By madis senner, CPA

While it appears that President Bush is in charge of America in a culture ruled by money and the market it is the market's high priest, the Federal Reserve and its Chairman Alan Greenspan that rule--not the President. We need only go back to the 1992 presidential election to see the enormous power the Federal Reserve yields. Candidate Clinton's slogan was; 'It's the economy, stupid.' The bad economy was going to keep President Bush (Number 41) from getting reelected-as if nothing else mattered. Further, some have openly admitted that they think it was Greenspan's tight money that kept the first President Bush from serving a second term.

The powers of the Federal Reserve Chairman rest in the subtlety and the nature of the job. Unless well versed in the behavior of Wall Street and financial markets it is difficult to fathom the enormity of power and sway the Fed Chairman holds. The power comes not from what may be called traditional line authority but the power to influence financial markets, the economy and decision-makers. After all we have abandoned everything to free markets, so it is only logical that the one closest to being able to harness the markets should be the most powerful mortal. But this power, as it is with the fnancial markets, rests to a great degree in confidence and appearance--this is both the Fed's greatest strength and its achilles heel. It is this strength and weakness that activist must keep in mind.

Federal Reserve Chairman Greenspan has been allowed to overstep the bounds of his office and put our country on a potentially fatal path. It is time Chairman Greenspan had his wings clipped.

It was stated earlier that we believe Chairman Greenspan has abused his power. We do. "Abuse" is a harsh word, and we do not throw it around lightly. As the Fed Chair, his responsibility is solely to regulate monetary policy and banking oversight. We are not alone in noticing that influence previously accorded to elected officials has, somehow, shifted into the hands of the Federal Reserve.

Robert B. Reich, writing in The American Prospect, notes how the downsizing of government has diminished the influence of fiscal policy and increase the power of monetary policy:

"In the old days, when America still had a fiscal policy to speak of (that is, when presidents and Congress could spur the economy through public spending)…the FOMC’s decisions were important, although not dominant. Now, they are definitive. In a previous era, it was possible for elected officials in America to fashion a host of domestic policies affecting jobs, wages, the poverty rate, public spending on health and education, and access to homes and cars, to take but a few examples. Candidates for national office occasionally took positions on such issues; there was occasional public debate about them; laws were even passed".

"Now, much of this is beside the point. Domestic policy is handmaiden to the bond market. The level of unemployment, the rate of wage growth, the poverty rate, and access to money for homes, cars, and for a large share of the cost of high education depend on the rate of interest. And what happens to interest rates, both short-term and long-term, depends largely on the decisions made by the FOMC". …

"In an earlier era, America had a foreign policy as well, and an apparatus for setting it and keeping it on course: a State Department staffed with career diplomats and managed by political appointees; a National Security Council linking State and Defense Departments and providing the president with independent advice and analyses; and a national security adviser I the White House itself, to coordinate all of it. But now American foreign policy depends largely on global flows of money, and our apparatus for trying to influence these flows has almost nothing to do with the old apparatus. Here, too, decisions of the FOMC are increasingly important". (Robert B. Reich, "The Bankers’ Regime," The American Prospect vol. 9, No. 41, November 1, 1998 – December 1, 1998)

Both the left and right are crying foul. Talk show Bill O’Reilly of Fox News’ ‘O’Reilly Factor’ in his "Talking Points" column on March 16, 2001 voiced what many think:

"The danger is not a short-term recession which we are having. The danger is unbridled power and keeping Americans in the dark. I don’t want to depend upon Alan Greenspan. I don’t trust him. He’s a shadowy guy who will not explain his policies. I want the Fed chief and all government economic people to hold press Conferences and answer questions. So we the people know what’s going on".

Look at the policies and actions of the Fed Chairman. On Wednesday, January 3^rd,2001, the Federal Reserve changed monetary policy by lowering the federal funds rate one half of a percent and the discount rate by one-quarter point. Chairman Greenspan made the abrupt change from tightening to easing in a highly unusual way—in between Fed meetings. Why? Was it a daring rescue to save the nation from recession, or an effort to protect big businesses and the wealthy? Most prognosticators have attributed Mr. Greenspan’s action to signs of a slowing economy. A statement by the Federal Open Market Committee cited "further weakening of sales and production,….lower consumer confidence, tight conditions in some segments of financial markets and high energy prices sapping household and business purchasing power" as the reasons. The economy did slow afterwards. But two days after the cut the market was surprised to learn that the Bank of America held a lot of loans from troubled California utilities.

