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From: http://www.usagold.com/publications/Nov2014R&O.html
The
Reinvention of Alan Greenspan
Former
chairman calls Fed balance sheet a tinder box, endorses private gold
ownership
by Michael J. Kosares
; Late October, 2014
During the time Alan
Greenspan and representative Ron Paul had their famous series of
exchanges (some might have labeled them confrontations) during
Congressional hearings from 1997 to 2005, the congressman made what
turns out to have been a prescient observation. "My questions,"
he said, "are always on the same subject. If
I don't bring up the issue of hard money versus fiat money, Greenspan
himself does." I say "prescient observation"
because here we are a decade or more later and the "new"
post-Fed Greenspan sounds very much like the
"old" pre-Fed Greenspan-––the one who
consistently advocated gold before he became Fed chairman.
Greenspan has always come
across as a conflicted figure
forced to reconcile his responsibilities as chairman of the Federal
Reserve––the epicenter of the fiat money universe––with
a "nostalgia," as he put it, for the gold standard, its
diametric opposite. As such, I always saw him as torn between the
two––the devil on one shoulder and an angel on the other.
Outside those memorable
proddings by Congressman Paul, Greenspan
rarely spoke publicly about the virtues of gold while Fed chairman,
and when he did his approach seemed guarded. Even in the years
following his tenure, he rarely broached the subject. In
recent months though, as you are about to read, the
gloves have come-off not just with
respect to gold but with the
dangers inherent to the fiat monetary system as well.
The reinvention of
Alan Greenspan
Part
one -
an article in Foreign Affairs magazine
Greenspan's
reinvention began with a
surprising defense of gold in the October issue of Foreign
Affairs magazine.
In that article, titled "Golden Rule: Why Bejing Is Buying,"
he reminds top level policy makers of gold's role as a national asset
of last resort. "If, in the words of the British economist John
Maynard Keynes," he says, "gold were a 'barbarous relic,'
central banks around the world would not have so much of an asset
whose rate of return, including storage costs, is negative. . .Gold
has special properties that no other currency, with the possible
exception of silver, can claim."
So why is Bejing buying
gold?
"If China were to
convert a relatively modest part of its $4 trillion foreign exchange
reserves into gold," he says, "the country's currency could
take on unexpected strength in today's international financial
system. It would be a gamble, of course, for China to use part of its
reserves to buy enough gold bullion to displace the United
States from its position as the world's largest holder of monetary
gold. But the penalty for being wrong, in terms of lost interest
and the cost of storage, would be modest."
In
short, China
sees gold reserves as a means to building the credibility of the yuan
as a global reserve currency that would compete with the dollar. As
I mentioned in a recent issue of this newsletter, China
could purchase the U.S. gold reserve in its entirety with only 8% of
its $4 trillion in currency reserves and the entirety of global gold
reserves with 32% of
its foreign exchange holdings––some
sobering numbers.
Part
two -
a speech before the Council on Foreign Relations (CFR)
Greenspan followed that
article with a speech before the CFR in late October. In that speech,
he raised questions about the effectiveness of the Fed's quantitative
easing program. He also registered concern that the Fed might not be
able to adequately control either a future rise in interest rates or
the volatility (read downside) it might create in the markets. He
also cast doubt on the viability of the euro in the absence of a
European political union. In a surprise, he offered what I consider
to be some very sound financial advice: "Gold is a good place
to put money these days given its value as a currency outside of the
policies conducted by governments."
Part three - an
appearance at the gold-friendly New Orleans Investment Conference
Greenspan also spoke at
the New Orleans Investment Conference in October and here he offered
some important insights into the role of the Federal Reserve in the
present political economy. Henry Bonner (Sprott Global) who was in
attendance offers this summation:
"[Greenspan]
fell into his role as Fed Chairman purely by accident, he claimed,
and what he did there, he
did it because he had to.
He explained that the capital needs of the Federal government were so
massive that the only way to prevent disaster for the rest of the
economy was to keep
feeding the beast with cheap money.
If the Fed hadn't created and circulated new money, the Treasury's
insatiable demand for capital would certainly have 'crowded out' the
rest of the economy, wrecking the entire private credit system.
Political realities, he explained, in the form of entitlement
spending and off-balance sheet obligations of the US government,
trump the need for sound money every time."
In
this context, he explained, a gold standard is impossible. Greenspan
added flatly that he "never said the Fed was independent and
that its
heavily monetized balanced sheet is "a
pile of tinder but it hasn't been lit.
