Watch Bernie Sanders tell Alan Greenspan, in 2003, that Americans are not living the way that Mr. Greenspan imagines they are.

Then just 5 years later Alan Greenspan, former Chairman of the Federal Reserve, admits that there is a flaw in his ideology.

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“Thank you madam chairman – Mr Greenspan nice to see you again.

Mr Greenspan i have long been concerned that you are way out of touch – with the needs of the middle-class and the working family of our country. That you see our major functioning our position as the need to represent the wealthy and the large corporations.

And i must tell you that your testimony today – only confirms all of my suspicions – and i urge you – and i mean this seriously – because you are an honest person – i think you just don’t know what is going on in the real world.

And i would urge you – come with me to Vermont – meet real people.

The country clubs and cocktail parties are not real America.

The millionaires and billionaires are exception to the rule.

You talk about an improving economy – while

  • we have lost 3 million private-sector jobs in the last 2 years
  • long-term unemployment has more than tripled
  • unemployment is higher than it has been since 1994
  • we have a 4 trillion Dollar national debt
  • 1.5 million Americans have lost their health-insurance
  • millions of seniors can’t afford subscription drugs
  • middle-class families can’t send their kids to college because they don’t have the money to do that
  • bankruptcy cases have increased by a record-breaking +23%
  • business investment is at it’s lowest levels in more than 50 years
  • CEOs make more than 500 times of their workers make
  • the middle-class is shrinking
  • we have the greatest gab between rich and poor of any industrialized nation

and this is an economy that is “improving” – i hate to see what will happen if our economy was sinking.

Now today you might not have known this – i expect that you don’t – but you have insulted – tens-of-millions of American workers.

You have defended over the years among other things – the abolishion of the minimum-wage – one of your policies – and giving huge tax-breaks to millionaires.

But today you reached a new low that i think – by suggesting that manufacturing in America – does not matter.

It doesn’t matter where the product is produced.

We lost 2 million manufacturing jobs in the last 2 years alone. 10% of our workforce.

Walmart has replaced General Motors as the major employer in America.

Paying people starvation wages rather than living wages – and all of that does not matter to you?

Doesn’t matter if it is produced in China – where workers are making 30 Cents an hour?

Or produced in Vermont where workers can make 20 bucks an hour?

It doesn’t matter – you have told the American people – that you support an trade policy that is selling them out – only working for the CEOs who can take our plants to China, Mexico and India.

You insulted Mr Castle a few moments ago – a good republican – told you that we are seeing not only the decline of manufacturing jobs – but white-collar information-technology jobs.

Forrester Research says that over the next 15 years 3.3 million service industry jobs and 136 billion in wages will move off-shore to India, Russia, China and the Philippines.

Does any of this matter to you?

Do you give one wit of concern to the middle-class and working families of this country – that’s my question.”

Alan Greenspan: “Congressman we have the highest standard of living in the world.”

Sanders: “No we have not – you go to Scandinavia and you will find that people have a much higher standard of living in terms of education, health-care and decent paying jobs.”

Alan Greenspan: “For a major industrial country – we have created the most advanced technologies – the highest standard of living – for a country of our size. Our economic growth is crucial to us. The incomes – the purchasing powers of our workers our people are by far more important than what it is we produce…”

5 years later…

Alan Greenspan: “I found a flaw in the model that i perceived as the critical functioning structure that defines how the world works – so to speak”

Congressmen: “In other words you found that your view of the world – your ideology was not right it was not working.”

Alan Greenspan: “precisely. That is precisely the reason why i was shocked, because i have been going for 40 years or more – with very considerable evidence that instead it was working exceptionally well…”

Greenspan drew from his analysis “a radical position: the United States should return to the gold standard of the nineteenth century. By tying money and credit to a fixed supply of gold, the nation could prevent toxic surges in purchasing power.” … “‘The pre-World War I gold standard prevented speculative “flights from reality” — with their disastrous consequences,’ “Greenspan insisted.”

President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the White House. White House photo by Shealah Craighead


Alan Greenspan, Sellout

by David Gordon

Sebastian Mallaby is the Paul A. Volcker Senior Fellow for International Economic Relations at the Council on Foreign Relations. One can be sure, then, that his new comprehensive book, The Man Who Knew: The Life and Times of Alan Greenspan, reflects an Establishment point of view. As if this were not enough to tell us where the book is coming from, Mallaby informs us that he had Greenspan’s full cooperation in writing it. “This book is based on almost unlimited access to Alan Greenspan, his papers, and his colleagues and friends, all of whom were generous in their collaboration.

Though the book is hardly a panegyric to Greenspan, Mallaby views his subject with considerable favor. Nevertheless, the book contains ample material for a more severe verdict: Greenspan abandoned the free market convictions he effectively defended early in his career as an economist. To uphold economic truth was not the path to the power and influence Greenspan sought; and he readily adjusted his beliefs to fit with his ambitions.

Greenspan attached himself to Ayn Rand’s inner band of disciples; but his adherence to free-market economics did not stem from his alliance with Objectivism. Greenspan learned economic theory from Arthur Burns at Columbia University. For Greenspan, like his mentor Burns, statistics had primary importance: economic theory emerged from discerning patterns in the data and was strictly subordinate to its empirical sources. “Burns was the chief heir to Wesley Mitchell’s empiricist tradition, and his influence restrained any enthusiasm that Greenspan might have felt for the new trends that had begun to stir in economics. … Even the cleverest econometric calculation was limited because yesterday’s statistical relationships might break down tomorrow; by contrast, finer measures of what the economy is doing are more than just estimates — they are facts.”

