and services. The coercive power of the state is best restrained, as the Declaration of Independence and the U.S. Constitution originally intended, to limiting government authority and preserving liberty. The role for government can still valuably include defending individuals from the use of guns by others. But in our real world, unfortunately and increasingly, the best way to “get more” is to gain hold of the coercive power of government to manipulate things, and bail yourself out with other people’s money if and when you get in trouble.
Today, we have a classic chicken and egg problem. Money can buy power, and power can make as well as protect money. Causation is running both ways, back and forth, over time. Power can protect honest money, but it also coins money by illegitimate means, through the state. And as the money and power cycle repeats itself, bad money drives out, and demoralizes, the good.
The Federal Reserve is at the center of this process, and Alan Greenspan headed the Fed for nearly 20 years.
Greenspan’s Pre-Fed Background
Sheehan’s discussion of Greenspan’s early years includes some interesting and positive stories. In his private sector consulting business, Greenspan was a hard worker, developing expertise in managing and updating large amounts of fundamental economic data. He provided client value with up-to-date hard data at a time before computer communications had advanced where they are today. In his Ayn Rand circles, he expressed enthusiasm for free banking and a gold standard. But those days may have been the beginnings of his strategic malleability; Sheehan’s take was “Even then, Greenspan could talk in one direction while moving in another.”
Sheehan shows fairness, and his own leanings, in praising Greenspan for some of his early work — including Greenspan’s 1965 essay “Gold and Economic Freedom.” The history of forecasting includes a lot of bad forecasts, and Sheehan catalogues many of Greenspan’s bad ones. But Sheehan also takes note of Greenspan’s valuable mid-1960s warning about the implications of “guns and butter” spending and its incompatibility with a gold standard. This period included Greenspan’s first foray into working for the government, after impressing Richard Nixon, and that cooperation with the government was a NO-NO with his early Ayn Rand circle. Here, Sheehan starts to get a little more critical, noting for example Greenspan’s “special knack for appearing virtuous while raiding the cookie jar.”
The criticism gets a little more intense when Sheehan describes the circumstances leading up to Greenspan’s ascension to lead President Gerald Ford’s Council of Economic Advisers in 1973. Sheehan notes that in the aftermath of breakdown of the gold standard and the arrival of higher inflation with higher unemployment in the 1970s, Greenspan was pretty quiet about his prescient observations and criticisms in “Gold and Economic Freedom” in 1965. Sheehan takes this forbearance as a sign of, well, collegiality.
Having demonstrated his tact, Alan Greenspan was a top candidate for a government job.
Greenspan’s political connections were long in the making, dating back at least as far as his clarinet days playing in a band that included Leonard Garment, who became an attorney for Richard Nixon. During his tenure at the Council of Economic Advisers, Greenspan developed the beginnings of a long friendship with Richard Cheney, then Gerald Ford’s chief of staff. Cheney was a big fan, publicly, and Greenspan was getting a lot of favorable media attention as well. The famous economist did not have a PhD, but he did end up being awarded one byNew YorkUniversityin 1977. Sheehan questions the circumstances leading to that PhD, and noted that it certainly served to buttress his case for a future senior position in government.
The panderer to power may have had a selective bent; Greenspan went back toNew Yorkwhen Jimmy Carter became president, and his moves into senior government roles were more often the function of Republican decisions. But Sheehan also documents Greenspan’s bipartisan currying of favor, noting that “all candidates were potential employers.” Candidate Ronald Reagan became President Reagan in 1980, three years before a term for Paul Volcker as chairman expired. In 1983, amidst some uncertainty whether Volcker would be reappointed, Sheehan cites how “Alan made a point of regularly massaging the people who mattered.” Volcker did get reappointed in 1983, and Greenspan then became head of the National Commission on Social Security Reform. Here, Sheehan’s take was that Greenspan again worked in the short-run interest of government leaders, promoting ‘reforms’ that pushed the problem further down the road.
In 1985, one of the more important signals of future troubles arrived. That was the year Alan Greenspan was retained by Charles Keating to lobby on behalf of Lincoln Savings and Loan. Lincoln had been a relatively well-managed thrift before its sale to Keating in 1983, and in his request for approval for the acquisition, Keating pledged to keep current management in place and concentrate on its existing mortgage base. After he acquired control, Keating then replaced senior management, and pursued aggressive growth. He broadened Lincoln’s wings, seeking higher investment yields in riskier bonds, land, and takeover speculation. Lincoln funded this strategy with subsidized, publicly-insured deposits. Lincoln certainly wasn’t alone, but it was a big player on this score, and ultimately provided some of the largest losses in the savings and loan debacle.
Sheehan notes that Greenspan’s work on Lincoln’s behalf (the S&L, not the former President) included a letter to regulators praising Lincoln’s “adequate capitalization, sound business plans, managerial expertise and proper diversification.”
Two years later, as the S&L crisis was gathering steam and Lincoln was beginning to implode, President Ronald Reagan nominated Alan Greenspan to be the Chairman of the Federal Reserve Board of Governors.
Sheehan’s review of Greenspan’s years at the Fed will be the subject of Part II of this review.
Some Chicago Perspective
Writing from Chicago about this valuable book, three other sources of perspective come to mind. Back in the 1950s, Milton Friedman wrote one of the more famous of his articles, titled “The Methodology of Positive Economics.” In this article, Friedman included a metaphor describing how expert billiard players behave as if they knew the higher laws of physics, simply because if they didn’t, they wouldn’t be expert billiard players. This metaphor can also illuminate some of the reasons people rise to positions of high government power. Not to be harsh, but too often, people that rise to a position like the one held by Chairman Greenspan might simply be assumed to be panderers to power, simply because if they weren’t, they wouldn’t have risen to those positions in the first place.
Some other lessons from the “Chicago School” of economics, and in particular the leaders in the economic theory of regulation like George Stigler and Sam Peltzman, can shine some light here. The Chicago School emphasizes that we shouldn’t expect people to stop behaving rationally, with ‘rationally’ defined as pursuing self-interest, simply because they are pursuing or have entered into positions of public service. When people in public service pursue their self interest, public policy is more likely to be driven by special interest group forces. And leaders of our central bank, an institution charged with controlling the amount of money and credit used by 300 million other people, are not always driven by the ‘common good’ — even if they really knew how or could actually control things like the total amount of money and credit of 300 million people. Like other politicians and regulators, central bankers can be driven by the needs of other self-interested people, including powerful people responsible for their arrival as leaders in the first place.
A third perspective from Chicago is shaped by a recent academic paper describing Chicago and Illinois as “Leading the Pack in Corruption.” The Chicago and Illinois political machines provide good examples of insiders persistently rising to the top and running the show for their own benefit and those of their friends, even in the face of relatively robust prosecutors and criminal convictions. City and state fiscal conditions now reflect the long-term consequences of those tendencies, and taxpayers and citizens throughout the state are paying for it.
Sheehan’s Panderer to Power helps identify similar elements in the career of Alan Greenspan and other Fed leaders, and in turn, how those forces helped lead to our financial and economic malaise in recent years.
# # # # Bill Bergman has 10 years of experience as a stock market analyst sandwiched around 13 years as an economist and financial markets policy analyst at the Federal Reserve Bank of Chicago. He earned an M.B.A. as well as an M.A. in Public Policy from the University of Chicago in 1990. Mr. Bergman is currently working with Social Movement Sciences LLC, a new enterprise developing evaluation and funding services for not-for-profit organizations.