R.I.P. Alan Greenspan: You were charming, thoughtful, powerful, and wrong

His insistence on financial deregulation brought the economy to its knees

Friends,

Alan Greenspan has died at the age of 100.

My students don’t recognize his name, but you probably do. When he was chairman of the Federal Reserve — for more than 18 years, from August 11, 1987 to January 31, 2006 — he not only ran the U.S. economy (and most of the world’s) but was also in many ways the most powerful person in America.

He maintained an iron grip over the Fed and almost single-handedly decided on interest rates. But that was just the start of his power. He essentially fired George H. W. Bush by raising interest rates so high (ostensibly to ward off the inflation then threatening the economy) that the economy took a dive, and voters blamed Bush.

This was enough to convince my boss, Bill Clinton, to do exactly what Greenspan wanted — which was to reduce the federal budget deficit and thereby destroy much of the agenda Clinton ran on (and I helped create). As I wrote in my memoir of those years, Locked in the Cabinet, “Greenspan has the most important grip in town: Bill’s balls, in the palm of his hand."

I don’t want to speak ill of anyone who has passed. Greenspan was an extremely charming, intelligent, and thoughtful man.

But the truth must be told: If any single person was responsible for the financial crisis of 2008, it was Greenspan. That crisis — the worst collapse since 1929, which led to the worst recession in decades, in which millions of Americans lost their jobs, their savings, and even their homes — resulted from the deregulation of Wall Street that Greenspan advocated.

Greenspan pushed Clinton and Congress to repeal the Glass-Steagall Act, which since the Depression decade of the 1930s had separated investment banking from commercial banking, thereby preventing banks from gambling with personal savings. He also argued vigorously against regulating derivatives — essentially, financial bets on financial bets — that proved to be weapons of mass financial destruction.

Greenspan finally acknowledged that the crisis caused him to rethink his free market ideology. “I have found a flaw,” he told a congressional committee. “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms …. I was shocked.”

Shocked? Shocked that the free market would succumb to greed, self-dealing, betting, and fraud? Shocked that decades of deregulation of Wall Street would plunge the nation and the world into crisis? Please.

Near the start of the Clinton presidency, I realized Greenspan was the Darth Vader of the American economy — and that I needed to try to convince him that the federal deficit and inflation weren’t as important as public investments in education, infrastructure, public-supported research, and social safety nets.

I had the opportunity when Greenspan invited me to breakfast. He did so probably because he wanted to be sure Clinton would reappoint him and assumed I had Clinton’s ear on economic policy. Given that he was a deficit hawk and I was the opposite, he figured it couldn’t hurt his chances to try to charm me.

We’d never met before, but as soon as he greeted me, I instinctively knew him. I knew where he grew up (New York) and where he got his drive and his sense of humor (he was Jewish). I felt like we’d been together at countless weddings, bar mitzvahs, and funerals.

Our breakfast was pleasant, our conversation easy. He deftly avoided talking about the deficit, inflation, or public investment. In fact, he avoided talking about anything that mattered. I left feeling pampered and charmed. Greenspan got out of that breakfast exactly what he wanted. Yet I never asked him the questions I intended to ask and never got the answers I imagined he’d give.

Here’s a version of the conversation I had anticipated:

Me: Mr. Chairman, how did a shy little Jewish guy like you get to be the most powerful man in the American economy?

He: I’m cunning and ambitious and very, very smart.

Me: You’re a Republican and follower of Ayn Rand?

He: And proud of it. Nixon, Ford, Reagan, and Bush all appointed me to powerful positions.

Me: What’s your purpose in life?

He: To stamp out inflation.

Me: Even if that means high unemployment?

He: You bet.

Me: Even if it requires slow growth and stagnant wages?

He: Right you are.

Me: Even if it means drastic cuts in federal programs that help working people and the poor?

He: Absolutely, if that’s what it takes to balance the budget and remove all temptation to inflate away the government’s debt.

Me: But why? A little inflation never hurt anybody.

He: You’re wrong. It hurts bond traders and lenders.

Me: But why place their interests over everybody else’s interest in good jobs?

He: Because I’m a capitalist, and capitalism is driven by the filthy rich. They make their money off bonds. Your constituents are just plain filthy. They have to work for a living.

Me: You’re the nation’s central banker. You should be accountable to all Americans.

He: But I’m not, and neither is the Fed.

Me: That’s not fair; it’s not right.

He: Nah-na-na-nah-na. You can’t stop me.

Me: Can too.

He: Can not.

Me: Can too. The president’s my friend.

He: So what?

Me: He won’t reappoint you.

He: Oh, no?

Me: No.

He: Well, we’ll see about that.

Me: You think he’ll reappoint you?

He: No doubt about it.

Me: Why are you so sure?

He: Because he needs me.

Me: Oh, yeah?

He: Yeah.

Me: What does he need you for?

He: He needs me because he needs to have the confidence of Wall Street, and only I can deliver that to him.

Me: Oh, yeah?

He: Yeah. That’s why Bush reappointed me in 1992, even though he hated me for keeping interest rates high as the economy slipped into recession in 1990. That’s why he lost the presidency to your man. I could do it to your man too. I could do worse. He’ll reappoint me. He’ll do whatever I want him to do.

Me: Well, you can take your crummy lunch and cram it, you robber-baron pimp.

He: Go suck on a pickle, you Bolshevik dwarf.