[Congressional Record (Bound Edition), Volume 149 (2003), Part 15]
[Senate]
[Pages 19963-19965]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           GREENSPAN'S RECORD

 Mr. BUNNING. Mr. President, I want to share with my fellow 
colleagues an article written by the best selling author and investor 
Jim Rogers. Mr. Rogers has been dubbed the ``Indiana Jones of 
investing'' and has earned himself a reputation for being one of the 
world's leading economic minds.
  In this article, Mr. Rogers does something that I have found rare 
when it comes to examining Chairman Greenspan's record. He actually 
looks at the Chairman's monetary stances throughout his tenure at the 
Federal Reserve and examines what kind of effect they had on the 
economy. In most cases, Mr. Rogers finds that Mr. Greenspan's policies 
were ill-timed or simply economically absurd. I urge my colleagues to 
read this article so that we may better understand the role the Federal 
Reserve and Chairman Greenspan specifically have played in our economic 
well-being.
  I ask unanimous consent to have the article printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                    For Whom the Closing Bell Tolls

       At a recent symposium sponsored by the Federal Reserve Bank 
     of Kansas City in Jackson Hole, Wyoming, Alan Greenspan 
     reflected on causes of the stock market bubble that grew at 
     the end of the 20th century. He discussed how difficult it 
     was to recognize when a bubble began and how anything he 
     could have done as Federal Reserve chairman would have only 
     made matters worse for the economy at the time.
       ``Bubbles,'' Greenspan said toward the end of his speech, 
     ``thus appear to primarily reflect exuberance on the part of 
     investors in pricing financial assets . . . Bubbles appear to 
     emerge when investors either overestimate the sustainable 
     rise in profits or unrealistically lower the rate of discount 
     they apply to expected profits and dividends.'' He said he 
     did not know there was a bubble and could have done nothing 
     even if he had figured out there was a mania. I wonder if he 
     really believes that. Even my mother knows there was a 
     bubble. Is he a charlatan or a foot? Perhaps both as we will 
     see from his own earlier words and deeds.
       I've got news for you, Alan: This stock market bubble was 
     yours and could have been prevented. It didn't have to 
     happen. Don't go blaming investors for so-called exuberance. 
     Irrational or rational. The only one who has acted 
     irrationally, it seems to me, is you. You could have 
     prevented it in the first place and certainly could have 
     stopped the bleeding a long time ago.
       I know, I know. This is not the way people want to think 
     about Alan Greenspan. The way people often talk about him, 
     you'd think he was up for sainthood. Back in 1999, Time 
     magazine nominated him to the ``committee to save the 
     world.'' Legendary journalist Bob Woodward wrote a flattering 
     book about Greenspan called ``Maestro.'' Senator Phil Gramm 
     of Texas called him the greatest central banker of all time. 
     Even the Queen of England recently added her voice, knighting 
     Greenspan and saying that Sir Alan has brought ``economic 
     stability to the world.'' I guess she didn't notice that 
     there have been at least five major financial crises in the 
     past eight years with perhaps more on the horizon.
       Could someone please give me the phone number of Alan 
     Greenspan's public relations firm? Actually it was down in 
     the board rooms of investment firms who used him to coin 
     money, but even they have caught on by now.
       Our current master of monetary policy has been at the helm 
     since 1987, one of the longest-running tenures of any Fed 
     chairman. Four different presidents--a Democrat and three 
     Republicans--have held court at the White House, but Alan 
     himself remained safely ensconced about a mile away at the 
     Fed. I'm the first to agree that Alan Greenspan has had a 
     tremendous impact on our economy. It's just the facts and 
     reality of his tenure that will look horrible to historians. 
     Looking back over his career in the past decade and a half, 
     it's pretty clear he made major mistakes that have gotten 
     this country into a huge economic bind today.
       Hindsight, as the saying goes, gives us 20-20 vision, but 
     it does something else: it usually tells us the truth, even 
     if it's a little late to correct the mistakes.
       In the long run, history's going to remember Greenspan as 
     the man who caused the stock market bubble and worse. If he 
     doesn't change his monetary policy, he'll also be remembered 
     as the man who created other bubbles to follow in its wake.
       Let's take a step back in time and take a little history 
     lesson. Think back to the gravy days of the 1990s. From 1992 
     to 1997, the S&P 500 soared 130 percent, or roughly 27 
     percent annually. It was the biggest bull market that many of 
     us who'd been in the business for years had ever seen. All 
     the economic indicators were pointing the right direction: 
     Unemployment was down, manufacturing hours were up. Corporate 
     profits rose about 120 percent over that period. The trade 
     deficit wasn't ballooning at its typical breakneck pace. The 
     Japanese Central Bank was flooding the world with money so we 
     had an unusually good period so far, but nothing too 
     dangerous here. These were good days for the country and the 
     Maestro began taking the credit.
       But here's the funny thing about the stock market, 
     something even the most educated investors seem to forget 
     when the going gets good: the stock market and economies move 
     in cycles. It's just the way it goes. Don't take it 
     personally. Markets have always done it; they always will. 
     (Alan, are you listening?) A lot of people hoped the stock 
     market had gone to a new, special place, that cosmic zone 
     where stocks never go down. They continue to rise and we all 
     get rich. The New Economy, I believe it was called--somewhat 
     reminiscent of the New Era of the 1920s.
       Well, we all know what happened to that myth. Corporate 
     profits, we now know, peaked in 1997 and started to decline. 
     Manufacturing hours were down. In the fall of 1997, the stock 
     market, in turn, started to dip. Remember the other key thing 
     about the stock market: It anticipates the future. It looks 
     ahead. In other words, the stock market was recognizing that 
     1998 might not be a banner year for profits. When companies 
     don't earn as much, their stock loses value. It's reality. 
     Forget the Amazons: you need earnings to keep your stock 
     price up.
       But in the fall of 1997, something happened. We caught the 
     flu, the Asian flu. Several key Asian economies, including 
     Thailand and Malaysia, were the first to suffer when 
     economies started heading down. Again, this was nothing 
     unusual in economic cycles;

