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Its Official, Alan Greenspan Is To Blame

By: Steve Johnson

6/30/2009 - 41 Comments

Alan Greenspan was the Chairman of the Federal Reserve from 1987 to 2006, where he became the leading authority in guiding the US economy for the last two decades.

He is often praised for his handling of the 1987 stock market crash and the economic boom of the 90s.  

But, in recent years Alan has been criticized by some congressional leaders and economists who pointed out how his monetary policies of low interest rates and praise for sub-prime lending vehicles led to the dot-com burst and the housing bubble.

Alan Greenspan is a brilliant man, if you read his biography.

Yet, at the bottom of the page it says,

“Alan Greenspan is blamed by the followers of the Austrian School for creating excessive liquidity which caused lending standards to deteriorate resulting in the housing bubble of 2004-2006 and the market meltdown beginning in 2008. Currently the American Federal Reserve follows a modified form of monetarism, where broader ranges of intervention are possible in light of temporary instabilities in market dynamics. “

I am in this camp. The Federal Reserve’s intervention in the economy is the primary cause of the US recession that has spread into a global recession. 

The reason that the global economy has been pulled into the recession is because of the tight coupling of central banks resulting from decades of trade agreements (since WWII) and the increase in the ability to invest around the world brought about from advancements in technology.

Because of this, Alan Greenspan’s role at the Federal Reverse became must more as his policies became the foundation of the global economy. 

Banker Poll: Greenspan to Blame

In a recent British-based poll where 200 wealthy bankers, fund managers and investors were asked to pick a person most responsible for the crisis, Alan Greenspan as the clear winner.

“Gary Jenkins, Head of Fixed Income Research at Evolution Securities, wanted a more specific scapegoat and ran a poll of about 200 mostly fund managers and investors asking them to pick their credit crisis culprit.

“Former U.S. Federal Reserve Chairman Alan Greenspan was the clear winner, picking up 35 percent of the votes. Once considered one of the world's greatest central bankers, he has been widely criticized over the past year for low interest rate policies that helped fuel the credit boom.

Former U.S. president Bill Clinton figured quite prominently with about 10 percent of votes, and British prime minister Gordon Brown also got quite a few. “

Expansion of Credit

The Federal Reserve is suppose to operate as an independent agency so that they can guide the economy without facing political pressure to ‘juice’ the economy for the short-run and instead focus on long-term economic stability.

Somewhere along the way, the political pressure over took the ability of the Federal Reserve to operate without a political influence.  Alan Greenspan sold out to the political pressure of congress and the administration to ‘juice’ the economy and keep the GDP growing so that the politicians could continue to increase spending - and get re-elected.

The housing boom of the last decade was perhaps the largest example of neglect as Alan repeatedly refused to acknowledge to his critics that he was creating a huge bubble that allowed a massive expansion of credit – as consumers borrowed against their inflated homes by the trillions.

Alan Greenspan’s biggest failure was his belief that he could plan the economy better than people can on their own. 

This is the grand illusion that has destroyed many nations throughout history, leading many to hyperinflation. The grand illusion is to think that economists can direct the economy better than people can on their own.  Free market capitalism has been proven time and time again to be the best tool in the world to direct people into making wealth producing decisions. 

What About Greedy Bankers?

Some like to point out that Wall Street creating the easy home securities like ARM and sub-prime loans, but realize that Wall Street would not have been able to create these things if Alan wouldn’t have allowed interest rates to drop well below market rates.

The second largest culprit is congress, as they created the mortgage giants Freddie Mac and Fannie Mae which provided Wall Street with the means to get unqualified individuals to purchase homes that they couldn’t afford.

Last year Freddie Mac and Fannie Mae when bankrupt because of these risky loans and instead of letting them fail, the government bailed them out, took them over and is still handing out risky loans that they should not be. 

Some say Bernard Madoff got what he deserved from running a Ponzi scheme that caused many investors to lose millions. But what about the guys like Senator Christ Dodd and Senator Barney Frank who chaired the banking committee and helped create Freddie Mac and Fannie Mae into the disasters they are today – which has caused tax payers to lose billions.  Shouldn’t these guys be in the jail cell next to Bernard?

Freddie Mac and Fannie Mae were created by the Democrats and the Clinton administration to make mortgages available to more people. 

Many of Clinton’s white house directors also went to work for Freddie Mac and Fannie Mae and collected millions, like Franklin Raines, Jamie Gorelick and Jim Johnson (Obama VP search committee).

Senator Obama was the second most Senator to collect money from Freddie Mac and Fannie Mae.

A conversation about greedy bankers on Wall Street cannot escape a discussion about greedy politicians.  Wall Street can only play by the rules created in Washington.  The money trail goes all the way to the top. 

To Alan Greenspan's credit, he warned congress that Freddie Mac and Fannie Mae needed more regulation and  pose a great risk to the economy.  The economic collapse could have been prevented.

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Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse

In discussions of today's economic meltdown and what to do about it, the Federal Reserve is a stealth helicopter: it never shows up on the radar. With the exception of a few esoteric specialists and those Ron Paul Revolutionaries who burst into chants of "Abolish the Fed!" Historian Thomas Woods notes in this important book, the Federal Reserve bears a large part of the blame for the mess we're in. In the first part of "Meltdown," Woods shows how both in theory and in practice, Fed policy fueled an artificial boom and is now leading us to a much larger meltdown.

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