. . Inflation will eventually have to rise."
Why
Greenspan's reinvention is important to the average investor
So why go to the trouble
of cataloguing Alan Greenspan's October, 2014 epiphany?
We need to keep in mind
that this is an individual who actually sat at the controls of the
most important central bank in the world. As such he saw first-hand
how the monetary system operates––the good, the bad and
the ugly. For him to graduate
from that experience a proponent of gold reveals more about the
efficacy of central banks than perhaps those
institutions would like to be known. After all, the central
bankers' stock and trade is trust and belief. Wall Street trusts that
the central bank knows what it is doing and it believes that
it is powerful enough to make its will stick.
Greenspan
in the course of thirty days has dispelled both notions. He
tells us unambiguously that the Fed's power is limited; that its
policies by and large are dictated by forces outside its control (as
mentioned earlier, he exclaimed at one point that he "never said
the Fed was independent"); and that the Fed's options are
restricted by the overwhelming needs of a
government fiscally out of control.
What's more he recommends gold to the citizenry as a financial
defense. Tellingly, the man who was once called "maestro"
for his apparent mastery of economic orchestration appears to have
been humbled by his experience. His
born again embrace of gold,
and as one of the Fed's most vocal critics, should be viewed as one
of the more important curtain calls of the modern era. I am surprised
that more has not been made of it.
Epilogue
As a young man Greenspan
wrote what has become a famous
tract––one widely referenced by gold advocates
even now and one that still
ranks among the most highly visited pages at
USAGOLD. "Gold and
Economic Freedom" is a strongly worded,
no-holds-barred attack on fiat
money and the welfare state written in the late 1960s. It
also endorses the gold standard as a means to restraining those
impulses.
Former Congressman Ron
Paul once told the story of his owning an original copy of "Gold
and Economic Freedom" and asking Greenspan to sign it. While
doing so, Paul asked him if he still believed what he wrote in that
essay some forty years earlier. Greenspan, then still Fed chairman,
responded that he "wouldn't change a single word." True to
his word, and after serving a 19-year stint as chairman of the
Federal Reserve, he comes back to the place where he began. At nearly
89 years of age, he squares the books and adds a new and, in my view,
useful chapter to his legacy. At the New Orleans conference Greenspan
was asked where he thought gold would be in five years. He
answered "higher." When asked how much, he
said "measurably."
Welcome back, Mr.
Greenspan.
Links:
The
Paul-Greenspan Congressional hearing transcripts.
Gold
and Economic Freedom by Alan Greenspan (1967)
Sanford Weill, creator of CitiGroup
The
remarkably ironic pronouncement from Sandy Weill that the U.S. should
resurrect some form of the Glass-Steagall Act -- which he worked
assiduously to tear asunder in the 1990s as he created Citigroup Inc.
(C) -- has touched off another a debate about how to control the
worst instincts on Wall Street.”
Bloomberg
Opinion By William D. Cohan Aug 5, 2012 6:36 PM ET :
Don’t
Fall For Sandy Weill’s Crocodile Tears
The
Long Demise of Glass-Steagall.
Former FOMC Governor Kevin Warsh
What
an Ex-FOMC Governor Wants to Tell You about the Fed
Posted
on November
13, 2013 by ffwiley
Hunting
season is off to a good start this week, and I’m not just
talking about deer hunting. It seems that former Fed officials
declared open season on their ex-colleagues.
First,
Andrew Huszar, who once ran the Fed’s mortgage buying
operation, let
loose in
yesterday’s Wall
Street Journal.
Huszar apologized to all Americans for his role in the toxic QE
programs.
And
then today, the WSJ struck
again, this time with an op-ed by
former FOMC Governor Kevin Warsh.
Instead
of excerpting the Huszar essay, we’ll only share the apt words
of commenter Ernest Moosa, who wrote:
Every
reader needs to understand and grasp what is being said here. We have
been on the wrong economic path for five years, and without the
desired results, our leadership says “FULL SPEED AHEAD”.
We have wasted so much time and money that future generations will
point to us and say this is how a great country can be destroyed in
less than a decade with no shots even being fired. Deplorable.
Moosa
hit the nail on the head, and we recommend reading the op-ed in its
entirety if you haven’t already done so.
