The Greenspan Gadfly

THERE IT WAS, on live TV, in the Q&A session following Alan Greenspan's testimony before the House Financial Services Committee this week. Taking his turn with all the other committee members posing their loaded questions to score points with the voters back home about unemployment benefits, trade tariffs, tax cuts or whatever their pet issues might be, Rep. Ron Paul, a former doctor from the 14th district in Texas who brags on his Web site of having delivered over 4,000 babies, asked Chairman Greenspan point-blank if he thinks the Federal Reserve operates just like Enron (ENRNQ).

It was like a scene from "Mr. Smith Goes to Washington." Visualize Jimmy Stewart as Jefferson Smith here - a little nervous, perhaps a touch mad - but deep-down aw shucks sincere. Ron Paul, a Republican, looked the Master of the Universe in the eyes and said, "...we have nearly a $6 trillion debt.... Now the Federal Reserve comes in and they buy that debt in order to maintain the interest rate that they think is the right interest rate, and they take that and they use it as an asset. You put it in the bank, you call this debt that we have created an asset, and you use it as collateral for our Federal Reserve notes. So that's a pretty good scheme. And I think in moral terms, as well as in economic terms, it's very similar to how Enron operates."

A pause. The camera cut to Greenspan, scowling, almost a smirk, with his eyes rolled up looking at the ceiling, as though he were just waiting to see how this utterly bizarre monologue is going to resolve into a question he will actually have to answer, hoping maybe Paul's time will run out.

Paul went on for a while longer, talking about the perils of inflated paper money - fiat currency not backed by gold - issued by governments throughout history. And then the big finish: "...So I would ask you, can you see any corollary whatsoever on what you're asked to do in running our monetary system to that which Enron was involved in?"

If you were watching on CNBC you didn't get to see Greenspan's answer, because the network cut away then. But Greenspan did answer, and if you read the transcripts you'll find that he gave a respectful answer - perhaps even a thoughtful answer - to what might seem like a deliberately provocative question - perhaps even an off-the-wall question.

Greenspan admitted that "...in years past, there's been considerable evidence that fiat currencies have been mismanaged in general and that inflation has been too often the result.... There is some evidence that we are learning how to manage a fiat currency.... The evidence of recent decades is that it has been succeeding. Whether that continues is a forecast which I can't really project on."

And about that comparison to Enron? "And I don't perceive that anything we're doing as a central bank involves anything related to that. I hope that where we need to be transparent and indicate what we are doing, we do so, except in those areas where it...inhibits the ability to actually function as a central bank. But as I say in summary, I hope your analogy is inappropriate."

Congressman Paul told me Thursday that Greenspan is used to these out-of-the-box questions from him that cast doubt on the very legitimacy of the Federal Reserve. "My questions are always on the same subject. If I don't bring up the issue of hard money vs. fiat money, Greenspan himself does."

But at the same time, Paul says that he wasn't satisfied with Greenspan's answer. "I got what I expected: a nonanswer. He never gets into anything of substance, but, he does have a lingering doubt - he's not sure the system will work. He's a gold-standard person, but he's talked himself into believing he's the best manager in the world, and I just disagree with that."

Paul is a die-hard libertarian, who won't vote for any bill before the House - no matter how worthy it may seem - if he can't find a specific provision in the U.S. Constitution that empowers Congress to do what the bill proposes. And in that spirit, he thinks that the Federal Reserve has no right to exist in the first place. Paul told me, "All we'd have to do is support the Constitution and we'd abolish the Fed. The Federal Reserve Act is unconstitutional - nowhere in the Constitution does it say that Congress can create a central bank."

What would we do for money? Paul says, "Get the government out of money. Let the market determine it. Let American Express extend credit and decide what they want to back it with. But that's sort of idealism...so if the government is going to be involved, then government should just maintain the integrity of the monetary unit. Government should define the dollar as a weight in gold and maintain it. If I'm the secretary of treasury, I shouldn't issue the currency unless I've got the gold."

Paul puts his legislation where his mouth is. Following a bill to abolish the federal income tax, his latest effort is a law that would forbid the president, the Treasury or the Federal Reserve from engaging in any transactions in gold without specific authorization from Congress. Paul believes that the world's central banks, including the Federal Reserve, manipulate the price of gold to keep it deliberately low, to mask the inevitable inflation of their paper money.

