Study History, Mr. Epstein

Economic Beat: Study History, Mr. Greenspan

By Gene Epstein, Barron's | 22 December 2007

Can former federal reserve chairman Alan Greenspan be blamed for the current crisis in mortgage debt? The question is like asking whether the recently departed Mafia lord in charge of pushing drugs might be responsible for the fact that a lot of folks got addicted, and eventually overdosed. Now suppose this same Mafia lord also manages the major methadone clinics and rehab facilities. This is good for his organization, which wants to sell to users whose habits are kept under control. It all makes for a system that runs like a well-oiled machine.

The "drug" in question is money and credit, which the central bank dispenses. And it's the ready availability of money and credit that lures the irrationally exuberant [[bankers and 'semi-prudent' businessmen?: normxxx]] into committing finance capital to unsustainable projects that eventually bring on the sort of crisis we're now in.

These points are worth making not because we share Greenspan's concern about the way history will remember him. (See his self-exculpatory article in The Wall Street Journal, Dec. 12.) Rather, they help us gain perspective on the current debate about fundamental causes: And as usual, it's the debate about whether government regulators should have been aware of the problem sooner, or whether the former Fed chairman, "the maestro," should have moderated the tempo sooner.

In this umpteenth variation on the credit crisis that periodically strikes the world's economies, the cause that is truly fundamental is rarely addressed. That cause is the very regime that makes the expansion of money and credit possible. The existence of that regime is bound to make the economists happy. Being an adviser to presidents can undoubtedly be exciting, as both Greenspan and current Fed chairman Ben S. Bernanke can probably attest, since both once served as Chairman of the President's Council of Economic Advisers. But what can be more glorious than running a virtual fifth estate, in the form of today's central bank?

The human susceptibility to "Potomac fever" helps explain why Alan Greenspan so conveniently forgets that he himself once saw the alternative to the modern Fed. "A fully free banking system and fully consistent gold standard have not as yet been achieved," he wrote hopefully in his 1966 essay "Gold and Economic Freedom." And: "under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth."

[ Normxxx Here:  And, the bankers who would "stand… as the protector of [the] economy…"— are they the same one's who got us into this mess, who went to town with Mr. Greenspan's nearly free money!?! The same ones who gave us the various panics of the 19th century, culminating in the Panics of 1870, which lasted, off and on, for over twenty years, and the horrendous 'bankers' panic of 1907? ]

It was seen that a central bank had to be (contradictorily) decentralized somehow, or it would be attacked by local politicians and bankers as had the First and Second Banks of the United States. The solution was a regional system. Numerous small revisions were made, such as headquartering a region in the financial backwaters of Richmond, Virginia. President Woodrow Wilson added the provision that the new regional banks be controlled by a central board appointed by the president. Wilson also came up with a compromise plan that pleased bankers and the opposition alike. The opposition were happy that Federal Reserve currency became liabilities of the government rather than of private banks— a symbolic change— and by provisions for federal loans to farmers. The demand to prohibit interlocking directorates did not pass. Wilson convinced the anti-bank Congressmen that because Federal Reserve notes were obligations of the government, the plan fit their demands. Southerners and westerners learned from Wilson that the system was decentralized into 12 districts and and thus assured that this design would weaken New York City's Wall Street influence and strengthen the hinterlands. After much debate and many amendments Congress passed the Federal Reserve Act or Glass-Owen Act, as it was sometimes called at the time, in late 1913. President Wilson signed the Act into law on December 23, 1913.

[[This is one case where I am sure the best solution is to ammend the system, not go back to a system that was tried— and failed wantonly.: normxxx]]


How quickly we forget!

In today's environment, anyone who even raises these issues risks being branded as a heretic and crank. One common rejoinder is that credit crises predated the creation of the Federal Reserve. Of course; but the Fed didn't invent money-and-credit expansion, either. The creation of the Federal Reserve in 1913 only made the practice more respectable and systematic, while not incidentally giving the economists a seat at the tables of power.

For example, in his Dec. 12 article Greenspan refers to the "South Sea Bubble of the 18th century." But he does not mention, as economist Jesus Huerta de Soto does in his 2006 book Money, Bank Credit, and Economic Cycles, the role played by credit expansion in the South Sea Bubble via the Bank of England. De Soto's comprehensive work would make for indispensable reading by Greenspan, Bernanke and anyone else wishing to know the way out of our current predicament.

[ Normxxx Here:  And perhaps Gene Epstein should reread the history of money and banking since about 1800. Note, however, I am no Greenspan or Bernanke fan, but trivializing solutions to what has become almost as complex as rocket science, is not helpful.  ]

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Normxxx    
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