[[Page 19964]]

     marginal countries and companies always get caught first when 
     declines begin. There is often an ``event'' which signals the 
     normal end to bull markets, but the simple reality always is 
     that it is time for that bull run to end for whatever reason. 
     Schumpeter showed that instability is one of the strengths of 
     capitalism. There is always destruction upon which the 
     dynamic thrive and create for future growth. But it was bad 
     news for major investment firms like Goldman Sachs and 
     Fidelity who'd invested tons of money, through loans, bonds, 
     and other financial instruments, in these countries. The 
     phones started ringing in Washington. Who came to the rescue? 
     Sir Alan. Greenspan started printing money and extending 
     credit, pumping liquidity into the U.S. economy to make sure 
     that the problems in the East wouldn't rock his friends in 
     the West.
       To me, this was a pivotal moment in Greenspan's career and 
     a problematic decision. He should have let the markets 
     correct themselves as they were already trying to do. Stocks 
     would have fallen. Companies would have been hurt or possibly 
     destroyed by the normal, economic decline. There would have 
     been a bear market, panic and a selling climax. Many 
     investors would have lost money. But that's what bear markets 
     often do: they chasten those who get a little too greedy. As 
     the late Fed Chairman William McChesney Martin once put it, 
     the central bankers' job has always been to take away the 
     punch bowl just when the party gets going. They have to step 
     on the brakes before things get out of control. It's no 
     wonder Martin held the position of Fed chairman from 1951-
     1970, longer than any one else in history.
       The problem is that Greenspan didn't take away the punch 
     bowl or even let it empty naturally. He just kept pouring 
     more into it. He overrode what would have been normal stock-
     market behavior. The same process repeated itself over the 
     next three years. In the fall of 1998, it was the Russian 
     collapse and the fall of the legendary hedge fund Long-Term 
     Capital Investment. The stock market was already in trouble: 
     roughly 60 percent of all stocks were down in 1998 and 
     decliners also outnumbered advancers in 1999, even with 
     Greenspan's pumping. Remember profits had already peaked in 
     1997 and were in decline. The LTCM crisis probably would have 
     been the normal selling climax for the bear market which had 
     begun the year before, but the Maestro kept the presses 
     running. After all, he was getting panic calls from his Wall-
     Street friends who feared some would fail. Again, it was just 
     the normal workings--more creative destruction--of financial 
     markets, but Greenspan has never really understood markets. 
     In 1999, it was Y2K.
       All along, Alan Greenspan's Federal Reserve was pumping out 
     cash and extending credit, helping to float the U.S. economy. 
     From 1997 to 2001, M3, a broad measure of the money supply 
     that includes all currency in circulation, and liquid assets 
     like bank deposits, money-market mutual funds and time 
     deposits, grew 48 percent, the fastest it's ever grown. 
     Greenspan pumped roughly $2.6 trillion into the economy, 
     adding fuel to the fire Off-balance-sheet debt and 
     derivatives rose 185 percent to $59 trillion while non-
     government debt rose 52 percent. In 1997, syndicated loans 
     totaled $423 billion. By June 2002, they were up 64 percent 
     to $692 billion. Our foreign debts skyrocketed. Remember this 
     was in a period when profits were declining steadily after a 
     long climb from 1992 to 1997. Greenspan was trying to 
     override normal economic history and laws for some reason.
       Why did he do it? Why didn't he let the markets simply 
     correct themselves? I'm not sure. From what he said in 
     Wyoming, it appears he thought he was doing the right thing. 
     My guess is he was also doing it to appease his friends on 
     Wall Street who went into a panic when the markets began 
     normal declines. After all, these are the people who are 
     always singing his praise. Heck, I'd praise him too if he 
     kept bailing me out of the poorhouse.
       It may well be that he too was eventually swept up in the 
     fantasies he was creating. After all, on Feb. 17, 2000, he 
     said, ``Security analysts' projections of long-term earnings, 
     an indicator of expectations of company productivity, 
     continued to be revised upward in January, extending a string 
     of upward revisions that began in early 1995. One result of 
     this remarkable economic performance has been a pronounced 
     increased in living standards for the majority of Americans. 
     Another has been a labor market that has provided job 
     opportunities for large numbers of people previously 
     struggling to get on the first rung of a ladder leading to 
     training, skills, and permanent employment.''
       He seems to have actually believed all the New Economy 
     stuff we now know was garbage. Our Maestro was relying on 
     Jack Grubman, Mary Meeker, Abby Cohen, and Henry Blodget to 
     justify his credit pumps.
       Remember how he began marveling at the ``remarkable wave of 
     new technologies'' and a ``once-in-a-century acceleration of 
     innovation'' and ``a pivotal period of economic history'' 
     where ``I see nothing to suggest these opportunities [of high 
     rate of return productivity enhancing investments] will peter 
     out any time soon'' in 2000? He went on to tell Congress on 
     Feb. 13, 2001: ``From all indications, however, technological 