He says, "They readily admit that foreign governments have loaned tons of gold, and Britain is outright selling gold. Our government denies it, and I don't know the answer. Right now they are sticking with the story that they do not deal in gold. I received a letter from [Treasury Secretary] Paul O'Neill stating clearly that they are not dealing in gold. This legislation is merely an attempt to open up the debate, make certain they aren't dealing in gold, or if they are that Congress knows about it."

It's hard to get radical ideas like this listened to - even if you're a congressman. I asked Paul whether he was taken seriously by his colleagues. "I think at times I'm a nuisance to them. They are so entrenched in the system. Those who do understand it would not like to rock the boat. It's no coincidence that we have a paper money system when we have a Congress that likes to spend a lot of money."

But Paul continues to fight his fight, and suspects that somewhere in Greenspan's heart of hearts, the Fed chairman may secretly be on his side. "There was a very special article he wrote in 1966 in The Objectivist Newsletter," he told me, referring to "Gold and Economic Freedom," a powerful plea for the gold standard published by radical capitalist Ayn Rand, then a close friend of Greenspan's. "I have an original copy and Greenspan signed it for me. I asked him if he still believes it, and he said he 'wouldn't change a single word.' Maybe deep down inside he's having a few doubts."

If you've been reading my columns for SmartMoney.com, you know that I have more than a few doubts. I assign a considerable amount of blame for the wild oscillations our economy has experienced over the past five years to Greenspan's ad hoc monetary policies. So Rep. Ron Paul may come off like a radical - but set against the context of the fawning, subservient adoration accorded Greenspan by virtually every other politician, I think Paul is doing us all a great service. He's telling the emperor that he's got no clothes, right on live TV. I'm glad Ron Paul is there.

Here is another take on the exchange from GATA:

"Our hero, U.S. Rep. Ron Paul, R-Texas, had an interesting exchange with Federal Reserve Chairman Alan Greenspan today before the House Financial Services Committee, wherein the most terrifying four-letter word in Washington was heard: G-O-L-D.

Paul cited a speech Greenspan gave in January to the American Numismatic Society in which Greenspan seemed to question whether the fiat monetary system would continue to work. In that speech, Greenspan had joked that, if the fiat system failed, the country might have to go back to using sea shells and oxen as money, and he promised that the Fed's discount window would maintain an adequate supply of those things.

Paul suggested that managing the Fed is like managing Enron, insofar as their accounting is similar. That is, Paul said, money is borrowed into being in the United States -- the government borrows money, issues instruments for that debt, and then those debt instruments are treated as assets on the books of everyone holding them.

In earlier remarks to the committee, Paul noted, Greenspan said Enron had operated by "capitalizing its reputation while holding few assets." Paul said this was just like the Fed itself.

Then the four-letter word came in. Gold, Paul said, is giving a hint of inflation despite the efforts of central banks to push the gold price back down.

Greenspan did not respond to Paul's remarks about gold, and since just moments earlier Greenspan HAD disputed remarks by Rep. Bernard Sanders, D-Vermont, about market concentration in certain industries, it's a fair assumption that Greenspan CHOSE not to deny that central banks are trying to suppress the gold price.

The Fed chairman told Paul that he "hoped" that there are "fundamental differences" between Enron's and the Fed's operations.

Fiat currency, Greenspan said, indeed has been mismanaged into inflation, but, he added, "We're learning how to manage fiat currency."

Of course with a little candor Greenspan might have added that managing fiat currency lately has been a matter of managing the gold price too.

Greenspan said he remained skeptical of fiat currency but recent evidence "is that it has succeeded."

Well, let's all stick around and see how much longer it succeeds.

Greenspan concluded his reply to Paul by saying that "I don't perceive" that the Fed is doing anything like Enron. The Fed, the chairman said, is being "transparent," but added, tellingly: "except where it inhibits the Fed's ability to function as a central bank."

Committee members are allotted only a few minutes at these hearings, and Paul could not follow up on Greenspan's reply. But Greenspan's conclusion seemed to acknowledge that he seems the basic functions of a central bank as requiring keeping the public ignorant about the most important stuff.

With luck that important stuff may be discussed if a hearing is ever held on Paul's legislation to require the Treasury Department, the Exchange Stabilization Fund, and the Fed to get the approval of Congress for any intervention in the gold market.

