--- Begin Message ---
Gary North's REALITY CHECK
Issue 122 March 7, 2002
ALAN GREENSPAN'S LITTLE SHOP OF HORRORS
The 1986 re-make of Roger Corman's 1960 "Little Shop
of Horrors" still stands as the most improbable musical
comedy of all time. It's the story of an obscure little
man whose career is going nowhere. Seymour works as an
assistant in a skid row flower shop. He is in love with
his co-worker, Audry, but he has no career prospects, so he
doesn't tell her how he feels. His boss, Mr. Mushnik, is
an overbearing, grasping man who is always complaining
about how bad business is. Seymour is played to a T by
Hollywood's master of wimpetude, Rick Moranis.
On the day after an eclipse, Seymour buys a peculiar
looking little plant and brings it to the shop. He names
it Audry II. For some reason, the plant attracts visitors
into the shop. The flow of visitors and the flow of funds
keeps increasing. Business soars. Mr. Mushnik (played by
the appropriately named Vincent Gardenia) is ecstatic, but
of course gives Seymour no credit. Yet Seymour deserves
all the credit. When it comes to credit, Seymour is the
source.
But there is a major problem with the crowd-pleasing,
publicity-attracting, money-generating plant. It feeds
only on human blood. Seymour at first uses his own blood,
but the plant keeps growing. It needs ever-larger
quantities of blood. Seymour is desperate. The store's
new-found economic success depends on this plant, as do
Seymour's economic and romantic prospects, but the plant
depends on blood.
The plant talks. It talks only to Seymour. Its
message never changes: "Feed me, Seymour!"
One by one, Seymour finds new sources of supply. One
by one, the film's characters are written out of the
script.
The movie was released almost exactly one year before
Alan Greenspan took over as Chairman of the Board of
Governors of the Federal Reserve System. This, I contend,
was prophetic. So was the name of the movie's director:
Oz.
When we think of Oz, what do we think of? A little
man behind the curtain.
ALAN GREENSPAN (PLAYED BY RICK MORANIS)
When Alan Greenspan took over as Chairman of the
Federal Reserve, his career was headed towards skid row.
Murray Rothbard, who had known Greenspan 30 years earlier
when they were both on the fringes of Ayn Rand's movement,
made this assessment of things to come in August, 1987,
about six weeks before Greenspan formally took office.
I found particularly remarkable the recent
statements in the press that Greenspan's economic
consulting firm of Townsend-Greenspan might go
under, because it turns out that what the firm
really sells is not its econometric forecasting
models, or its famous numbers, but Greenspan
himself, and his gift for saying absolutely
nothing at great length and in rococo syntax with
no clearcut position of any kind.
As to his eminence as a forecaster, he ruefully
admitted that a pension-fund managing firm he
founded a few years ago just folded for lack of
ability to apply the forecasting where it counted
-- when investment funds were on the line.
Rothbard spotted the power of Greenspan's syntax.
This has been the continuing feature of Greenspan's long
career, which is the opposite of his predecessor's style,
Paul Volcker, who used his 6'7" frame and cigars to keep
Congress intimidated. Instead, Greenspan keeps Congress
off balance. The result is the same: a lapdog Congress.
Rothbard added:
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 fact, his views are
virtually the same as Paul Volcker, also a
conservative Keynesian. Which means that he
wants moderate deficits and tax increases, and
will loudly worry about inflation as he pours on
increases in the money supply.
The first key to understanding Greenspan's policies is
this: "He can be trusted never to rock the establishment's
boat." The second key is his connection to the world of
investment banking.
