Greenspan: The Last Straw Jude Wanniski August 30, 1999

Fifteen or sixteen years ago, I remember having dinner with Fed Chairman Paul Volcker at his favorite spaghetti restaurant on Pennsylvania Avenue. We had such dinners annually from 1982 until he left in 1987, to talk politics and economics, a practice I continued with Alan Greenspan from about 1989 until 1997, when he could no long abide my criticism of his monetary deflation and broke off all contact with me. That specific dinner with Volcker came to mind last Friday when I read Greenspan's stunning remarks to the Fed summer gathering at Jackson Hole. I'd told Volcker that I didn't think I could live with the power he had, where every small error he would make on monetary policy would be magnified, causing damage in some part of the world. Only a market link to gold would reduce to liveable proportions the human error that might cause such damage. Volcker had enormous power back then, but nothing like Greenspan has now, as he exhibited at Jackson Hole. I'm sure he doesn't realize it, but he surely is drunk with power, dizzy with power, the Master of the Universe, as Robert Novak put it in his column today:

For five decades, I have witnessed Fed chairmen elevated in prestige beyond all reason: William McChesney Martin, Arthur Burns, Paul Volcker. But none has approached Greenspan's invulnerability. Although the Fed has made mistakes of judgment in the last seven years, this central bank is improbably credited with U.S. prosperity. Its last two rate increases are viewed as mindless by many administration economic officials, but a gag order has been placed on any criticism. GOP presidential campaigners, noting farm price deflation, were impolite enough in their Iowa campaigning to say the "Master of the Universe" wears no clothes. But front-runner George W. Bush's support for Greenspan is unconditional.

What we have surely is the inevitable result of a managed currency. Either the market signals the central bank how much liquidity it needs by adding or subtracting from the gold price, which was the practice until the Nixon administration broke that link. Or, the Fed will be bound by Congress to hit an alternative target, as Volcker was when the Humphrey-Hawkins Act was in full swing and monetarists dominated the Treasury and congressional banking committees. In other words, Volcker's freedom of maneuver was constrained by the M targets. At Jackson Hole, Greenspan advised the universe that He must now be free of all constraints in order to manage the national economy AND the stock market! This was my immediate reaction when queried by former Vice President Dan Quayle's headquarters in Phoenix. I'd been discussing the "Greenspan Standard" with Quayle since he first asked for my advice last January, and he was among those GOP presidential campaigners "impolite" toward Greenspan in Iowa, where the farm communities have been crushed by the deflation. Still, I was pleasantly astonished when this statement from Quayle was e-mailed to me on Saturday afternoon:

PHOENIX, AZ - GOP presidential candidate Dan Quayle issued the following statement today on remarks delivered in Jackson Hole, Wyoming by Federal Reserve Chairman Alan Greenspan:

"The chairman's speech at the Fed's annual gathering in Jackson Hole is the straw that breaks the camel's back, as far as I am concerned. I can no longer understand how the entire Political Establishment can sit back in a state of paralysis while Alan Greenspan lectures the nation on the need to not only subdue economic growth, but also to rein in the stock market. As far as I know, there is nothing in the Federal Reserve Act of 1913 that empowers the Fed to both manage our national economy and regulate the values of equities on our stock exchanges. There is no sign of inflation with the highest-powered telescopes available, yet Mr. Greenspan continues to threaten even higher interest rates later this year, where instead he should be ending the commodity deflation he has induced. "As much as I appreciate the job he has done in keeping inflation under control since his appointment by President Reagan in 1987 and his reappointments by Presidents Bush and Clinton, I believe he has in the last few years strayed further and further from his authority. The speech in Jackson Hole, in which he advises the American people that he will now assume even greater powers, demonstrates the need for term limits for Fed chairmen. I not only disagree with those Republicans who say Mr. Greenspan should be deified with a fourth term. I believe he should consider taking early retirement. Where is George Bush on this issue? He has taken the lead in announcing unequivocal support for Greenspan, even as the President of the Dallas Fed, Robert McTeer, has courageously voted in opposition to the Fed's wrong-headed policy. This is not just a question of a quarter point on the federal funds rate. We are talking about the power of the Fed and its chairman in assuming powers placed by the Constitution in the hands of the people and their elected representatives."

This is exactly the right criticism -- not that the Fed is too tight or too easy, but that Greenspan has placed himself above the rule of law and out of the realm of accountability and nobody seems to care. As long as his ratings are high, he can do as he pleases. How low must the Dow Jones Industrial Average go to satisfy him? The S&P 500? NASDAQ? And what guidelines has he imposed on himself? This is all we can find in his speech: "One of the most enduring is that interest rates, as far back as we can measure, appear trendless, despite vast changes in technology, life expectancy, and economic organization. British long-term government interest rates, for example, mostly ranged between three percent and six percent from the early eighteenth century to the early twentieth century, and are around five percent today. Indeed, scattered evidence dating back to ancient Rome and before reflects the same order of interest rate magnitude, not a one percent interest rate nor 200 percent." Between 3% and 6%, don't bother him. And if it is above 6%, well, the stock market is too high or the unemployment rate is too low. Don't bother him.

This is the atmosphere as we await the return of the Republican Congress next week, where the primary focus will be on taxes. There are hopeful reports that a bipartisan package with the Coverdell/Torricelli provisions can be sold as soon as President Clinton gets his veto out of the way. But hovering over the deliberations throughout will be the Master of the Universe, who will do what needs to be done to keep people from spending their money on (a) stocks, which will make them feel richer, so they will buy more and drive up prices; or on (b) goods and services, which will cause inflation directly by driving up wages. I could not believe my ears when I heard Abby Joseph Cohen, the otherwise estimable chief economist at Goldman Sachs, give Greenspan her blessing for his Jackson Hole speech, including points (a) and (b). After all these years, Greenspan is back to his cash-flow model of Townsend-Greenspan. Why not? He can do whatever makes him happy. He's at the top of the heap.