Some of our people are upset that CNBC's coverage of Greenspan's appearance before the House Financial Services Committee was interrupted during Paul's questioning as the network switched to a hearing on Enron. Whether or not this was the result of CNBC's hatred of gold, which is the enemy of all the imaginary investments CNBC has touted for years, you can see the Greenspan-Paul exchange for yourself over the Internet, courtesy of that ever-more-wonderful network, C-SPAN.

You're right, that's the way things are today. To most paper is more valuable than gold. It doesn't bother most that the paper they trade for is backed by nothing more than a promise that cannot be kept, and is easy prey for manipuation, usually devaluation, through money supply inflation, which we got another big dose of this last week.

The issue is, was, and always will be, does it matter that fi-yacht is backed by nothing. Even Greenspan, the reigning fiat distribution prince, but hardly the king, admitted that fiat has a critical, inherent flaw, which if not as he put it, "managed" correctly, would indeed lead to a economic disaster, which he defined as [hyper]"inflation".

His little smirk comes from somebody who knows the rig well, and last week simply becomes another trophy on the Great Manger's mantle piece. However, I have to laugh, because this is all Greenspan has done, create hyper inflation. Look at the prices of things these days. Those prices are not the result of productivity gains, they are a result of monetary inflation, prompted by many factors, but surely a big one is the govt's capacity to create new debt, of which an obliging money cartel is more than happy to 'fund'.

The govt was going into contraction mode pre 9/11. They were lowering taxes, giving rebates, etc. No major source of new money was coming into the 'system'. This is probably one of the main reasons why the market was buckling and headed for a sustainable crash.

But then, by a coincidence we had 9/11/01 happen, which led to a massive round of fresh govt spending, and sure enough, we are back to budget deficits again, and voila, look at, for example, DOW. The evidence is crystal clear: unless people keep borrowing new money, unless we go deeper into debt, in this current economic paradigm, there is no prosperity. What this means is our prosperity is leased from the bank/govt, and it really is not our own. If the bank/govt ever loses its ability to keep the rig afloat, than the whole thing collapses in upon itself, which is exactly where this thing was headed on 9/10/01.

Of course, the picture has changed, temporarily. There has been a massive rig going on since 9/11/01, and we are still inside of that action. Personally, I find it sickening how low the boyz have stooped to keep the CON game alive. If 9/11/01 did not happen, instead of a smirk, Greenspan would have either been eating crow, or out of a job by now. 9/11/01 shows us all how aggressive the boyz are at keeping their game alive. They have a level of control over the world, its people, and their economies that is totaly unprecedented.

The current net effect is just more hyper bubble pumping. That leads to more reckless speculation in the stock market, more pressure to buy high priced real estate, continued decimation of saving's accounts, and generally high prices of stuff throughout the economy, which will force the game to come full circle. It was inflationary price pressure that broke the market in the first place. Now they are at it again.

It seems to me that most people, looking at recent housing statistics, simply lack the ability to resit the pressure to 'get in'. Or maybe life cannot be put on hold forever. With the 4th Q rally, there was an avalance of pent up housing purchases that could hold back and wait no longer. Greenspan and his buds are saying "good, they took the bait"

But what of the next time, and the next episode, when once again that bank/govt needs to create another massive batch of fiat to keep the game afloat, inflation and productivity be damned? Today it was 9/11/01. The next time, if the past (9.11.01) is any indication of the future, we'd have to expect something much worse.

This is what Greenspan refers to when he says things like "in recent years we have seen that the fiat racket has been managed well." Is this the sort of thing that is good for America? No way. We do not need their fiat racket, and all the horrible conspiracies that are played out to keep the game going. We do not need the govt to grow at will, and create and fund for itself wars in order to keep the current new world economic order, which rests exclusively on fiat fundsing, in tact.

What we need is an honest money supply that cannot easily be manipulated, and we need to get back to the business of smaller govt and greater liberty for all. The world will likely become a far more peaceful place, with happier, and more produtive people.

However, the grocery clerk at Ralph's doesn't understand this. So even though they would accept gold coins for payment, they'll just as easily keep on with the paper. It is sad that they know so little how much they are getting screwed by the govt and the banks. If they understood that, they would in no way accept fiat. But because the fiat game is so aggressively pursued and defended by those who control it and benefit from it, the clerk at Ralph's is not likely in his lifetime to ever understand the full extent of how his future is being undermined by the banks and the govt, using their best weapon against clerks at Ralphs everywhere -- fi-yacht 'money'.

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