Alan, We Hardly Knew Ye -
Sen. Proxmire chided the candidate for a “dismal forecasting record” when he was chairman of the Council of Economic Advisers. (Greenspan was CEA chairman during the Ford administration.) In Proxmire’s words, the forecasts made by the candidate were “way off.” Of the interest rate forecasts made by the CEA, Greenspan’s were “wrong by the biggest margin of any of the [CEA chairmen].” Proxmire went on: “There you broke all records for the entire period in error.” Of inflation: “There again, you broke all records.” The only CEA chairman to adorn the front cover of Newsweek estimated the consumer price index would rise 4.5% in 1978. It soared 9.2%.
Greenspan would control such quibbles in later years, but not this day. He replied: “That is not my recollection of the way the forecasts went.” Proxmire, forecasts in his hand, read the dates to Greenspan. The candidate admitted: “Well, if they’re written down, those are the numbers.”
Greenspan then embarked on the gobbledygook so familiar in later years. Proxmire waited patiently, and then responded:
PROXMIRE: “Every one of the chairmen of the Council of Economic Advisers had the same problem, and they didn’t miss by as much as you did, not nearly as much…”
GREENSPAN: “I feel sorry for me and happy for them.”
Proxmire pursued Greenspan’s competence as a private forecaster. “As you know, you put your forecasting to a direct test in the private sector.” Proxmire then quoted a recent issue of Forbes magazine. “Greenspan and O’Neil turned in one of the least impressive records of all pension fund advisers.”
Greenspan did not throw out an illusory defense this time: “All I can say is I acknowledge that did not work out very well, and I take my share of the responsibility.”
PROXMIRE: “I hope…when you get to the Federal Reserve Board everything will come up roses. You can’t always be wrong.”
GREENSPAN: “All I can suggest to you, Senator, is that the rest of my career has been somewhat more successful.”
As a taste of what was to come, this was an introduction to Greenspan’s ever-present qualifiers: “Suggest” and “somewhat” giving the candidate room to maneuver, should Proxmire pursue this course of interrogation. The senator did.
Proxmire quoted a forecast Greenspan sent to clients on March 20, 1987. “The recession we had not expected until 1990 now appears more likely to emerge in the last quarter of 1989…A stock market-led expansion of capital equipment in late 1987 is projected to lead to a final surge for the business credit cycle. This surge is expected to precipitate a recession shortly thereafter…[and the] recession is also expected to be somewhat more severe than we had projected in October [1986].”
Proxmire asked Greenspan if he still stood by that forecast:
GREENSPAN: “I don’t know how to answer that…”
After not knowing how to answer that, he launched into an answer that was not an answer, but a response full of qualifications that qualified the qualifiers. Proxmire waited patiently before responding: “You were so specific in the dates of this forecast.” To this, Greenspan went on to qualify more qualifications. Proxmire, his time up, responded “yes.”
Note the turn of the tide. Proxmire was in charge, but Greenspan’s furtive nondisclosures had prevented a deeper inquiry into his contestable past.
…
Sen. Shelby from Alabama asked Greenspan if he was troubled that, as a nation “the U.S. had added $1.5 trillion to the national debt over the previous five years when it took the first 195 years to accumulate $1 trillion.” Greenspan responded, “It bothers me a great deal.” He then attempted to pacify the senator: “We’re starting to deal with it.” Shelby was having none of this: “We haven’t even started to deal with it.” The nominee thought he might soothe Shelby by claiming he did not think “it would be necessary to actually reduce the national debt.” Greenspan then launched into some equivocations, that, if read five or 10 times (not a luxury available to the senators), essentially meant: “We can’t reduce it because we won’t reduce it.” This, of course, was true, and it was diplomatic of Greenspan not to call the kettle black to the very men who had let the kettle rot.
In an Abbot and Costello routine so common in later years, Shelby worried about America’s status as the largest debtor nation in the world. Greenspan replied, it “isn’t clear” which is the largest debtor nation in the world:
SHELBY: “If we are not first, who is?”
GREENSPAN: “Oh, there are a lot of others.”
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Greenspan lacked the mental vigor to ever imagine the future: Witness his consistent inability to discuss even present dangers. Greenspan’s trail of misapplied economics would be clear soon enough. One of many examples that would pass unnoticed: In January 1990, Greenspan prophesized, “Such imbalances and dislocations as we see in the economy today probably do not suggest that anything more than a temporary hesitation in the continuing expansion of the economy.” In the wake of this speech, Drexel Burnham Lambert failed. This fractured the junk bond market. The economy was in recession by midyear.
…Enough of the old days. We will skip to the end. A full listing can be dreary. However, to give the distinguished economist – that is, Proxmire – credit for all he feared, we drop in on a news conference on July 10, 1991. The Maestro spoke: “I think the evidence is increasing week by week that the bottom is passed and the economy is beginning to move up…I think it’s a pretty safe bet at this stage to conclude that the decline is behind us and the outlook is continuing to improve.” The decline was still putting on its ski boots.
Greenspan topped out on Feb. 23, 2004. He addressed the Credit Union National Association in Washington. The chairman of the Federal Reserve Board tried his best to convince Americans their best interests were served by grasping for the highest priced houses by means of the riskiest loans. He opened his pitch by noting, “American homeowners clearly like the certainty of fixed mortgage payments.” He advised insulated Americans to look overseas: “This preference is in striking contrast to the situation in some other countries, where adjustable-rate mortgages are far more common…Fixed-rate mortgages seem unduly expensive to households in other countries.” He informed his constituents the “traditional fixed-rate mortgage might be an expensive method of financing a loan.” He advised they refinance. Refinancing generally exploited two tendencies – 1) the lower monthly payment of a variable rate mortgage and 2) a higher valuation of the house. The combination of the two often took the form of refinancing at a higher level of principal.
Only a month later, Greenspan told the New York State Economics Association that rates would rise at some point. On June 30, 2004, the Federal Reserve raised the federal funds rate. Once the Fed started to raise rates, the trusting adherents to the Book of Greenspan were doomed. (It is to be hoped advice from Greenspan’s quarterly monologues does not discourage Pimco mutual fund returns.)
On Oct. 26, 2006, the retired chairman announced the housing slump is “likely past.” Exactly one week later, this opinion was expertly choreographed into a National Association of Realtors $40-million advertising campaign. The full-page newspaper ads were titled: “It’s a Great Time to Buy or Sell a House.” Greenspan contributed to the sales pitch by assuring us that the fourth quarter (of 2006) will “certainly be better than the third quarter.”
Notably, not a single mortgage lender had surrendered at the time of this upbeat forecast. In the wake of this reassurance, 66 mortgage lenders have entered bankruptcy. Last fall, “subprime” was a poor cut of meat to most Americans. Now, Congress investigates why no one at the Federal Reserve forewarned of this problem.
To conclude (with difficulty, as the field is so broad), the subprime market received a rousing endorsement from Greenspan on April 8, 2005. The head of the Fed – who is also the nation’s leading bank regulator – announced:
“With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers…Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.”
