Wednesday, February 08, 2006

Greenspan speaks his mind

Greenspan said the high cost of gold did not reflect inflation or the strength of commodities, but rather a fear among investors of a major geopolitical conflict. There were people who believed that a nuclear weapon could be detonated within five years, the former American central bank supremo said. Greenspan says

Not infrequently over the past years I've wondered what now retired Federal Reserve Chairman Greenspan might say were he free to speak his mind. My hope was that he might echo the sentiments of his mentor, Arthur Burns, noting the constraints of the office, and the dangers of being affected by the philosophic and political trends of the time. My fear was that he had been, more or less, already speaking his mind. His first comments since retirement lead me to the latter view.

It is, of course, possible that his acceptance of an advisory role to the UK's Treasury will act as further constraint on his "free speech." On the other hand, despite Paul Volcker's continued involvement with government, he apparently feels free enough to criticize the lack of policy response. Perhaps more time needs to pass before Mr. Greenspan finds his voice. For the purposes of this essay, however, I'll proceed under the assumption that he is speaking his mind.

Clashes between internal sensibilities and the pressures of public office can manifest in many ways. Dissenters who wish to remain "inside" might pay lip service to policies for public consumption while effort is directed to exposing the perceived error. These people can sometimes stall institutional acceptance of the passions of the day. Sometimes the clash is so intense that dissenters take action, Daniel Ellsberg and Lawrence Wilkerson come to mind.

Mr. Greenspan's lack of private life, by most accounts he devoted himself to his job, further leads me to think that what you see is, by and large, what you get. Perhaps underneath the expressed sense that he has managed the economy well lies, not a family man concerned about the future state of the world, Greenspan has no children, but the belief that he has managed things well and price action to the contrary is a temporary phenomenon. His history as Objectivist, the philosophy that the world is as it seems to you, and that people who disagree don't get it, also suggests this view. Then again, should I even be surprised to find that a man who does not believe in the soul demonstrates his lack thereof?

Why, you might be wondering, would I be fearful that Greenspan was, in the main, calling it like he saw it? I feared that view because the projected Greenspan seemed quite shallow to me suggesting that policy changes would reflect that shallowness. Remember this wasn't a man who grudgingly went along with executive branch pressure to ease policy, but rather one whose embrace of "new economy" tenets led him to revise statistical definitions in support of that view. He biased institutional measures which will remain with us for some time.

He seemed to be a true believer, in himself, merely paying lip service to "on the other hand." Men of that persuasion are apt to lead people over a cliff, because they can't imagine the edge even exists, until it's too late.

To wit, it seems extraordinarily shallow to me to argue that Gold is not rising due to inflation concerns but rather due to fear of geopolitical conflict. Is conflict between nations (a phrase I much prefer to the popular sound bite "geopolitical conflict") an exogenous event, or a result of policy failures? In the event of an expanded conflict, (perhaps someone should tell Mr. Greenspan that there already is a war going on) would it not be a wise trade to expect further inflationary finance from the nation which acts as both policeman and banker to the world?

Admittedly, some time passed before Arthur Burns wrote what I read as an indictment of discretionary monetary policy:

Viewed in the abstract, the Federal Reserve System had the power to abort inflation at its incipient stage fifteen years ago or at any later point, and it has the power to end it today. At any time within that period, it could have restricted the money supply and created sufficient strains in financial and industrial markets to terminate inflation with little delay. It did not do so because the Federal Reserve was itself caught up in the philosophic and political currents that were transforming American life and culture.

Greenspan, it seems to me, was and still is caught up in those currents.