The Austrian Way: What the F*** happened to Alan Greenspan?

In the contemporary financial era (2nd World War ‘til today) the sound, sensible and practical school of economics (ours of course…) lost one of its biggest names to the dark side.

This doesn’t happen much.

Logical and rational thinkers tend to gravitate towards our side, due to Damascene conversions, creeping doubts about central planning, the messy realities of life or whatever.

This man was Alan Greenspan, the longest ever serving Fed governor and potentially the most powerful man on earth during the years 1987 to 2006.

Greenspan: the early years

Greenspan’s earlier years reveal a penchant for sounder money and economic doctrines.

He was a close friend of Ayn Rand’s; meeting and becoming extremely close to her in the 1950s, getting inside access to Atlas Shrugged whilst it was being written, becoming a fellow Objectivist and contributing a number of essays to her book ‘Capitalism: the Unknown Ideal’.

Greenspan was so close to Rand she appeared prominently whilst he was being sworn in as the Chair of the Council of Economic Advisors. He was a true Randian, or ‘Randroid’ as the ASI’s Dr Madsen Pirie likes to call them.

This early Greenspan is well described as Libertarian and an Austrian economist.

Young Alan and his love of gold

One of the parts of the younger Greenspan that reveals his Austrian tendencies best was his stance on money.

He was fully aware of the dangers, corrupting nature and inherent flaws of fiat money, and talked of the gold standard in not just terms of utility but also morality.

Here’s the earlier Greenspan on golden money standards:

“An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense… that gold and economic freedom are inseparable.”

Here he is again, not just bigging up gold backed money but also another Bogpaper favourite – free banking.

“Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth… The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit… In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.”

To see the high tide of Greenspan’s love for sound money just look up his 1966 essay – ‘Gold and Economic Freedom.’ It’s a great read and reveals an economic thinker after our own hearts.

Here was a highly intelligent man who had arrived at his conclusions and world view via much thought, logic and scholarship.

So far, so good.

Our man goes of the rails

The next stage in Greenspan’s life then becomes difficult to understand and rationalise from the outside.

From this sound base he becomes Fed governor, a position many Austrians (including the younger version of himself) would do away with.

He becomes an advocate for highly accommodative monetary policies, low interest rates and is not able to resist a temptation he knew so much about – money printing.

Greenspan’s time at the Fed became so famous for unAustrian policies that there he is seen as the founder of ‘bubble economics’.

There are blogs called ‘The Mess that Greenspan made’, run by financers like Tim Iacono, explaining why the economic levers he pulled and pushed so forcefully during his tenure would cause all sorts of unexpected consequences.

Bubbles Greenspan is still pilloried today by some of the brightest fund managers on the planet (a minority really are worth listening to), like Bogpaper favourites Peter Schiff and Kyle Bass.

When interview about Greenspan, Bass urges that he ‘traded the tech bubble for the housing bubble’ in his economic super-meddling.

So, what the hell happened?

From a sound Austrian school base Greenspan seems to totally have lost his way.

His change in economic principles is so marked, so extraordinary, so illogical, it is difficult to explain.

There are essays dedicated to this subject, and it’s often debated by Austrians, Libertarians and gold bugs, but no-one really has the answer.

Was it a case of absolute power corrupting absolutely?

Was he pressured from within Washington and Wall Street into changing?

Was he socialised and institutionalised over a period of time? Brain washed by a drip, drip flow of competing ideas? An economic form of Stockholm Syndrome, if you will?

Even if in his 2007 book – ‘The Age of Turbulence’ – he criticizes Republicans for abandoning their principles on spending and deficits, Alan Greenspan remains the ultimate lost boy of Austrian economics.

We still cannot explain it. For this reason it makes Austrian minded folk uneasy.

It saddens us to this day and makes us uncomfortable.

What do you think happened with Alan? Tell us in the comments below…

18 comments on “The Austrian Way: What the F*** happened to Alan Greenspan?

  1. Anthem
    August 6, 2013 at 6:46 am #

    I think the answer lies somewhere around “all of the above”.

    Unlike other economists of the era (Friedman et al), Greenspan wasn’t just an economic theorist, he had to actually advise on government policy and was very much involved in the “realities” (yes, I know, I know…) of the economic debate.

