American Armageddon Judgement Day

For 19 years – 1987 to 2006 – Greenspan was the most powerful central banker in the world. As chairman of the US Federal Reserve, he used that power to personally oversee two of the biggest boom-and-busts in modern global economic history – the dotcom explosion and the US housing bubble.

Within months of Greenspan leaving unelected office in January 2006, the second of these bubbles popped in a spectacular way, leading just over a year later to an unprecedented (and still ongoing) credit crisis. Now itself nearly a year old, this credit crisis in turn threatens a global economic slowdown on a scale not seen for many decades – perhaps even since the depression of the 1930s.

An increasing number of commentators now point the finger of blame at Greenspan’s policies during his time in office, primarily for encouraging policymakers to slash interest rates in the wake of the 9/11 attacks and the collapse of the dotcom boom.

This deliberate policy of flooding the world’s largest economy with cheap money inevitably led to the subsequent surge in house prices and the disastrous explosion in personal and corporate debt, it is argued.

And as we approach the first anniversary of the credit crisis, it is difficult to disagree with any of these criticisms; indeed, many warned of such consequences at the time.  

Greenspan, meanwhile, now earns vast amounts of money advising major global financial institutions on the best way to make even more cash, as well as touring the world sharing his insights on matters of economic policy and finance. In true A-list celeb fashion, he even has a book to promote.

Today Greenspan is at it again, this time in our own Financial Times. But in this morning’s article Greenspan does not – as you might expect – try to reassure us that the global economy he helped to fashion is in a strong position to weather the current storm.

No, instead he warns us that worse may be yet to come for the finance sector and the global economy. ‘Fears of insolvency have not, as yet, been fully set aside,’ he says, before warning that:

‘There may be numbers of banks and other financial institutions that, at the edge of defaulting, will end up being bailed out by governments.' 

Chilling stuff, though one can’t help but ask why on earth Greenspan – in his 17 years in power – did nothing to avoid creating a global economy so unbalanced that rich private bankers need taxpayer cash to avoid going bust. Indeed, for most of his tenure Greenspan appeared to be willing to do anything to keep banks and other financial institutions happy, whatever the long-term consequences.

Did he not, then, see any of this coming?

The answer is simple. Reaching for the phrase that every policymaker uses when trying to avoid admitting personal liability, Greenspan contends that this crisis is ‘different’. It is ‘a once or twice a century event deeply rooted in fears of insolvency of major financial institutions.’ Nobody could have seen it, in other words.

And on it goes. Greenspan’s article is well worth a read, if only as a breathtaking rewriting of history and abrogation of personal blame. Perhaps most impressive is his passionate assertion that the powers of global finance must remain unfettered if this crisis is to blow over, that political interference will only makes matters worse. I quote:

‘We may not easily confront or accept the price dynamics of home and equity prices, but we can fend off cries of political despair which counsel the containment of competitive markets. It is essential that we do so. The remarkably strong performance of the world economy since the near universal adoption of market capitalism is testament to the benefits of increasing economic flexibility.

‘The danger is that some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs. If that becomes widespread, globalisation could reverse – at awesome cost.’

But an 'awesome cost' to whom exactly, one must ask? The banking giants that have lent themselves into a terrible mess, certainly, many of which are the same banks that pay Greenspan's wages. For the rest of us, however, matters are not nearly as clear-cut as Greenspan would like to have us believe.

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