     advance still is going forward at a rapid pace, and 
     investment will likely pick up again if, as expected, the 
     expansion of the economy gets back on more solid footing. 
     Private analysts are still suggesting the current 
     sluggishness of the economy has not undermined perceptions of 
     favorable long-term fundamental.'' Now we know this 
     ``Maestro'' was relying on Wall Street ``analysts'' and 
     bubblevision for his ``genius.'' It is bad enough he 
     listened, but he actually believed all this hype.
       On Jan. 25, 2001, he explained to Congress on that budget 
     surpluses would continue for years because of the ``the 
     extraordinary pickup in the growth of labor productivity 
     experienced in this country since the mid-1990s.'' He went on 
     to marvel at the ``structural productivity growth.'' You 
     would think someone with the brains and ability to ``save the 
     world'' would remember what happened ``once in a century'' in 
     1917-1927 when electricity, automobiles, airplanes, 
     telephones, radio, wireless, refrigeration and several other 
     things came together to generate productivity growth over 
     twice as high as under Dr. Greenspan. Even in the 1950s and 
     1960s, U.S. productivity grew more than 60 percent faster 
     than during the mania he was creating and justifying as 
     ``once in a century.''
       Now we all make mistakes, but most do not have PR machines 
     calling us maestros when we are actually just selling snake 
     oil. He began by trying to bail out his old cronies and then 
     by trying to override a normal bear market. The more money he 
     printed and the more credit he created, the deeper we all 
     got. Then he started believing Time [who also named the CEO 
     of Amazon as Man of the Year a few months later] and the 
     Washington Post. Everyone loves a bubble, so few wanted to 
     know the Emperor actually had no clothes, especially when the 
     party seemed to be getting better and better. The few 
     Cassandras were ignored again.
       As we know, even Alan Greenspan couldn't stop the stock 
     market from correcting itself in the end. Bubbles all work 
     the same way. They eventually pop. In his speech in Wyoming, 
     Greespan said the Fed was ``confronted with forces that none 
     of us had personnally experienced.'' That's just not true. 
     There have been plenty of bubbles in his experience, from the 
     stock-market bubble of the 1960s to the Kuwait Stock Exchange 
     bubble in the 1970s to gold and silver two decades ago to the 
     Texas real-estate bubble of 1980s to the Japanese bubble to 
     the S&L/junk-bond bubble. Evidently history does not mean 
     much to our wise Maestro since there are also numerous 
     descriptions of past bubbles and how they have always worked. 
     You'd think someone with the ability ``to save the world'' 
     would have read a few books about markets.
       The problem is the glut of money and credit that has been 
     poured into the U.S. economy has created a host of new 
     problems. The U.S. Government's fiscal budget is now in huge 
     deficit because so many projections were based on revenues 
     from capital-gains taxes that won't be realized. Employee 
     401(k) plans are in the dumps, insurance companies, pension 
     plans, whether they are corporate or government, are in 
     trouble, some in danger of disappearing. Social Security and 
     Medicare are certain to suffer in the long run.
       It's caused problems on a corporate level as well. All the 
     easy credit that's available is propping up companies that 
     are basically zombies, companies that should have long gone 
     out of business (read: Lucent?) to cleanse the system for the 
     survivors. My guess is many of the corporate accounting 
     problems now surfacing might not have happened if Greenspan 
     had allowed the stock market to correct itself as profits 
     declined. After all, he kept creating credit to prolong the 
     bubble so companies played the stock-market game to keep 
     their stocks and options participating.
       Greenspan could have raised margin requirements--the 
     ability to buy equities on credit--during all this to control 
     the animal spirits loosened by his credit machine. He is even 
     on record in 1996 stating: ``I recognize there is a stock-
     market bubble problem at this point.'' He went on to say: 
     ``We do have the possibility of raising major concerns by 
     increasing margin requirements. I guarantee that if you want 
     to get rid of the bubble, whatever it is, that will do it.'' 
     He was dead right. If he had followed through, many of these 
     companies wouldn't have been jiggering the books when times 
     got tough.
       More important, Greenspan's reaction with regard to the 
     stock-market bubble has caused two more bubbles to grow: a 
     real-estate bubble and a consumer-debt bubble. Faithful 
     readers know I believe the real-estate market will pop within 
     a year or so. Many investors have simply transferred their 
     assets from the stock market to the real estate market, 
     thinking they can get rich quickly. Greenspan himself is 
     certainly helping the effort, lowering interest rates 11 
     times in the last two years along, allowing homeowners to 
     refinance their mortgages, often borrowing even more money, 
     without raising their monthly payments. This might be fine if 
     people were using the money to pay off their credit cards and 
     car loans and other debts, but that doesn't appear to be 
     true. Consumer-debt levels continue to soar as people take 
     money from their homes and

