Bye Bye Banker!

Alan Greenspan's Real Legacy

It's the end of an era - Alan Greenspan has stepped down as chairman of the Federal Reserve after 18 years at the helm.

Now it's time to examine the myths regarding his long tenure as chief steward of the American economy.

Many have been quick to lavish praise on Greenspan when he announced he would step down on Jan. 31.

"He has a legitimate claim to being the greatest central banker who ever lived," Princeton University economist Alan Blinder, who spent 19 months as the Fed's No. 2 in the mid-1990s, wrote in a paper.

President Bush went so far as to present Greenspan with the Presidential Medal of Freedom, America's highest civilian award, saying at a November ceremony that the outgoing Fed chief "leaves behind a standard that will always define a successful chairman."

Some, as I do, feel Alan Greenspan falls short of this Second Coming view of him.

Jarret Wolstein, writing in NewsMax's Financial Intelligence Report in October delivered a detailed - and highly critical - analysis of Greenspan's reign as head of the world's most powerful central bank.

A chief beef of Greenspan critics is that rather than deal with economic problems as they arose, he has been "passing the buck" - leaving incoming Chairman Ben Bernanke to wrestle with mounting economic woes.

Harry Truman was an unpopular figure while presiding in the White House, but in hindsight he has gained enormous respect for the difficult decisions he made.

The opposite could be true for Greenspan. Admired today, I predict he will be increasingly reviled in years to come as Americans grapple with his legacy.

Let us not forget that Alan Greenspan presided over the two largest bubbles in U.S. history, perhaps world history. The first was the dot-com bubble of the 1990s.

In 1996 Greenspan himself warned that the U.S. economy was suffering from "irrational exuberance" as the stock market, led by the high-tech and Internet sectors, boomed.

But he took no action, leading to what Sir John Templeton described as the "the greatest bubble in history." For sure, Greenspan knew he should have dampened the stock mania with reasonable rate hikes. But he did not for several years.

I have little doubt his motive was to serve Clinton administration interests. Greenspan waited until 2000 to apply the brakes to an overheated economy. In my mind he did want to upset the Democrats chances to capture the White House in the 2000 elections.

After the 2000 election, Greenspan dramatically ramped up interest rates in 2000 and 2001, plunging the country into a recession. After slamming on the brakes, Greenspan then flipped again, and put his foot on the accelerator by dropping interest rates.

By 2002, he dropped interest rates to record lows -- as low as 1 percent. This helped fuel the U.S. economy. But at such low rates, who was going to buy our debt? In the end, the U.S. had to rely largely on Asian investors, particularly Chinese and Japanese central banks, to prop up our debt structured economy.

For sure, low interest rates fueled the U.S. economy. But it has also created a new asset bubble, this time in real estate and one the Economist magazine has dubbed the greatest bubble of all time, superseding the dot-com one.

As Greenspan was preparing to depart the Federal Reserve he made clear we could see as an asset price tumble in real estate.

This is easy to expect as the Fed has raised interest rates repeatedly in the past 18 months - with rates now at 4.25 percent mortgage rates will eventually rise.

Greenspan and the Federal Reserve have stated these rate hikes were made to curb inflation.
I doubt that is the real reason, as I think Greenspan couldn't care less about inflation.

The real reason for the rate boosts can be found elsewhere.

For one thing, overseas investors like China and Japan are tired of bailing out the United States and don't want to buy our debt at below market rates. Greenspan had to raise rates to market our debt to the world.

Second, under Greenspan's watch the dollar has collapsed. In recent years it tumbled as much as 40 percent - though we have seen a small rally for the dollar as interest rates have increased.

But the greenback is still down a remarkable 30 percent in five years against a basket of currencies known as the dollar index, and almost 40 percent against the Euro. Imagine if the value of your home fell 40 percent in five years!

The collapsed dollar has had dramatic effects on American consumers, most notably on commodity prices, particularly oil and gold, which have been skyrocketing in price.

So Greenspan has steadily raised interest rates, leading to what some economists predict will be the next big bubble burst - in the housing market.

The boom in real estate fueled the U.S. economy back into what appeared to be good health.

But now rising interest rates - and of course, mortgage rates - are threatening to explode the real estate bubble.

Some economists warn that the Fed has simply replaced the dot-com bubble with a housing bubble that is ready to burst and promoting other conditions that could lead to a serious recession.

As the Financial Intelligence Report noted, "Greenspan is hardly the financial genius that many have proclaimed him to be. He is much more like a bad doctor who gives his patient terrible medical advice and then warns about the consequences."

So now Greenspan is gone, leaving Bernanke to clean up the mess. Someday Americans will wake up and say: Alan, we hardly knew ye!

By Christopher RuddyEditor, NewsMax.com Publisher, Financial Intelligence Report