The Federal Reserve, the central bank of the United States, was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Today the Federal Reserve's duties fall into four general areas: (1) conducting the nation's monetary policy; (2) supervising and regulating banking institutions and protecting the credit rights of consumers; (3) maintaining the stability of the financial system; and (4) providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions Source Federal Reserve

Again, why did the FED act so unusually by taking such a rapid about face? We may never know the full story. The New York Times questioned the chairman’s timing in an article published the following day (p. C9 "Federal Reserve, Reacting to Signals of a Slowdown, Cuts Rates"):

"It is unclear why Alan Greenspan, the Fed chairman, chose to act yesterday instead of waiting until the next regular meeting at the end of the month – whether he knew something about the economy not evident to everyone else".

We may never know what was or was not evident to the chairman because the Federal Reserve is an independent agency answering to no one, not even the president. The law doesn’t compel him to account to anyone for his decisions. Perhaps, someday we may hear the complete rationale, should the Fed Chairman divulge his intentions in the minutes of a FED meeting or, later, in Humphrey Hawkins testimony to the senate. But then, there is the problem of Greenspeak, the term used to describe the often-cryptic phrases Chairman Greenspan typically employs in speeches. If this seems unduly suspicious of a man who is being hailed as a champion just now, consider the actions Mr. Greenspan has taken in the past. The "maestro" takes risks. Consider this incident, reported in the Times Book Review ("Alan Greenspan and the Temple of Boom"). Robert Kuttner writes:

"Two months after Greenspan took office in August 1987, the stock market lost over 22 percent of its value in a day. The nation’s largest financial institutions, thinly capitalized and in debt to one another, can collapse if money markets seize up for lack of buyers or lenders. Greenspan, working closely with E. Gerald Corrigan, president of the New York Fed, embarked on a course far more interventionist than his onetime mentor, the free-market apostle Ayn Rand, might have commended. Woodward [the biographer Bob Woodward] explains just how Corrigan discreetly instructed bank executives to keep lending to momentarily insolvent debtors. The Fed would back them up".

"All this was illegal and, if it didn’t work, could violate countless fiduciary duties and prudent-man rules. But it was precisely what the Fed had failed to do in 1929. This time, the system held.".

"This time" the system held. what happens next time? Are we willing to take that risk?

The 1987 stock market bailout is not a question of judgement—but ethics. Kuttner implies illegality. Did Greenspan abuse his power? Unfortunately most of the investigations after the crash dealt with why we had the crash and how to prevent crashes. Most notable were the recommendations of then Treasury Secretary Brady that established measures such as trading limits and stoppage in trading to prevent a collapse in the stock market. Few – if any—asked whether Greenspan had done anything wrong.

Some have argued that Alan Greenspan is the most powerful man in the world. In the preface to his book Maestro: Greenspan’s Fed and the American Boom (Simon and Schuster, 2000) Bob Woodward expresses the perspective of many Americans: "On January 20, 2001, a new president takes the oath of office. He assumes the presidency in a Greenspan era". Clearly Woodward is exalting praise for the chief and giving him his due. But Woodward’s statement carries a much greater truth: that the presidency is in some ways in subservient to the Chairman of the Federal Reserve. Our elected President George W. Bush is a mere elected government official in the shadow of the regal czar like Greenspan.

The Czar’s personal political views have shaped his responses to White House economic initiatives. When President Bush in his first week in office talked about his tax cut, the supposed neutral Federal Reserve Chairman nodded his approval. In testimony on March 2, 2001 he reiterated his preference:

"For reasons I have testified to previously, if long-term fiscal stability is the criterion, it is far better, in my judgment, that the surpluses be lowered by tax reductions than by spending increases".

In fact, surplus projections have not changed much since the last time Greenspan spoke. What has changed is the administration. During the Clinton era, the right-leaning Greenspan was afraid of spending hikes—a prospect he helped ward off with his advocacy of debt reduction.