[[Page 19965]]

     spend rather than lower debt or save. The U.S. savings rate, 
     after all, is roughly 1 percent, one of the lowest in the 
     world. A consumer-debt bubble is building and it will 
     devastate many people when it bursts. Our Maestro is on 
     record as saying this use of more unsustainable, non-
     productive credit is a sound basis for keeping the economy 
     humming. I fail to see how pouring more debt into our houses 
     which only produce more negative cash flow will save us down 
     the road.
       What would I do? I'm not the Federal Reserve chairman and 
     it's not a job I'd want. That said, I wouldn't keep forcing 
     lower interest rates. Way back when, before the central bank 
     got involved, interest rates used to set themselves. If 
     people borrowed a lot of money, rates were higher. If people 
     didn't borrow money, rates fell. Why shouldn't it be any 
     different now? The rest of the world is following these 
     eternal verities these days. Plus, I'd aggressively encourage 
     people to pay down their debt and start saving. Our system 
     discourages saving and investing, but encourages consumption. 
     The only way to make it through the hard times is if you've 
     prepared for them. The U.S. desperately needs more saving and 
     investment, not more SUVs and vacations in the casinos. We 
     need to let inefficient companies fail to clean out the 
     system. Japan over the past decade has proved that for all of 
     us. Greenspan has even talked of Japan's ``ensuring failures 
     of policy.'' We need to build future productivity, not more 
     bubbles. Hopefully, it's not too late.
       Greenspan is up for reappointment in 2004. He's already 
     lobbying to be reelected, hoping to surpass the last William 
     McChesny Martin as the longest-running Federal Reserve 
     chairman in history. He shouldn't be reappointed. By then, 
     things may be so bad that even he won't be able to hide what 
     he's done. In his recent speech in Wyoming, Greenspan said, 
     ``As history attests, investors too often exaggerate the 
     extent of the improvement in economic fundamentals.'' Boy, 
     did he speak from the heart and get that right, although he 
     was trying to blame others for his mistakes. But who can 
     blame investors for their rose-colored glasses when the 
     Federal Reserve chairman--the man who allegedly makes the 
     most important financial decisions for the entire nation--
     ignores history in order to protect his friends and his 
     legacy?
       On Sept. 25, 2002, Greenspan told a group of economists 
     again not to worry about his approach of sustaining the 
     economy with a new housing ad consumption base with more 
     credit piled on top of the huge debt increase of 1997-2001. 
     He is getting in deeper while still trying to override normal 
     economic history and rules. He said, ``These episodes suggest 
     a market increase over the past two or three decades in the 
     ability of modern economics to absorb shocks.'' We do not 
     need to worry he said because the world economy ``has become 
     more flexible.'' He is now a believer once again--in a New 
     Flexibility.
       Among the most dangerous words in the world are: ``It is 
     different this time.'' The Maestro still believes once again 
     that things are now different. History will judge him one of 
     the worst Central Bankers ever.

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