Goodbye to Greenspan
Inside Liberty Watch Today - Oct. 31, 2005

Now that conservative beltway insiders and outsiders don't have the Bush-loving Harriet Miers to kick around anymore, attention has turned to the man who will replace Fed Chair Alan Greenspan: Ben Bernanke. 

Bush's choice of Bernanke, as James Grant wrote in the NY Times, "has raised a roar of approval. Economist, scholar, presidential counselor and former Fed governor, Ben S. Bernanke is a nominee from central casting." Indeed the Dow went up 1.7% the day of his announcement. 

But all new Fed Chair's are venerated. Murray Rothbard wrote about Greenspan when he was appointed. "The very existence of the office makes its holder automatically wonderful, revered, deeply essential to the world economy, etc. Anyone in that office, up to and including Lassie, would receive precisely the same hagiographic treatment. And anyone out of office would be equally forgotten; if Greenspan should ever leave the Fed, he will be just as ignored as he was before."

Bernanke has the perfect résumé - winner of the South Carolina state spelling bee, Ph.D. from the Massachusetts Institute of Technology, former chairman of the Princeton economics department * and has promised to follow the policies of his predecessor.

But, although beloved by Wall Street, Greenspan is viewed as the worst Fed Chair ever by hedge fund manager and market commentator Bill Fleckenstein. Greenspan has perpetrated one bubble after another since his watch began a couple of months prior to the 1986 stock market crash.

He bailed out Wall Street after the '86 crash, he found more liquidity when Orange County hit the ditch in 1995, bailed out the Asian crisis two years later, bailed out those Nobel prize winning economists at Long-Term Capital Management in 1998 and cranked up the monetary printing press in 1999 over the Y2K hoax. After 9/11, Greenspan stepped on the monetary gas again. Is it any wonder government inflation measures, as bogus as they are, are hitting multi-year highs? 

Besides inflation, all of this liquidity has to go somewhere. First it was stocks, then bonds, now real estate. But, The Maestro, as adoring biographers have dubbed Greenspan, takes no responsibility for the Fed's actions. He sited, "extraordinary gains in productivity growth spawned by technological change" as a reason for the dot com boom. 
Responding to critics, Greenspan said, "The alternative was to wait for the eventual exhaustion of the forces of boom." He was the force of the boom, for crying of loud. 

Greenspan is leaving plenty of time bombs behind. "So, the fallout from the housing boom, the unfinished business from the stock boom and all the derivatives he's championed for his beloved deregulated financial system will combine to hit with full force somewhere down the road," Fleckenstein contends. 

Fleckenstein believes Greenspan's replacement will shoulder the blame for the coming financial train wreck; "But we must understand what actually took place and not let this arrogant buffoon get away with his attempt to rewrite history." 

Amazingly, Bernanke will likely be worse than Greenspan. Bernanke is so worried about deflation that in a 2002 speech he said: "Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation*" 

According to Bernanke the Fed could, if necessary, buy up all of the Treasury's debt, using dollars created specially for the purpose. "Or," as Grant explains; "for a double-barrel stimulus, it could also buy up private debts (mortgages, car loans, bonds and the like). And as a last resort, the Fed could figuratively put in place an idea that the economist Milton Friedman once theorized for illustrative purposes: It could drop money out of helicopters. Approbation for Mr. Bernanke is not quite universal on Wall Street; after that speech some took to mockingly calling him 'Helicopter Ben.'" 

But despite the almost unanimous agreement that deflation is bad news for an economy's health, this is not at all the case. As economist Frank Shostak explains, deflation is merely a response to previous inflation. Deflation is the disappearance of money that was previously created out "of thin air." This type of money diverts real funding from wealth generating activities to various non-productive activities. 

Shostak believes Bernanke will likely be very damaging for the economy. Bernanke's "proposal to target inflation is nothing more than a policy of tampering with the price mechanism," Shostak writes, "and can only weaken the process of wealth formation. His misguided view on falling prices and what the Fed ought to do in such an event, could produce serious economic trouble down the road."

As always, the question is: what should we do? "Since each of the world's major currencies is a scrap of paper of no intrinsic value, some of these disaffected dollar investors may buy gold," Grant writes. "Mr. Bernanke doesn't talk much about that barbarous relic. What would he make of a flight from a rationally managed currency into an inert precious metal? I will guess that it would astonish him." 

Gold was trading at $465 per ounce on Monday when Bernanke's nomination was announced. Last Friday it closed at $473. Gold vs. Bernanke: looks like the barbarous relic is winning so far. 

Doug French, Liberty Watch Columnist