As
for Warsh’s editorial, it was tough to read without wondering
what he’s thinking. Warsh is a former Morgan Stanley investment
banker whose 2006 to 2011 stint on the FOMC spanned the end of the
housing boom and the first few years of “unconventional”
policy measures. After such a solid grounding in the ways of the Fed
and Wall Street, he recently morphed into a critic of the status quo.
His criticisms are welcome and we believe accurate, but they’re
also oh so carefully expressed. They’re written with the polite
wording and between-the-lines meanings that you might expect from
such an establishment figure. He seems to be holding back.
So,
what
does he really want to say?
Here
are our
guesses,
alongside excerpts from the editorial on each of nine topics that
Warsh covered:
Quantitative
easing
“The
purchase of long-term assets from the U.S. Treasury to achieve
negative real interest rates is extraordinary, an unprecedented
change in practice since the Treasury-Fed Accord of 1951.
The
Fed is directly influencing the price of long-term Treasurys—the
most important asset in the world, the predicate from which virtually
all investment decisions are judged. Earlier this year the notion
that the Fed might modestly taper its
purchases drove significant upheaval across financial markets. This
episode should engender humility on all sides. It should also correct
the misimpression that QE is anything other than an untested,
incomplete experiment.”
What
he really wants to say:
We’d
all be better off if the central banking gods
(myself included) hadn’t
been so damn arrogant to think that we actually understood QE. We
don’t, and it never should have been attempted.
The
Fed’s focus on inflation
“Low
measured inflation and anchored inflationary expectations should only
begin the discussion about the wisdom of Fed policy, not least
because of the long and variable lags between monetary interventions
and their effects on the economy. The most pronounced risk of QE is
not an outbreak of hyperinflation. Rather, long periods of free money
and subsidized credit are associated with significant capital
misallocation and malinvestment—which do not augur well for
long-term growth or financial stability.”
What
he really wants to say:
The
inflation target is stupid. It’s
not the CPI that’s killing us, it’s the credit booms and
busts.
The best way out of this mess is to lose the inflation target and go
back to the old-fashioned approach of “taking the punch bowl
away when the party gets going.”
Pulling
off the exit from extraordinary measures
“[T]he
foremost attributes needed by the Fed to end its extraordinary
interventions and, ultimately, to raise interest rates, are courage
and conviction. The Fed has been roundly criticized for providing
candy to spur markets higher. Consider the challenge when a steady
diet of spinach is on offer.”
What
he really wants to say:
Pundits
who praise the courage of our central bankers are clueless. The
true story is that we consistently take the easy way out. If the
current cast of characters wanted to show courage, they’d man
up and replace the short-term sugar highs with long-term thinking.
The
Fed’s relationship to the rest of Washington
“The
administration and Congress are unwilling or unable to agree on tax
and spending priorities, or long-term structural reforms. They avoid
making tough choices, confident the Fed’s asset purchases will
ride to the rescue. In short, the central bank has become the default
provider of aggregate demand. But the more the Fed acts, the more it
allows elected representatives to stay on the sidelines. The Fed’s
weak tea crowds out stronger policy measures that can only be taken
by elected officials. Nobel laureate economist Tom Sargent has it
right: ‘Monetary policy cannot be coherent unless fiscal policy
is.’”
What
he really wants to say:
And
if
we don’t man up, you can count on Congress to continue its
egregious generational theft and destroy our nation’s finances,
just as me, Stan and Geoff have
been warning.
Who
benefits from QE and who doesn’t?
“Most
do not question the Fed’s good intentions, but its policies
have winners and losers, which should be acknowledged forthrightly.
The
Fed buys mortgage-backed securities, thereby providing a direct boost
to balance sheet wealth of existing homeowners to the detriment of
renters and prospective future homeowners. The Fed buys long-term
Treasurys to suppress yields and push investors into riskier assets,
thereby boosting U.S. stocks.
The
immediate beneficiaries: well-to-do households and established firms
with larger balance sheets, larger risk appetites, and access to
low-cost credit. The benefits to workers and retirees with
significant fixed obligations are far more attenuated. The plodding
improvement in the labor markets offers little solace.”
What
he really wants to say:
Unbelievably,
my ex-colleagues still don’t acknowledge their policies are
killing the middle class to support the plutocracy. Their silence on
this is wholly unacceptable and has to stop (and so do the policies).
Domestic
versus global policy considerations
“[T]he
U.S. is the linchpin of an integrated global economy. Fed-induced
liquidity spreads to the rest of the world through trade and banking
channels, capital and investment flows, and financial-market
arbitrage. Aggressive easing by the Fed can be contagious, inclining
other central banks to ease as well to stay competitive. The
privilege of having the dollar as the world’s reserve currency
demands a broad view of global economic and financial-market
developments. Otherwise, this privilege could be squandered.”