    To have had someone who was once so close to a thinker like Ayn Rand in such a position of influence in politics should have been a dream come true but from him to seemingly abandon everything he (and she) had believed in once he got there is one of the greatest shames and I can only think that he realised that the only way to maintain his position was to play along with the game according to the rules as laid down by “the dark side”.

    As one of the bureaucrats in Atlas Shrugged might say, “One needs to be practical“.

    • Rocco
      August 6, 2013 at 11:29 am #

      Anthem, you are mistaken. Friedman certainly did advise on government policy. He was Reagan’s economic adviser from 1981. Much earlier he invented the withholding tax; what Walter Block terms “road socialism”; school vouchers; in his official government capacity he was a staunch proponent of fiat money and inflation (that is redistribution).
      Although, given your nom de plume, this might seem an insensitive reference, Rothbard’s “Alan Greenspan: a minority report” is worth checking out.

      • Anthem
        August 6, 2013 at 8:09 pm #

        Hi Rocco,

        Thank you for correcting me on the Friedman thing.

        The Rothbard article is interesting given that it was published in 1987 – he certainly wasn’t fooled by Greenspan’s “Randian” link.

        Seems Greenspan is also Redspan, Bluespan or Yellowspan – like a chameleon, he will change his colours to suit the environment he finds himself in.

        Thanks for pointing me in the direction of that – I’m pretty sure I’d never read it before.

    • Rocco
      August 6, 2013 at 11:52 am #

      Anthem, that Rothbard thing wasn’t meant as a dig, by the way. I hope you didn’t take it as one. I absolutely adore Miss Rand’s writings, both fiction and nonfiction.

      • Anthem
        August 6, 2013 at 8:11 pm #

        Didn’t see this addition before I wrote my response to your first message. No, of course I didn’t take it as a dig. I am grateful for being corrected.

        I’ve just been busy today and haven’t had chance before now to check out the views of others on this interesting post.

    • theaustrianway
      August 6, 2013 at 12:26 pm #

      Excellent satirical use of ‘practical’ there Anthem!

      I can imagine this word being well abused by Paul Krugman during his smearing of dissenting voices.

      Come to think of it, I can imagine Uberpresident of the Free World, Barak Obama, using it rather freely too.

      Both would be friends of Wesley Mooch no doubt.

    • Rocco
      August 6, 2013 at 8:19 pm #

      That’s cool. I’m glad I could be helpful, Anthem.

  2. Simon Roberts
    August 6, 2013 at 8:54 am #

    I think it was pretty much explained when he said this:

    “Look, in fact I had a very interesting conversation with Ron Paul when he was complaining, this was a House hearing, that the Federal Reserve should be going back on the gold standard. Look, the American people have chosen to have a fiat money standard because they want a welfare state. You cannot have a gold standard and a welfare state at the same time. You have to make the choice. We have made a decision as a society that we’ll be dealing with the welfare state.”

    That’s consistent with his earlier position that sound money and a welfare state were incompatible. He’s just saying that we have decided to have a welfare state and therefore we can’t have sound money.

    The bigger question of course is whether the US electorate actually did choose a welfare state. It’s certainly unconstitutional and I suspect that FDR and his ridiculous New Deal are to blame – followed by Johnson’s Great Society – but I’m not sufficiently up on US politics to know whether a welfare state ever appeared in any election manifestos.

    We certainly made that mistake in the UK by electing the Atlee government – who made their disastrous intentions clear before the election – so we only have ourselves to blame.

    I’d love to see a return to sound money but it won’t happen without there being a financial disaster first. To paraphrase Keith Joseph – it’s one thing to deny a bog a bone, it’s another thing entirely to take a bone away once the dog has it. Every political party knows that if they take welfare away there will be riots bordering on civil war.

    • Rocco
      August 6, 2013 at 11:11 am #

      Mr Roberts, regarding FDR and the New Deal, look up – I believe – “The revolution was” by Garet Garett. Roosevelt sold his program by promising it would reduce State interference, taxes etc. (If it’s not that essay, it’s one of the other two from “The peoples’ pottage” by Garett.)

    • theaustrianway
      August 6, 2013 at 12:22 pm #

      Interesting comment there Simon,

      FDR certainly didn’t let a good crisis go to waste. Surely he’s the ultimate pin up for statists!

      IMHO the developed nations chose a course to a welfare state between 1890 and 1913, in a move to unequal taxation, but I wholeheartedly agree that corrupting the money was one of the great enablers of this trend to >50% government participation in the economy, welfarism and cronyism.