Alan is a long-time member of the famed
Trilateral Commission, the Rockefeller-dominated
pinnacle of the financial-political power elite
in this country. And as he assumes his post as
head of the Fed, he leaves his honored place on
the board of directors of J.P. Morgan & Co. and
Morgan Guaranty Trust. Yes, the Establishment
has good reason to sleep soundly with Greenspan
at our monetary helm. And as icing on the cake,
they know that Greenspan's "philosophical"
Randianism will undoubtedly fool many free market
advocates into thinking that a champion of their
cause now perches high in the seats of power.
http://www.mises.org/freemarket_detail.asp?control=267&sortorder=articledate
THE SELL-OFF: OCTOBER 19, 1987
On that fateful day, the Dow Jones Industrial Average
fell 508 points, down almost 23% for the day. Around the
world, other stock markets fell by a comparable percentage.
Greenspan had been on the Board as Chairman, filling
Volcker's unexpired term, for a grand total of 8 days.
The next day, October 20, the world's money markets
were on the verge of a meltdown. A good account of how
near to a disaster the capital markets were is provided in
Bob Woodward's book on Greenspan, MAESTRO: GREENSPAN'S FED
AND THE AMERICAN BOOM (2000). The WASHINGTON POST ran a
long excerpt from it.
Greenspan knew how the financial system's
plumbing worked; an elaborate series of networks
involving regular banks such as Citibank,
investment banks such as Goldman Sachs and stock
brokerage firms such as Merrill Lynch. Payments
and credit flowed routinely among them. The New
York Fed alone transferred more than $1 trillion
a day. If one or several of these components
failed to make their payments or to extend
credit; or even just delayed payment in a crisis;
they could trigger a chain reaction and the whole
system could freeze up, even blow up.
James Baker, the Secretary of the Treasury, was out of
the country. Howard Baker, Reagan's Chief of Staff, called
Greenspan, who was in Dallas to give a speech to the
American Bankers Association. Baker sent a military plane
to Dallas to fly Greenspan back to Washington. Here was
the problem facing Greenspan:
The immediate and pressing question was who would
finance or give credit to the banks, the
brokerage houses and others in the financial
system that needed money. For practical
purposes, the Fed was already giving credit in
the hundreds of millions of dollars at the
current interest rates in routine overnight
loans. What were the limits? Would it pull the
plug? Would the Fed's lending system be
overwhelmed? There were both technical and
policy questions. . . .
They finally agreed on a one-sentence statement.
Greenspan issued it in his name at 8:41 a.m. on
Tuesday, Oct. 20, before the markets opened:
"The Federal Reserve, consistent with its
responsibilities as the nation's central bank,
affirmed today its readiness to serve as a source
of liquidity to support the economic and
financial system."
This was the solution: FED-issued money. This is
always the solution. The FED has no other solution. It is
only a matter of how to implement this solution. Woodward
continues:
After all, the Fed was in charge of the sovereign
credit of the United States. It had the legal
power to buy up the entire national and private
debt, theoretically infusing the system with
billions, even trillions, of dollars, more than
would ever be necessary to restore liquidity and
credit.
In addition, there was an ambiguous provision in
Section 13 of the Federal Reserve Act, the
lawyers told Greenspan, that would allow the Fed,
with the agreement of five out of seven members
of the Fed's Board of Governors, to lend to
institutions; brokerage houses and the like;
other than banks. Greenspan was prepared to go
further over the line. The Fed might lend money,
but only if those institutions agreed to do what
the Fed wanted them to do. He was prepared to
make deals. It wasn't legal, but he was willing
to do it, if necessary. There was that much at
stake. At that moment, his job was to do almost
anything to keep the system righted, even the
previously inconceivable.
It was not just the banks that were weak links. Even
weaker were the brokerage houses, which enjoyed no
government protection, at least not officially. But
unofficially, they did.
We can't hold it, [New York Federal Reserve Bank
President Gerald] Corrigan said, with real panic
in his voice. It's falling apart. There's not
enough trust in the market, and it's going to
melt down.
He came up with a desperate contingency plan.
Instead of just lending money -- guaranteeing
liquidity to the banks -- the Fed would directly
guarantee the payments between brokerage firms.
But it would be a last, desperate measure. The
plan, and the Fed's willingness to embrace it,
had to remain a deeply guarded secret. If word
got out, banks and brokerage houses would just
seize on the guarantees and use them instead of
their own money. It would give everyone an easy
way out. . . .