The New Republic took note:

"Greenspan’s endorsement carried such political weight in part because he had spent the previous eight years urging fiscal restraint. And so his dramatic turnaround is taken evidence that the budgetary outlook must have changed dramatically".

In 2003/04 when it became evident that the supposed surpluses had vanished and the USA was going deep into the red Greenspan did voice some concern over the deficits. He also began advocating some very two-faced policies about social security.

Consider the words of Paul Krugman of the New York Times on March 2, 2004 in 'Maestro of Chutzpah:

"The traditional definition of chutzpah says it's when you murder your parents, then plead for clemency because you're an orphan. Alan Greenspan has chutzpah."

"Last week Mr. Greenspan warned of the dangers posed by budget deficits. But even though the main cause of deficits is plunging revenue - the federal government's tax take is now at its lowest level as a share of the economy since 1950 - he opposes any effort to restore recent revenue losses. Instead, he supports the Bush administration's plan to make its tax cuts permanent, and calls for cuts in Social Security benefits. ."

"Yet three years ago Mr. Greenspan urged Congress to cut taxes, warning that otherwise the federal government would run excessive surpluses. He assured Congress that those tax cuts would not endanger future Social Security benefits. And last year he declined to stand in the way of another round of deficit-creating tax cuts. ."

"But wait - it gets worse. ."

"You see, although the rest of the government is running huge deficits - and never did run much of a surplus - the Social Security system is currently taking in much more money than it spends. Thanks to those surpluses, the program is fully financed at least through 2042. The cost of securing the program's future for many decades after that would be modest - a small fraction of the revenue that will be lost if the Bush tax cuts are made permanent. ."

"And the reason Social Security is in fairly good shape is that during the 1980's the Greenspan commission persuaded Congress to increase the payroll tax, which supports the program. ."

"The payroll tax is regressive: it falls much more heavily on middle- and lower-income families than it does on the rich. In fact, according to Congressional Budget Office estimates, families near the middle of the income distribution pay almost twice as much in payroll taxes as in income taxes. Yet people were willing to accept a regressive tax increase to sustain Social Security. ."

"Now the joke's on them. Mr. Greenspan pushed through an increase in taxes on working Americans, generating a Social Security surplus. Then he used that surplus to argue for tax cuts that deliver very little relief to most people, but are worth a lot to those making more than $300,000 a year. And now that those tax cuts have contributed to a soaring deficit, he wants to cut Social Security benefits. ."

"The point, of course, is that if anyone had tried to sell this package honestly - "Let's raise taxes and cut benefits for working families so we can give big tax cuts to the rich!" - voters would have been outraged. So the class warriors of the right engaged in bait-and-switch ."

Okay, so he’s a Republican—the kind that he makes President Bush truly a Compassionate Conservative in comparison. Consider Mr. Greenspan’s favorite statistic: The Employment Cost Index. What is it and why does he fret over it? It measures worker wage gains on a quarterly basis and he looks at it because he is concerned that worker wage gains will lead to inflation. He wants to make sure that he snuffs out any dramatic rise in wages that will lead to inflation. But not all wage increases meet his disapproval. Not the inflation in the stock market that has seen the stock market increase tenfold under his reign. Nor the wage inflation in executive salaries which has seen average CEO wages go from 80 times the size of an average worker’s to 475 times average factory wages. No—it’s the inflation in the salaries of wage earners, people that are paid by the hour that he is concerned with. You know, the guys and gals with no or little money in the stock market.

Although Greenspan may not be compassionate to the little guy, he makes up for it to the rich. It’s not surprising that he would favor President Bush’s tax cut which would have the top 1% of income earners get 40% of the benefits. Senator Bernie Sanders, during a banking committee hearing on July 25, 2000, questioned Greenspan about his prejudiced outlook: Sanders said,

"It’s dead wrong to continue to talk about a so-called ‘booming economy’ for all Americans when millions are finding it difficult to survive economically. The truth is that while the wealthiest have never had it so good, millions of people are working longer hours for lower real wages than 25 years ago. The purchasing power of the minimum wage is far lower than it used to be and a large number of people who want to work full time can only find part-time to temporary jobs with limited or no benefits. Meanwhile, more than 20% of our children live in poverty, millions of elderly cannot afford their medications, 44 million Americans do not have health insurance and there is a growing housing crisis in cities throughout the country." (‘Sanders to Greenspan; Do Not Overlook Millions of American Not Benefiting From So-Called "Booming Economy").

