Second Guessing The Maestro: Greenspan’s Reputation Under Fire

Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.

…….

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

– Alan Greenspan, “Understanding Household Debt Obligations”, Spech, February 23, 2004

The core of the subprime problem lies with the misjudgments of the investment community.

– Alan Greenspan, “The fed is blameless on the property bubble”, Financial Times, April 7, 2008

… under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.

– Alan Greenspan, “Gold And Freedom”, in Ayn Rand’s Capitalism: The Unknown Ideal (1966), quoted in Gene Epstein, “Study History, Mr. Greenspan” (subscription required), Barron’s, December 22, 2007

Since his own intellectual development is supposed to be part of the story, it’s surprising that The Age of Turbulence does not even mention the issue [of the gold standard and the Fed’s role in creating bubbles], if only to explain why the author has changed his mind about it.

– Gene Esptein, “The Maestro’s Mistakes” (subscription required), Barron’s, September 22, 2007

For many years, Alan Greenspan was regarded with almost mythical status.  A biography of him published by Bob Woodward in 2000 was called “Maestro: Greenspan’s Fed And The American Boom” (2000).

But lately, as the housing boom has imploded and the unwinding of massive leverage is causing huge dislocations in financial markets, many are reassessing Greenspan’s legacy.

A popular blog is titled The Mess That Greenspan Made and a new book by hedge fund manager and Money Central columnist Bill Fleckenstein is titled “Greenspan’s Bubbles: The Age Of Ignorance At The Federal Reserve” (Jan 16, 2008).

Greenspan is alarmed and a front page article in today’s Wall Street Journal (“His Legacy Tarnished, Greenspan Goes On Defensive” (subscription required), The Wall Street Journal, Tuesday April 8, A1) features commentary of his from three recent interviews.  He also appeared on CNBC’s The Closing Bell today to defend his tenure at the Federal Reserve.

Alan Greenspan’s biography is especially interesting. 

How did he go from an Ayn Rand follower, an ardent believer in the gold standard who wrote an article called “Gold And Freedom” for Rand’s Capitalism: The Unkown Ideal at the age of 40 in 1966, to the Federal Reserve Chairman who cut interest rates all the way down to 1% and held them there creating the most massive speculative bubble in the history of the world?

Who is Alan Greenspan?  And what really transpired in his mind and soul that explains his early roots and later actions?

Some have speculated that Greenspan cast himself as a real life Francisco D’Anconia, a character from Rand’s Atlas Shrugged, presenting one image of himself to the world while secretly working for other purposes.  Is Greenspan trying to teach the world a lesson the way that John Galt did when he took the men of the mind on strike?  The contrast between Greenspan’s early convictions and later actions is so striking that such speculations actually carry some weight.

The more likely explanation, however, is that Greenspan sold out.  He sold out his convictions, his beliefs, his roots, for position, power and prestige.  By flooding the economy with money, Greenspan ushered in a monumental boom that had many lauding him as a genius and a savior.  Greenspan was God.  He was the Maestro.  Universally admired and loved, credited with creating a golden age of economics, it must have been intoxicating and Greenspan was likely seduced by the adulation.

But now, the roosters are coming home to roost.  They always do.