Then, at about 1 p.m., the Major Market index
futures market staged its largest rally in
history. Several major Wall Street firms bought
a mere $60 million in future contracts on stocks,
and the action sent a shock of brief optimism
through the market. Because the buyer of futures
contracts had initially only to put up a small
portion of the money, the cost of these
transactions was only a fraction of that $60
million. But the positive movement apparently
triggered a significant number of buy orders in
the underlying stocks. Some big institutions or
wealthy investors had perhaps decided to gamble
in order to stabilize or even save the market.
Soon the Dow itself rallied, ending the day up
102 points, a record gain.
http://www.washingtonpost.com/ac2/wp-dyn/A1742-2000Nov11?language=printer
There we have it. This is our financial system, in
all of its leveraged fiduciary glory. It rests on the
confidence of trading insiders and on the promise of the
Federal Reserve System to inject credit money into the
economy. It also rests on the highly leveraged futures
market, where those going long -- "Who are those guys?" --
can get so much more bang for the buck.
THE SELL-OUT: OCTOBER 20, 1987
There were numerous conference calls throughout the
days of this crisis, but only the October 20 meeting of the
Open Market Committee (FOMC) has transcripts, says the
Federal Reserve. Parts of these minutes have been posted
on-line. They are quite revealing. We discover the
following: (1) the committee, which buys government debt
with the FED's newly created money, was winging it; (2)
there was a possibility that the FED's offer of new money
would not be accepted by high-level institutional
borrowers, and therefore would not save the payments system
from gridlock; and (3) the international value of the
dollar was not collapsing, which no one could explain
clearly.
CHAIRMAN GREENSPAN. I think we're playing it on a
day-to-day basis. And in a crisis environment.
I suspect we shouldn't really focus on
longer-term policy questions until we get beyond
this immediate period of chaos.
MR. ANGELL. But I presume that there's at least
an acceptance by the members of the Committee
that the $600 million on borrowings is not
necessarily in place in the coming two weeks as
well as in the reserve maintenance period now
ending.
CHAIRMAN GREENSPAN. Yes. Does anybody disagree
with Governor Angell's comment on this?
MR. STERNLIGHT. Mr. Chairman, I'd like to think
that there's a particular element of flexibility
here because I suspect there may be some greater
reluctance by banks to borrow in this kind of--
MR. JOHNSON. I agree with Peter on that. I think
that one of the problems we may run into, and
we've already seen it, is a strong unwillingness
to borrow. And trying to force the borrowing
target in that environment could result in an
unbelievable funds rate.
So, I agree with Peter: he needs the flexibility,
at least for a while, to manage that situation.
We just don't know what we're up against, at
least for a while, in this kind of situation.
What bears repeating is their concern with the
financial system's unwillingness to borrow. "And trying to
force the borrowing target in that environment could result
in an unbelievable funds rate."
What would be an unbelievable federal funds rate?
What it is today: 1.75%, down from 6% in January, 2001.
This is what it took to get the "players" to borrow in
2001.
Then there was the question is the levitating dollar
in the midst of an international crisis.
CHAIRMAN GREENSPAN. I want to ask Sam Cross if he
will explain to us why the dollar is as strong as
it is in this environment.
MR. CROSS. That's a very good question and I wish
I had a good answer for it. We've been asking
ourselves and others that, without any really
very convincing response. Certainly, there has
been some liquidating of things abroad as people
have brought funds back into the United States
either for meeting their own liquidity needs or
for other purposes.
It is now time to quote the French proverb, "The more
things change, the more they stay the same." Why is the
dollar so high today, when the FED is pumping in new money
(St. Louis FED's Adjusted Monetary Base) at over 20% per
annum? "That's a very good question and I wish I had a
good answer for it. We've been asking ourselves and others
that, without any really very convincing response." The
agreed-upon answer was this: foreigner investors were in
even worse shape that American investors were.