What
he really wants to say:
We
really need to climb out of our shell and look at things from a
global perspective. The
rest of the world knows that we’re selling a bill of goods and
won’t continue buying it forever. If we don’t change, you
can kiss the dollar goodbye.
Forward
guidance
“Since
QE began, Fed policy makers have tried to explain that asset
purchases and interest rates are different. Hence their refrain that
tapering is not tightening, and that very low interest rates will
continue after QE. Investors do not agree. Once the Fed begins to
wind down its asset purchases, these market participants are likely
to reassert their views with considerable force.
Recently,
the Fed has elevated forward guidance as a means of persuading
investors that it will indeed keep interest rates exceptionally low
even after QE. Forward guidance is intended to explain how the
central bank will react to incoming data. Fed projections for
example, may show below-target inflation and a residual output gap
justifying very low interest rates several years from now. But words
are not equal to concrete policy action. And the Fed hasn’t
received many awards for prescience in recent years.”
What
he really wants to say:
Forward
guidance is a load of crap. First, you won’t convince the
market of any of your dumb ideas. Investors can and will think for
themselves. Second, talk is cheap. And talk
that’s based on the Fed’s ability to foresee the future?
C’mon now, that’s ridiculous.
Transparency
“[T]ransparency
in communications about future policy is not a virtue unto itself.
The highest virtue is getting policy right. Given manifest
uncertainties about the state of the economy, oversharing policy
deliberations is not useful if markets are led astray, or if public
commitments reduce policy makers’ flexibility to call things
the way they see them.”
What
he really wants to say:
Transparency,
shmansparency. I’ve had it up to here with taper, untaper,
maybe taper, maybe not taper. I’ll
trade a transparent central bank for one that knows what it’s
doing any day.
Obama’s
nomination of Janet Yellen as the next FOMC chair
“The
president has nominated a person with a well-deserved reputation for
probity and good judgment. The period ahead will demand these
qualities in no small measure.”
What
he really wants to say:
The
president made a bad choice.
Disclaimer
These
are only our guesses, not actual thoughts from Kevin Warsh, who
hasn’t told us what he really wants to say. We don’t
even know if he hunts. (We’re guessing no.)
OPINION
Andrew
Huszar: Confessions of a Quantitative Easer
We
went on a bond-buying spree that was supposed to help Main Street.
Instead, it was a feast for Wall Street.
By
ANDREW
HUSZAR
Nov.
11, 2013 7:00 p.m. ET
I
can only say:
I'm sorry, America.
As a former Federal Reserve official, I was responsible for executing
the centerpiece program of the Fed's first plunge into the
bond-buying experiment known as quantitative easing. The central bank
continues to spin QE as a tool for helping Main Street. But I've come
to recognize the program for what it really is: the
greatest backdoor Wall Street bailout of all time.
Five
years ago this month, on Black Friday, the Fed launched an
unprecedented shopping spree. By that point in the financial crisis,
Congress had already passed legislation, the Troubled Asset Relief
Program, to halt the
U.S. banking system's free fall.
Beyond Wall Street, though, the economic pain was still soaring. In
the last three months of 2008 alone, almost two million Americans
would lose their jobs.
The
Fed said it wanted to help—through a new program of massive
bond purchases. There were secondary goals, but Chairman Ben Bernanke
made clear that the Fed's central motivation was to "affect
credit conditions for households and businesses": to drive
down the cost of credit
so that more Americans hurting from the tanking economy could use it
to weather the downturn. For this reason, he originally called the
initiative "credit easing."
My
part of the story began a few months later. Having been at the Fed
for seven years, until early 2008, I was working on Wall Street in
spring 2009 when I got an unexpected phone call. Would
I come back to work on the Fed's trading floor? The job: managing
what was at the heart of QE's bond-buying spree—a wild attempt
to buy $1.25 trillion in mortgage bonds in 12 months.
Incredibly, the Fed was calling to ask if I wanted to quarterback the
largest economic stimulus in U.S. history.
