Greenspan, the Wizard of Bubbleland
By Henry C K Liu
Sep 14, 2005
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The Kansas City Federal Reserve Bank annual symposium at Jackson Hole, Wyoming, is a ritual in which central bankers from major economies all over the world, backed by their supporting cast of court jesters masquerading as monetary economists, privately rationalize their unmerited yet enormous power over the fate of the global economy by publicly confessing that while their collective knowledge is grossly inadequate for the daunting challenge of the task entrusted to them, their faith-based dogma nevertheless should remain above question. That dogma is based on a single-dimensional theology that sound money is the sine qua nonof economic well-being. It is a peculiar ideology given that central banking as an institution derives its raison d'etre from the rejection of a rigid gold standard in favor of monetary elasticity.
In plain language, central banking sees as its prime function the management of the money supply to fit the transactional needs of the economy, instead of fixing the amount of money in circulation by the amount of gold held by the money-issuing authority. Thus
central bankers believe in sound money, but not too sound please, lest the economy should falter. Their mantra is borrowed from the Confessions of St Augustine: "God, give me chastity and continence - but not just now."
This year, the annual august gathering in August took on special fanfare as it marked the final appearance of Alan Greenspan as chairman of the US Federal Reserve Board of Governors. Among the several interrelated options of controlling the money supply, the Federal Reserve, acting as a fourth branch of the US government based on dubious constitutional legitimacy and head of the global central-banking snake based on dollar hegemony, 
has selected interest-rate policy as the instrument for managing the economy all through the 18-year stewardship of Alan Greenspan, on whom many accolades were showered by invited participants in the Jackson Hole seminar in anticipation of his retirement early next year.
Greenspan's formula of reducing market regulation by substituting it with post-crisis intervention is merely buying borrowed extensions of the boom with amplified severity of the inevitable bust down the road. The Fed is increasingly reduced by this formula to an irrelevant role of explaining an anarchic economy rather than directing it towards a rational paradigm. It has adopted the role of a cleanup crew of otherwise avoidable financial debris rather than that of a preventive guardian of public financial health. Greenspan's monetary approach has been "when in doubt, ease". This means injecting more money into the banking system whenever the US economy shows signs of faltering, even if caused by structural imbalances rather than monetary tightness. For almost two decades, Greenspan has justifiably been in near-constant doubt about structural balances in the economy, yet his response to mounting imbalances has invariably been the administration of off-the-shelf monetary laxative, leading to a serious case of lingering monetary diarrhea that manifests itself in runaway asset price inflation mistaken for growth.
Volcker's bloody victory
Paul Volcker, as chairman of the Fed before Greenspan, caused a "double-dip" recession in 1979-80 and 1981-82 to cure double-digit inflation, in the process bringing the unemployment rate into double digits for the first time since 1940. Volcker then piloted the economy through its long recovery that ended with the 1987 crash. To his credit, Volcker did manage to bring unemployment below 5.5%, half a point lower than in the 1978-79 boom, and the acknowledged structural unemployment rate of 6%.
To achieve his heroic, albeit bloody, victory over intractable inflation, Volcker adopted a "new operating method" for the Fed in 1980 as a therapeutic shock treatment for Wall Street, which had been spoiled fearless by the brazen political opportunism of Arthur Burns, Volcker's predecessor during the Nixon-Ford era. Wall Street had lost faith in the Fed's political will to control inflation.