CHAIRMAN GREENSPAN. In part, I think, the issue
obviously is that potentially defaulting
investors in dollar securities were drawing funds
out of other currencies. That presupposes that
the declines in the other markets were not doing
the reverse, which I assume is where you come
out.
MR. CROSS. Yes. Perhaps reflecting what Peter is
talking about. In our bond market there has been
some tendency to move into Treasury bonds as kind
of an attractive place at this point, given the
chaos in so many of the equity markets around the
world. But I think there certainly has been
liquidation of overseas positions.
http://www.federalreserve.gov/fomc/transcripts/1987/871020ConfCall.pdf
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ALAN GREENSPAN: BI-POLAR SCHIZOPHRENIC?
On his ninth day on the job, Chairman Greenspan
launched his career as the most famous schizophrenic in
American central banking history: a gold standard advocate
who became the maestro of credit money expansion. First,
we read his 1966 survey of the history of money and the
gold standard, "Gold and Economic Freedom."
An almost hysterical antagonism toward the gold
standard is one issue which unites statists of
all persuasions. They seem to sense -- perhaps
more clearly and subtly than many consistent
defenders of laissez-faire -- that gold and
economic freedom are inseparable, that the gold
standard is an instrument of laissez-faire and
that each implies and requires the other.
He then offered a short history of money in a division
of labor society.
Money is the common denominator of all economic
transactions. It is that commodity which serves
as a medium of exchange, is universally
acceptable to all participants in an exchange
economy as payment for their goods or services,
and can, therefore, be used as a standard of
market value and as a store of value, i.e., as a
means of saving.
The existence of such a commodity is a
precondition of a division of labor economy. If
men did not have some commodity of objective
value which was generally acceptable as money,
they would have to resort to primitive barter or
be forced to live on self-sufficient farms and
forgo the inestimable advantages of
specialization. If men had no means to store
value, i.e., to save, neither long-range planning
nor exchange would be possible. . . .
In the early stages of a developing money
economy, several media of exchange might be used,
since a wide variety of commodities would fulfill
the foregoing conditions. However, one of the
commodities will gradually displace all others,
by being more widely acceptable. Preferences on
what to hold as a store of value, will shift to
the most widely acceptable commodity, which, in
turn, will make it still more acceptable. The
shift is progressive until that commodity becomes
the sole medium of exchange. The use of a single
medium is highly advantageous for the same
reasons that a money economy is superior to a
barter economy: it makes exchanges possible on an
incalculably wider scale.
Whether the single medium is gold, silver,
seashells, cattle, or tobacco is optional,
depending on the context and development of a
given economy. In fact, all have been employed,
at various times, as media of exchange. Even in
the present century, two major commodities, gold
and silver, have been used as international media
of exchange, with gold becoming the predominant
one. Gold, having both artistic and functional
uses and being relatively scarce, has significant
advantages over all other media of exchange.
Since the beginning of World War I, it has been
virtually the sole international standard of
exchange. . . .
When banks loan money to finance productive and
profitable endeavors, the loans are paid off
rapidly and bank credit continues to be generally
available. But when the business ventures
financed by bank credit are less profitable and
slow to pay off, bankers soon find that their
loans outstanding are excessive relative to their
gold reserves, and they begin to curtail new
lending, usually by charging higher interest
rates. This tends to restrict the financing of
new ventures and requires the existing borrowers
to improve their profitability before they can
obtain credit for further expansion. Thus, under
the gold standard, a free banking system stands
as the protector of an economy's stability and
balanced growth. When gold is accepted as the
medium of exchange by most or all nations, an
unhampered free international gold standard
serves to foster a world-wide division of labor
and the broadest international trade.
Greenspan then offered a cogent history of fractional
reserve banking and its pitfalls. Commercial banks are
innately inflationary, he said. They, in turn, require a
central bank to protect them against bank runs and to keep
credit money coming into the economy.