From his studies of the data, Greenspan arrived at an important conclusion. Financial markets played a crucial role in the genesis of the business cycle: “Squarely confronting the notion that financial markets are merely a casino of meaningless side bets, he laid out an insight for which Nobel laureate James Tobin would later capture the credit. Stock prices drive corporate investments in fixed assets. … In turn, these investments drive many of the booms and busts in a capitalist economy.”

Greenspan applied his insight to Fed policy in a way that resembles the Austrian theory of the business cycle. During the 1920s, “the Fed’s key error was to underestimate its own contribution to the stock bubble. The rise in the market had set off a rise in investment and consumer spending, which in turn had boosted profits and stoked animal spirits, triggering a further rise in the stock market. The 1920s Fed had been the enabler of this feedback loop — in order for investment and consumer spending to take off, companies and consumers needed access to credit. Faced with a jump in the appetite to borrow, the Fed had [wrongly] decided ‘to meet the legitimate demands of business,’ as Greenspan put it.”

Greenspan drew from his analysis “a radical position: the United States should return to the gold standard of the nineteenth century. By tying money and credit to a fixed supply of gold, the nation could prevent toxic surges in purchasing power.” … “‘The pre-World War I gold standard prevented speculative “flights from reality” — with their disastrous consequences,’ “Greenspan insisted.”

Nor was this the only area where Greenspan adopted a radically free-market stance. Defying the mainstream, “Greenspan followed up with an attack on government efforts to rein in monopolies with antitrust laws. … He pointed out that it was not just corporate managers who would want to challenge monopolists; the financial system would demand that they do so. If a monopoly extracted fat rents from its customers, its share prices would soar; that would give entrepreneurs an incentive to create rivals to the monopoly, and it would give financiers an incentive to ply those rivals with abundant capital.” Mallaby views this “crude” view with evident distaste, noting that both Friedrich Hayek and Milton Friedman adopted a more “nuanced” position.

What then became of this free-market radical? Unfortunately, his desire for “power and pelf,” in Murray Rothbard’s phrase, led him to alter his views. A firm commitment to freedom would never gain him entry to the inner sanctum of government, and Greenspan soon learned to temper his views.

In his radical days, Greenspan had opposed government bailouts to failing firms: the discipline of failure was essential to the operation of the free market. In 1971, he defied his teacher Arthur Burns, who favored bailing out Lockheed. “Testifying before the Senate, Greenspan refused to back his mentor. ‘I am in fundamental disagreement with this type of loan guarantee,’ he began. Government-directed lending ‘must inevitably lead to subsidization of the least efficient firms,’ damaging productivity and therefore living standards. … What the economy really needed was for weak companies to go bust, so that capital and workers would move to better-run establishments.”

Once close to the levers of power, matters were different. He wished to become Paul Volcker’s successor as Fed chairman, and he knew that firm opposition to Fed policy would hurt his chances for the job. Going against his earlier analysis, he supported the “largest bank bailout in U.S. history,” the rescue in 1984 of the Continental Illinois National Bank. He admitted the dangers of the bailout, but it was, as Mallaby summarizes his position, “necessary and appalling.” Appalling, one suspects, because of its effects on the free market; but necessary to advance Greenspan’s career. By the time he became Fed Chairman, the transformation was complete. By 1989, his “libertarian rejection of bailouts was long gone; what he wanted above all was the space to fight inflation.”

Greenspan wanted to fight inflation; but the best way to do it was no longer acceptable. A gold standard, he had long ago recognized, would bring with it monetary stability; but to replace the Fed with a commodity standard not subject to control by the government would erode his power. Accordingly the gold standard had to go.

He cast aside the gold standard with a transparent sophism: “A necessary condition of returning to a gold standard is the financial environment which the gold standard itself is presumed to create. … But, if we restore financial stability, what purpose is then served by a return to a gold standard?” (quoting Greenspan). Why a gold standard cannot help create a stable financial environment, but instead presupposes it, Greenspan left unclear. Even less clear was how the Fed was supposed to preserve stability in the absence of the gold standard. Evidently we were to rely on his supreme powers of judgment in steering the economy.

Greenspan in his long career as Fed chairman gained the power and acclaim he coveted; but the crash of 2008, two years after the end of his tenure in office, led to a sharp decline in his reputation.

In their attitude toward compromise, Greenspan is the polar opposite to Murray Rothbard. Rothbard could have tailored his views to win the favor of Arthur Burns, who was a family friend, but he refused to do so. He never abandoned his principles, and he took the measure of Greenspan. Writing about him in 1987, Rothbard observed: “Greenspan’s real qualification is that he can be trusted never to rock the establishment’s boat. He has long positioned himself in the very middle of the economic spectrum. He is, like most other long-time Republican economists, a conservative Keynesian, which in these days is almost indistinguishable from the liberal Keynesians in the Democratic camp.”

In looking over Greenspan’s fall from free-market grace, the melancholy first lines of Browning’s The Lost Leader, addressed to Wordsworth, come to mind: “Just for a handful of silver he left us,/Just for a ribbon to stick in his coat. …”