      Some might argue Greenspan’s virtue by not fighting what the market had voted for…

      Perhaps the learned Greenspan arrived too late, when the titanic was already well into her journey so to speak. One man and his circle of smart guys was never going to be able to tear down the Fed. I am in agreement also that the evils of central banking will only be torn down after a colossal crisis debunks the notion that the Feds can always handle what the market throws at them. At some stage the emperor will be shown to have new clothes and the Austrian dream of free banking and proper capitalism in money and banking might be rather closer to reality.

  3. Angry Harry (@AngryHarrysPage)
    August 6, 2013 at 1:35 pm #

    Just like Obama, as soon as Greenspan got into office, he was nobbled by the true powers-that-be.

    The ones we don’t see.

  4. dr
    August 6, 2013 at 1:53 pm #

    There is a theory that Greenspan wanted to move the US back to sound money, ie. what he truly beleived in. However, it is argued that he realised that the political forces would never allow such a transition to occur by policy changes alone. So he decided that the only way to achieve such a return, would be to blow up the existing system, such that people and politicians would have no choice but to embrace the change, having seen the folly of an alternative.
    So he needed a way of blowing up the system. In order to achieve this Greenspan set about pursuing a pair of aims, Populism and Keynesianism, knowing that they would be politically acceptable (very much so), and that they would be effective in this goal.
    In simple terms, he believed that once a populace experienced government largesse, they would refuse to give it up without a crisis, an appeal to discipline would forever be ineffective.

    • theaustrianway
      August 6, 2013 at 5:20 pm #

      I’ve heard that theory too doc! Thanks for reading and commenting.

      Not a bad theory and it wouldn’t surprise me to learn AG has plenty of gold stashed away. Probably silver too.

      It is interesting, even if nothing more, that one of AG’s advisory roles post-Fed, and perhaps the most prominent Wall Street role he’s had, has been advising the 2009 created gold bug – John Paulson.

      Paulson is one of the most heavily gold invested fund managers I can think of outside of Eric Sprott and a handful of other malcontents.

      In his book, The Greatest Trade Ever, Greg Zuckerman documents Paulson and co’s sub-prime plays, before revealing his next big macro thesis – a collapse of currencies. Paulson is incredibly candidate about his new thesis, highly bullish on gold and even after the recent gold correction and huge negative press, is still heavily long gold – short fiat. He is acting like one of the ‘strong hands’ in the market, with a long term horizon.

      Perhaps he hired the ultimate insider to help him reap the coming collapse…

    • therealguyfaux
      August 6, 2013 at 7:13 pm #

      I heard it described as the “Punch Bowl thesis”; one of Greenspan’s predecessors, William McChesney Martin, described the job of the Fed Chairman as having to “take away the punch bowl before the party gets out of hand,” a reference to the punch bowl obviously being spiked. Of course, there is another colloquial expression involving a punch bowl as well.
      Alan Greenspan, it is thought, figured that he would let everyone else finally discover that, under all that ice which was hiding it, there was the inevitable turd. The trouble is, he never bargained on the partygoers being so drunk by this time that they hardly noticed, or cared even if they did. And some may even have thought the turd added flavour.

  5. jonathan
    August 6, 2013 at 1:54 pm #

    ego and self-importance – it’s obvious to anybody (who bothers to think about it) that micro-managing the macro will screw things up – but once personally empowered to do so, most would give it a shot

  6. Bob H
    August 6, 2013 at 7:49 pm #

    I think we have to assume that Greenspan knew what he was doing, whatever his motives. Bernanke, however, apparently does not.

    After warning about irrational exuberance in 1996(date from memory,so might be a bit out), Greenspan was reprimanded by his political masters. He might have had a “well sod you then” moment and gone all out as a monetary experiment.

  7. James Peron
    August 6, 2013 at 7:49 pm #

    The premise of this article is false. Greenspan’s was NEVER an Austrian in terms of economics. He liked Rand’s theory on other issues, but was never in full agreement and he never adopted Austrian thinking.

Trackbacks/Pingbacks

  1. Weekly RoundUp: 4th-10th August | Bogpaper.com - August 9, 2013

    […] Mahmoud Abbas. This week the Austrian Way asked a question that even Ron Paul struggles to answer, what the f*ck happened to Alan Greenspan. And Russell Taylor went head to head with RGTyler offering a different viewpoint on immigration […]

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