If banks can continue to loan money indefinitely
-- it was claimed -- there need never be any
slumps in business. And so the Federal Reserve
System was organized in 1913. It consisted of
twelve regional Federal Reserve banks nominally
owned by private bankers, but in fact government
sponsored, controlled, and supported. Credit
extended by these banks is in practice (though
not legally) backed by the taxing power of the
federal government. Technically, we remained on
the gold standard; individuals were still free to
own gold, and gold continued to be used as bank
reserves. But now, in addition to gold, credit
extended by the Federal Reserve banks ("paper
reserves") could serve as legal tender to pay
depositors.
The problem is, we cannot safely trust central bankers
to do the wise thing. Their ability to inflate the
national currency tempts them to keep alive their credit-
money-created economic boom by new injections of credit
money. This is what happened, 1927-29.
When business in the United States underwent a
mild contraction in 1927, the Federal Reserve
created more paper reserves in the hope of
forestalling any possible bank reserve shortage.
More disastrous, however, was the Federal
Reserve's attempt to assist Great Britain who had
been losing gold to us because the Bank of
England refused to allow interest rates to rise
when market forces dictated (it was politically
unpalatable). . . . The excess credit which the
Fed pumped into the economy spilled over into the
stock market-triggering a fantastic speculative
boom. Belatedly, Federal Reserve officials
attempted to sop up the excess reserves and
finally succeeded in braking the boom. But it
was too late: by 1929 the speculative imbalances
had become so overwhelming that the attempt
precipitated a sharp retrenching and a consequent
demoralizing of business confidence. As a
result, the American economy collapsed. Great
Britain fared even worse, and rather than absorb
the full consequences of her previous folly, she
abandoned the gold standard completely in 1931,
tearing asunder what remained of the fabric of
confidence and inducing a world-wide series of
bank failures. The world economies plunged into
the Great Depression of the 1930's.
With a logic reminiscent of a generation earlier,
statists argued that the gold standard was
largely to blame for the credit debacle which led
to the Great Depression.
What central banking is really all about, Greenspan
said in 1966, is the funding of the welfare state.
National politicians do not want to raise taxes in order to
fund their forced transfer of wealth, so they prefer to
borrow newly created money. The problem is, the gold
standard thwarts the banks' creation of new money. This is
why the many defenders of the welfare state hate the gold
standard.
Stripped of its academic jargon, the welfare
state is nothing more than a mechanism by which
governments confiscate the wealth of the
productive members of a society to support a wide
variety of welfare schemes. A substantial part
of the confiscation is effected by taxation. But
the welfare statists were quick to recognize that
if they wished to retain political power, the
amount of taxation had to be limited and they had
to resort to programs of massive deficit
spending, i.e., they had to borrow money, by
issuing government bonds, to finance welfare
expenditures on a large scale.
Under a gold standard, the amount of credit that
an economy can support is determined by the
economy's tangible assets, since every credit
instrument is ultimately a claim on some tangible
asset. But government bonds are not backed by
tangible wealth, only by the government's promise
to pay out of future tax revenues, and cannot
easily be absorbed by the financial markets. A
large volume of new government bonds can be sold
to the public only at progressively higher
interest rates. Thus, government deficit
spending under a gold standard is severely
limited. The abandonment of the gold standard
made it possible for the welfare statists to use
the banking system as a means to an unlimited
expansion of credit. They have created paper
reserves in the form of government bonds which --
through a complex series of steps -- the banks
accept in place of tangible assets and treat as
if they were an actual deposit, i.e., as the
equivalent of what was formerly a deposit of
gold. The holder of a government bond or of a
bank deposit created by paper reserves believes
that he has a valid claim on a real asset. But
the fact is that there are now more claims
outstanding than real assets. The law of supply
and demand is not to be conned. As the supply of
money (of claims) increases relative to the
supply of tangible assets in the economy, prices
must eventually rise. Thus the earnings saved by
the productive members of the society lose value
in terms of goods. When the economy's books are
finally balanced, one finds that this loss in
value represents the goods purchased by the
government for welfare or other purposes with the
money proceeds of the government bonds financed
by bank credit expansion.