Enlarge
Image
Phil
Foster
This
was a dream job, but I hesitated. And it wasn't just nervousness
about taking on such responsibility. I had left the Fed out of
frustration, having witnessed the institution deferring more and more
to Wall Street. Independence is at the heart of any central bank's
credibility, and I had come to believe that the Fed's independence
was eroding. Senior Fed officials, though, were publicly
acknowledging mistakes and several of those officials emphasized to
me how committed they were to a major Wall Street revamp. I could
also see that they desperately needed reinforcements. I took a leap
of faith.
In
its almost 100-year history, the Fed had never bought one mortgage
bond. Now my program was buying so many each day through active,
unscripted trading that we
constantly risked driving bond prices too high
and crashing global confidence in key financial markets. We were
working feverishly to preserve the impression that the Fed knew what
it was doing.
It
wasn't long before my old doubts resurfaced. Despite the Fed's
rhetoric, my program wasn't helping to make credit any more
accessible for the average American. The banks were only issuing
fewer and fewer loans. More insidiously, whatever credit they were
extending wasn't getting much cheaper. QE may have been driving down
the wholesale cost for banks to make loans, but Wall
Street was pocketing most of the extra cash.
From
the trenches, several other Fed managers also began voicing the
concern that QE wasn't working as planned. Our warnings fell on deaf
ears. In the past, Fed leaders—even if they ultimately
erred—would have worried obsessively about the costs versus the
benefits of any major initiative. Now the only obsession seemed to be
with the newest survey of financial-market expectations or the latest
in-person feedback from Wall Street's leading bankers and hedge-fund
managers. Sorry, U.S. taxpayer.
Trading
for the first round of QE ended on March
31, 2010.
The final results confirmed that, while there had been only
trivial relief for Main Street,
the U.S. central bank's bond purchases had been an absolute coup for
Wall Street. The banks hadn't just benefited from the lower cost of
making loans. They'd also enjoyed huge capital gains on the rising
values of their securities holdings and fat commissions from
brokering most of the Fed's QE transactions. Wall Street had
experienced its most profitable year ever in
2009, and 2010 was starting off in much the same way.
You'd
think the Fed would have finally stopped to question the wisdom of
QE. Think again. Only a few months later—after a 14% drop in
the U.S. stock market and renewed weakening in the banking sector—the
Fed announced a new round of bond buying: QE2. Germany's finance
minister, Wolfgang Schäuble, immediately called the decision
"clueless."
That
was when I realized the
Fed had lost any remaining ability to think independently from Wall
Street.
Demoralized, I returned to the private sector.
Where
are we today? The Fed keeps buying roughly $85 billion in bonds a
month, chronically delaying so much as a minor QE taper.
Over five years, its bond purchases have come to more than $4
trillion. Amazingly, in a supposedly free-market nation, QE has
become the largest financial-markets intervention by any government
in world history.
And
the impact? Even by the Fed's sunniest calculations, aggressive QE
over five years has generated only a few percentage points of U.S.
growth. By contrast, experts outside the Fed, such as Mohammed El
Erian at the Pimco investment firm, suggest
that the Fed may have created and spent over $4 trillion for a total
return of as little as 0.25% of GDP
(i.e., a mere $40 billion bump in U.S. economic output). Both of
those estimates indicate that QE
isn't really working.
Unless
you're Wall Street. Having racked up hundreds of billions of dollars
in opaque Fed subsidies, U.S.
banks have seen their collective stock price triple since March 2009.
The biggest ones have only become more of a cartel: 0.2%
of them now control more than 70% of the U.S. bank assets.
As
for the rest of America, good luck. Because QE was relentlessly
pumping money into the financial markets during the past five years,
it killed the urgency for Washington to confront a real crisis:
that of a structurally
unsound U.S. economy.
Yes, those financial markets have rallied spectacularly, breathing
much-needed life back into 401(k)s, but for how long? Experts
like Larry
Fink at
the BlackRock investment firm are suggesting that conditions are
again "bubble-like." Meanwhile, the country remains overly
dependent on Wall Street to drive economic growth.
Even
when acknowledging QE's shortcomings, Chairman Bernanke
argues that some action by the Fed is better than none (a position
that his likely successor, Fed Vice Chairwoman Janet
Yellen,
also embraces).
The implication is that the Fed is dutifully compensating for the
rest of Washington's dysfunction.
But the Fed is at the center of that dysfunction.
Case in point: It has allowed QE to become Wall Street's new "too
big to fail" policy.
Mr.
Huszar, a senior fellow at Rutgers Business School, is a former
Morgan Stanley managing director. In 2009-10, he managed the Federal
Reserve's $1.25 trillion agency mortgage-backed security purchase
program.