Consider the bailout of Long Term Capital Management (LTCM), a highly speculative investment pool that pursues some of the riskiest strategies and investments possible. It was headed up by ex trader/banker John Meriwether, employed 2 Nobel Laureates in Economics and a host of the best and brightest. It was Wall Street’s version of the Dream Team (‘Dream Team’, Business Week, Leah Nathans Spiro, August 29, 1994) Unfortunately, the gods of highflying finance were mere mortals and became insolvent in 1998. To quote the Wall Street Journal, ‘Long-Term Capital Bailout Spotlights a Fed "Radical"’, November 2, 1998):

"The fear of "this layer cake becoming unglued" and putting the world’s financial markets at risk, as Mr. Fisher puts it, led him and his boss, New York Fed President William McDonough, to round up the biggest names on Wall Street to inject $3.625 billion into Long-Term Capital a few days later."

Why did Greenspan bail out LTCM? Was it because, as The Times of London said,

"Hedge Fund Managers, unlike Javanese peasants, are the sort of people investment bankers have lunch with…Even closer links now emerge. Directors and seniors at Merrill Lynch were, by almost anyone else’s standards, heavy investors in LTCM, one of the few hedge funds recommended by their firm…. Merrill protests that the personal interests of its own decision-makers had nothing to do with decision of keeping LTCM afloat. Given the role of Mr. Greenspan, this is wholly plausible." (September 30, 1998, ‘Crony Capitalism Stalks the Street’)

But the bailout goes beyond privilege and special interests. It tears at the very fabric of what we hold for truth in a market economy--or at least what the powers that be claim to be the truth. With the Asian contagion in 1997, Treasury Secretary Rubin and Undersecretary Summers talked about the contagion being a function of ‘crony capitalism’, the unethical and political ties between government and business. Kathryn M. Welling, in ‘Up & Down Wall Street: Crony Capitalism?’, Barrons, September 28, 1998 notes:

"CRONY CAPITALISM, AMERICAN STYLE? That the scene of the crime was one of the New York Fed’s posh, polished and paneled meeting rooms and not some teeming Hong Kong back or an outpost of the Kremlin kleptocracy makes no difference, say the cynics. What else to you call it when the Fed corrals the fat cats at the helms of the Street’s biggest banks and brokerage houses all into one elegant room—and doesn’t let them out until they (with only a few rather conspicuous exceptions) agree to equally divy up the tab on a $3.5 billion dollar bailout of a hedge fund formed by former colleagues."

"THE COLLAPSE AND RESCUE OF the biggest hedge fund in the United States shows how dangerous preaching can be. For 15 months, as financial markets in country after country collapsed like straw huts in a typhoon, the united states lectured the rest of the world on the evils of crony capitalism—of bailing out rich, connected insiders while letting everyone else suffer. U. S. officials and financiers talked about letting market forces allocate capital for maximum efficiency. Thai peasants, Korean Steel workers and Moscow pensioners may suffer horribly as their local economies and currencies collapse—but we solemnly told them that was a cost they had to pay for the greater good of the world. Capital should be free to flow to the places where it gets the highest and best use. Cronyism is bad. Capitalism is good.

How does the bailout of LTCM and other bailouts jive with Greenspan’s prophetic vision of capitalism—It does not! Here are his own words, spoken in 1998:

"Market economies have succeeded over the centuries by thoroughly weeding out the inefficient and poorly equipped…But maintaining the kind of social safety net that, for example, is prevalent in most continental European countries where high unemployment appears chronic is proving increasingly problematic in today’s altered environment". (Remarks by Federal Reserve Chairman Alan Greenspan before the Annual Convention of the American Society of Newspaper Editors, Washington D. C., April 2, 1998, 'The Ascendance of Market Capitalism')

And the previous year, speaking at the Woodrow Wilson Award Dinner of the Woodrow International Center for Scholars, on June 10, 1997, Chairman heralded the triumph of free markets:

"The long-standing debate between the virtues of economies organized around free markets and those governed by centrally planned socialism is essentially at an end…Centrally planned economies are frozen in time…In sharp contrast, capitalist market economies are driven by what Professor Joseph Schumpter, a number of decades ago, called ‘creative destruction’. . Market economies in that sense are continuously renewing themselves. Innovation, risk taking, and competition are the driving forces that propel standards of living progressively higher."