In the absence of the gold standard, there is no
way to protect savings from confiscation through
inflation. There is no safe store of value. If
there were, the government would have to make its
holding illegal, as was done in the case of gold.
If everyone decided, for example, to convert all
his bank deposits to silver or copper or any
other good, and thereafter declined to accept
checks as payment for goods, bank deposits would
lose their purchasing power and government-
created bank credit would be worthless as a claim
on goods. The financial policy of the welfare
state requires that there be no way for the
owners of wealth to protect themselves.
This is the shabby secret of the welfare
statists' tirades against gold. Deficit spending
is simply a scheme for the confiscation of
wealth. Gold stands in the way of this insidious
process. It stands as a protector of property
rights. If one grasps this, one has no
difficulty in understanding the statists'
antagonism toward the gold standard.
(This article originally appeared in a newsletter called
The Objectivist, published in 1966, and was reprinted in
Ayn Rand's Capitalism: The Unknown Ideal.)
http://www.321gold.com/fed/greenspan/1966.html
Fast forward 36 years. Here are Greenspan's latest
version of the history of money, in a speech delivered in
2002, on January 16. (That's right, Randians: January 16.
But during the day.) The history of money is the history
of the triumph of the bank note, he now says. Its success
has been made possible by central banks' ability to reduce
inflation over the past two decades.
The history of money is the history of
civilization or, more exactly, of some important
civilizing values. Its form at any particular
period of history reflects the degree of
confidence, or the degree of trust, that market
participants have in the institutions that govern
every market system, whether centrally planned or
free.
To accept money in exchange for goods and
services requires a trust that the money will be
accepted by another purveyor of goods and
services. In earlier generations that trust
adhered to the intrinsic value of gold, silver,
or any other commodity that had general
acceptability. Historians, digging deep into the
earliest evidence of human practice, link such
commodities' broad acceptability to peoples'
desire for ostentatious gold and silver
ornaments.
Many millennia later, in one of the remarkable
advances in financial history, the bank note
emerged as a medium of exchange. It had no
intrinsic value. It was rather a promise to pay,
on demand, a certain quantity of gold or other
valued commodity. The bank note's value rested
on trust in the willingness and ability of the
bank note issuer to meet that promise.
Reputation for trustworthiness, accordingly,
became an economic value to banks -- the early
issuers of private paper currency.
They competed for reputation by advertising the
amount of capital they had to back up their
promises to pay in gold. Those banks that proved
trustworthy were able to broadly issue bank
notes, along with demand deposits, that is, zero
interest rate liabilities. . . .
In the twentieth century, bank reputation receded
in importance and capital ratios decreased as
government programs, especially the discount
window and deposit insurance, provided support
for bank promises to pay. And, at the base of
the financial system, with the abandonment of
gold convertibility in the 1930s, legal tender
became backed -- if that is the proper term -- by
the fiat of the state.
The value of fiat money can be inferred only from
the values of the present and future goods and
services it can command. And that, in turn, has
largely rested on the quantity of fiat money
created relative to demand. The early history of
the post-Bretton Woods system of generalized fiat
money was plagued, as we all remember, by excess
money issuance and the resultant inflationary
instability.
Central bankers' success, however, in containing
inflation during the past two decades raises
hopes that fiat money can be managed in a
responsible way. This has been the case in the
United States, and the dollar, despite many
challenges to its status, remains the principal
international currency.
[Note: according to the inflation calculator that is on the
Web site of the U.S. Bureau of Labor Statistics --
http://www.bls.gov -- the U.S. dollar has lost almost half
of its purchasing power since 1981. It takes $1948 today
to buy what $1,000 bought in 1981.]
If the evident recent success of fiat money
regimes falters, we may have to go back to
seashells or oxen as our medium of exchange. In
that unlikely event, I trust, the discount window
of the Federal Reserve Bank of New York will have
an adequate inventory of oxen.
http://www.federalreserve.gov/boarddocs/speeches/2002/200201163/default.htm
Seashells! Discount windows! He's got a million of
'em! Jokes, I mean. Not seashells.
