On the 1973 recession...

I'd like to start off with a quote from Jan. 7, 1973. "It is very rare that you can be unqualifiedly bullish as you can be now," Greenspan commented to the New York Times when he was president of Townsend Greenspan. That was two days after the 1973 stock market peak, when the market was on its way to declining 50 percent over two years, and we endured the worst recession since the Great Depression.

On the S&L industry...

The last thing that Alan Greenspan did before he left Townsend Greenspan to become Fed Chairman, was to opine on the S&L industry, and more precisely Charlie Keating's S&L. What follows is a vignette from the book "Inside Job," written by Steven Pizzo, about an encounter in 1984 between Greenspan and Ed Gray, who was the Federal Home Loan Bank board chairman.

"Gray received a letter from respected economist Alan Greenspan telling him he should stop worrying so much. Greenspan wrote that deregulation was working just as planned, and he named 17 thrifts that had reported record profits and were prospering under the new rules. Greenspan wrote the letter while he was a paid consultant for Lincoln Savings & Loan of Irvine, CA, owned by a Charles Keating, Jr., company. Four years after Greenspan wrote the letter to Gray, 15 of the 17 thrifts he'd cited would be out of business and would cost the FSLIC $3 billion in losses."

In addition, in 1985, Greenspan pronounced specifically that the management of the Keating thrift enterprise was "seasoned and expert" with a "record of outstanding success in making sound and profitable direct investments." For that quote I'm indebted to Jim Grant's terrific book, "The Trouble with Prosperity," which we will quote from again later.

So those quotes provide a peek into the thinking of Alan Greenspan while he was still in the private sector. By the time the 1990 economic downturn rolled around, largely as a result of unsound banking practices and most especially the S&Ls, he was the Fed chairman. And I think it is most instructive to look at what he thought as we entered that recession and what he later claims to have thought about that.

On the 1990 recession... For that bit of insight, I would like to quote extensively from Jim Grant's book, because he did a superb job of capturing what Greenspan said at the time and his later recollection of what he said.

His 1994 version... "In testimony before the Senate Banking Committee in May 1994, Alan Greenspan all but claimed that the Fed had acted alone. `In the spring of 1989,' Greenspan led off, `we began to ease monetary conditions as we observed the consequence of balance-sheet strains resulting from increased debt. Households and businesses became much more reluctant to borrow and spend, and lenders to extend credit - a phenomenon often referred to as the `credit crunch.' In an endeavor to defuse these financial strains, we moved short-term rates lower in a long series of steps through the summer of 1992, and we held them at unusually low levels through the end of 1993 - both absolutely, and, importantly, relative to inflation. These actions, together with those to reduce budget deficits, facilitated a significant decline in long-term rates as well.'

"Students of the Greenspan record, listening to the chairman claim credit for the restoration of American solvency, were left to wonder what they had missed. Interest rates had fallen, of course, and the broken financial economy had knitted. However, it was the first they had heard of this commendable and forehanded course of action by the Federal Reserve.

"It was not until October 1991 that the phrase `economic headwinds' entered the Greenspan repertory. He used the metaphor to describe the unprosperous gusts that were buffeting the aircraft GNP, the source of which he identified as the debt predicament. However, it was a historic observation rather than a predictive one. Bank stocks had reached low ebb fully one year before Greenspan favored a Rhode Island audience with this apercu; the stock market-assisted recapitalization of the banking system was already long under way. In the midst of the overbuilding of real estate and the overleveraging of corporate balance sheets in 1988-90, Greenspan had been inclined not to dwell on the issue of credit, possibly because it had not yet, to him, become an issue. In remarks titled `Innovation and Regulation of Banks in the 1990s' before the American Bankers Association in October 1988, for example, he did not mention the excessive lending against real estate that was being carried out by members of his audience even as he spoke to them, and that would be featured as one of the great regulatory issues in the decade under examination.

His 1990 version... "In testimony before the Joint Economic Committee in January 1990, on the eve of the failure of Drexel Burnham Lambert, a signal event in the credit contraction of 1989-92, Greenspan did not dwell on junk bonds, junk loans, failing banks, or in general on `the consequence of balance-sheet strains resulting from increased debt,' as he would put it in 1994. Although he did mention commercial real estate, among other macroeconomic trouble spots, he did not let on that interest rates would be progressively lowered to reduce the `financial strains' he would see so clearly four years later, while looking backward: `But such imbalances and dislocations as we see in the economy today probably do not suggest anything more than a temporary hesitation in the continuing expansion of the economy,' he wound up in that 1990 appearance. The messy default by Washington Bancorp on its unrated commercial paper came only one week after a pronouncement by the Federal Reserve Board, also based in Washington, D.C., that no generalized credit contraction was under way."

The purpose of this exercise is to point out that Greenspan has historically NOT had a strong grasp of the banking system or the financial markets. (For the sake of brevity, I have not used rosy scenario quotes from him just prior to the LTCM debacle.) He has, however, been willing to ease, and ease aggressively, thereby creating the right financial conditions for a mania. For this he is revered, but yet printing money should not be confused with knowing what you are doing.

Greenspan is no Paul Volcker.