Obviously, Chairman Greenspan does not practice what he preaches. He wants less government spending which would reduce the safety nets for the poor, but he bails out the rich. He talks about the failure of Central Planning Committees but under his tutelage the Wall Street Journal has called the 1990’s ‘ the decade of Moral Hazard for all its Bailouts’.

But bailouts have a much more insidious side, they encourage speculation and play to humanity’s greed and destructive tendencies;

"Wednesday night’s bailout of Long-Term Capital Management, a highflying hedge fund, has the smell of $3.5 billion worth of moral hazard. Here we have the Federal Reserve Bank of New York parading all the big securities houses to pony up so that the fund’s investors don’t take a bath in 1998 after having earned 17.1% last year, 40.8% in 1996 and 42.8% in 1995. Wheee, the lesson runs, throw money at hedge funds, and leverage being the only way anyone can generate 40% returns. Don’t worry about the risk. So what if bets placed by Long-Term Capital got caught by a worldwide flight to quality following the Russian default. When the margin calls arrive, the government will work something our for you." ‘Decade of Moral Hazard’. Editorial column Wall Street Journal, September 25, 1998.

The recent stock market decline has highlighted how distorted our thinking has become. Jonathan Fuerbringer in "Market Place: Awaiting Fed Rescue, Even as Fed Discourages Dependency’, New York Times, March 15, 2001 notes;

"[T]he impact of these rescues can be heard in an odd Wall Street refrain these days: The economy is not slowing enough? As if that were good for stocks….The reasoning would seem simple. Investors think that rate cuts are the surest way to ensure that the economic slowdown will reverse and, therefore, make it safe to pile into stocks again."

We cannot begin to measure how distorted our thinking and actions have become as we have sacrificed all to the God we call the market. The Bubble and the Bailouts have fostered spirits of recklessness, selfishness, and callous disregard for the welfare of others as we rush along in the pursuit of money. How can we begin to measure our sickness? Consider this: The Wall Street Journal together with the Heritage Foundation compiled a survey measuring ‘The most economically free countries" in the world. The premise is that financial security leads to overall well being and, therefore, countries offering the greatest degree of economic freedom are the healthiest. Sadly, some of the most economically free countries are also the most violent. The World competitiveness Yearbook 1999 found that America, New Zealand and Australia, which have consistently ranked in the top of economic freedom also ranked in the top ten of most violent countries (1996) as measured by serious crime—Number of murders, violent crimes or armed robberies per 100,000 inhabitants. The statistic might not be representative as it measures reported crime only and not all of the top ranked most economically free countries were also high crime countries. But the statistics does give pause for concern. It is time we asked ourselves are the risks of a Wild Wild West market economy worth it?

But the risks and injustices to the American people does not end with the creation of the stock market bubble. The Fed is also responsible for the oversight of the banking industry. Under the Greenspan era we have had mega mergers in the financial services industry. Alan Sloan raises the right question in, ‘Bailout of a Big Failure Raises Big Questions About Too-big-to- Fail Policy’, Washington Post, September 29, 1998:

"And members of Congress might ask whether letting giant financial institutions combine is really such a good idea. Ironically, the same day that the Fed brokered a deal because long-term Capital was too big to fail, it approved the merger of Citicorp and Travelers Group Inc. Citicorp alone was deemed too big to fail when it got in big trouble a decade ago. The new $750 billion Citigroup will be so gigantic that it will put 'too big to fail' into a whole new dimension."