This system won't work until there is a commodity
futures market for seashells. Otherwise, it will take too
many seashells for the unnamed and unidentified buyers in a
to prop up the system when the inevitable bank runs begin.
When I compare his 1966 history of money with his 2002
history of money, I conclude that this man is in desperate
need of ideological lithium. He has a bi-polar ideology.
Well, not really. It only seems this way. Rothbard warned
of this back in 1987.
As an alleged "laissez-faire pragmatist," at no
time in his prominent twenty-year career in
politics has he ever advocated anything that even
remotely smacks of laissez-faire, or even any
approach toward it. For Greenspan, laissez-faire
is not a lodestar, a standard, and a guide by
which to set one's course; instead, it is simply
a curiosity kept in the closet, totally divorced
from his concrete policy conclusions.
Thus, Greenspan is only in favor of the gold
standard if all conditions are right: if the
budget is balanced, trade is free, inflation is
licked, everyone has the right philosophy, etc.
In the same way, he might say he only favors free
trade if all conditions are right: if the budget
is balanced, unions are weak, we have a gold
standard, the right philosophy, etc. In short,
never are one's "high philosophical principles"
applied to one's actions. It becomes almost
piquant for the Establishment to have this man in
its camp.
FEED ME, ALAN!
From October 20, 1987, until today, Alan Greenspan has
presided over a debt-based money system that keeps coming
perilously close to the abyss, ever more frequently: the
Asian crisis in 1997, the near default and bail-out of Long
Term Capital Management in 1998, the collapse of the NASDAQ
in 2000, the crisis of September 11, and the bankruptcy of
Enron. He is indeed the maestro. He has us all trapped in
a fiat money world in which it's either maestro or
maelstrom.
The economy survives, but only by means of ever larger
injections of the FED's credit money. Debt increases at
every level in every sector. It never gets repaid; it
constantly increases. It has to increase; otherwise, the
economy could go into gridlock, in which debtor A cannot
pay debtor B because debtor C has not paid him. (Debtor C
is incorporated in Barbados and cannot be located.)
Greenspan has called this scenario "cascading cross
defaults." This phrase appeared in his Congressional
testimony a few weeks after the LTCM crisis.
http://www.federalreserve.gov/boarddocs/testimony/19981001.htm
Like Audry II, America's debt-fed, blood-sucking, fiat
money economy cries out, "Feed me, Alan!" By now, Alan is
way beyond what the FED alone can supply. He has to find
new donors. Government Sponsored Enterprises (GSE's),
especially those that supply money for residential
mortgages, are the main donors today. But they are
reaching the limits of their ability to locate credit-
worthy first-time home buyers and home owners who are
willing to re-finance. The words of Mr. Johnson echo down
the halls of the FED.
I think that one of the problems we may run into,
and we've already seen it, is a strong
unwillingness to borrow. And trying to force the
borrowing target in that environment could result
in an unbelievable funds rate.
We've got that rate today. What comes next? When the
beast calls out once again, "Feed me, Alan," who will
supply the next meal?
We should not be like Mr. Mushnik. We should give
Greenspan -- our very own Seymour -- full credit. After
all, he gives the rest of us full credit. And for as long
as we accept his offer, the system will continue, devouring
all available equity caught in its path.
CONCLUSION
In the original director's cut of "Little Shop of
Horrors," the plant ate Seymour and Audry, and then escaped
into the world. This ending upset pre-release audiences,
so a less threatening ending was substituted. We all like
happy endings.
I wish I could think of a happy ending for Alan
Greenspan. So do the script writers, of whom he is chief.
This script is being re-written daily. Now, more than
ever, what Mr. Johnson said of Alan Greenspan on October
20, 1987, rings true.
He needs the flexibility, at least for a while,
to manage that situation. We just don't know
what we're up against, at least for a while, in
this kind of situation.
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