Were these giant conglomerates necessary to compete in our newly evolving global financial arena? Obviously Chairman Greenspan thinks so. During congressional briefings because of his power and sway Greenspan has been able to convince Congress that all is well. Martin Crutsinger, AP News, ‘Greenspan urges Free-market view of mergers’, June 16, 1998 notes such in Greenspan testimony on such date;

" Greenspan was the leadoff witness as the Senate Judiciary Committee heard from the government’s top antitrust officials in a hearing to determine how the recent spate of mergers would affect American consumers and the economy overall…Some members of Congress have expressed concerns that a number of big bank mergers could force consumers to pay higher bank fees because of reduced competition. But Greenspan said while the wave of bank mergers had reduced the level of banks nationally, the number of competing in any given region of the country remained about the same."

"Greenspan told the committee that these was no doubt that some of the recent mergers were "awesomely huge" but he said that was a factor of the growth of the overall economy and the increased forces of globalization, which are pushing banks and other financial institutions to consolidate to compete better worldwide.'

The issue of bank mergers is not just about size but also the type of combinations. Writing about the Travelers Citigroup merger notes Time Picayune Publishing Company September 22, 1998

"The marriage of a gigantic U. S. bank with a large diversified insurance and securities arm hasn’t happened since Depression-era laws mandated separation of such activities. The merger could set a precedent for the type of modern financial services company that Congress could allow if it passes proposed bank reform legislation.

But the average Jane and Joe does not have to wait for these conglomerates to have problems before they have to pay. Steven a. Holmes in ‘Huge Bank Mergers Worry Consumer Groups’, New York Times, April 19, 1998 notes such:

‘Our general view is straightforward,’ said Ed Mierzwinski, director of consumer programs for the United Sates Public Interest Group, an advocacy organization. ‘the bigger banks use monopoly power to charge higher fees. Basically, the mergers create fewer choices for consumers. Fewer choices mean less competition and more monopoly consolidation of power.’

It should also be pointed out that many of the financial conglomerates have credit card subsidiaries that stand to substantially benefit from the new bankruptcy law. A law that many say was won with soft money. Commercial banks ranked 10^th out of 80 industries while the Securities Industry ranked 3^rd for campaign contributions as measured by the Center for Responsive Politics (2000).

It is time we removed the Fed’s independence and made it a cabinet appointment or an elected post. An independent FED goes against the tenets of democracy this country was founded upon. It violates the concept of checks and balances which was intended to prevent one branch of government (executive, judicial, legislative) from becoming tyrannical and controlling the other branches to suit its needs. The original intent, I believe, was to keep the Reserve free from partisan influences, so that its decisions would clearly benefit the nation as a whole, not a special interest. Clearly, that is not happening here. De facto, Greenspan not only has seized the day but is running wild with it—and created a fourth branch of government answering to no one except, perhaps, his own conscience.

Chairman Greenspan has become a tyrant. Going against the tenets of the free market economy he so cherishes, he continually has bailed out money loosing organizations, countries and even speculators to such an extent that the Wall Street journal called the 1990’s the "Decade of Moral Hazard." He has presided over a policy of double standards that favors large financial institutions and speculators to the detriment of the rest of America.

We had better move fast the financial markets are crumbling and with the global economies slowing we may no longer be able to finance our record current account with the kindness of foreigners money. The Greenspan stock market bubble poses a big threat. Should troubles appear we must not let Alan fix them—his gig is up! And we must say NO! When the large financial conglomerates try to hold us hostage with their too big too fail threats. It is imperative we reestablish democratic order and not let corporate interests undermine democracy. We must regain control. We must collectively decide how things should be fixed—not some un-elected bureaucrat.

By now, you should know why we have an independent Fed: the markets like it. It’s the economy, or the market, stupid. It’s actually the power of money, the power of control, making sure that money does not loose its store of value. Nothing matters more than money—not jobs, not the suffering poor, not the health of the economy. The saddest thing is that by casting our lot with the market and the Fed we have done more than undermine democracy. We have let the Fed establish new values for us and influence how we live in this country. We may not believe that money is the number one priority. We may believe that loving your neighbor, loving justice, loving mercy, are more important than making a profit.

Progressives need to start focusing their efforts on reducing the power and changing the focus of the Federal Reserve to serve all Americans. All of the economic disparities and injustices that many of us see in the world are rooted in the actions of Fed chairman Greenspan. It is time we bit the bullet and removed the Fed’s independence, -- that is if we still think democracy is more important than the market. It’s time to clip the wings of an eagle soaring down a path along which we do not wish to go.

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