From the December 2005 Idaho Observer:

Greenspan’s legacy:

Alan Greenspan

Five-term Federal Reserve Chairman Alan Greenspan will retire January 21, 2006 at a time when the nation’s economy is in worse shape than it was prior to crashing in 1929.

After delivering his monthly report to Congress Nov. 3, 2005, Greenspan spent a few moments answering reporters’ questions. He then excused himself, presumably to go to the bathroom. By the time he returned, all but one reporter had left the area. Appearing as though he was only holding a pen and notepad, the reporter asked Greenspan if he thought his replacement Ben Bernanke was adequately prepared to take control of the world’s largest economic system. The camera in the BBC reporter’s tie clip reportedly caught the following comment from the world’s most powerful international banker: "It’s all going to collapse and I can’t wait." He then walked away.

For a look at the state of the economy, read the story below. For a theory of why Greenspan is leaving the ship he built before it sinks, see the comment at the end of this article.

Greenspan’s legacy of debt

by Paul Kasriel

On the day that Ben Bernanke, the nominee for the next Fed chairman, appears before the Senate Banking Committee for his confirmation hearing, it is only fitting that his predecessor’s legacy be reviewed. Although it is true that under Alan Greenspan’s command of the Fed the U.S. economy has experienced unusually low volatility, this low volatility may turn out to have been a Faustian bargain. That is, the low volatility was achieved by increasing the indebtedness of the U.S. economy, especially the household sector, to record levels. And increasingly, the debt is owed to foreign entities, not ourselves. The final chapter on Greenspan’s legacy will not be written until we see how this indebtedness issue is resolved.

Greenspan’s predecessor, Paul Volcker, provided us some insights [on Greenspan’s legacy of debt] in an article he wrote for the April 10, 2005 edition of The Washington Post entitled "An Economy On Thin Ice" (, excerpts of which are quoted below.

"[U]nder the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks—call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot."

"We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing."

"What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing."

"The difficulty is that this seemingly comfortable pattern can’t go on indefinitely. I don’t know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars."

"I don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change."

"So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s—a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions."

Below are a series of comments referring to charts [available at] that illustrate aspects of record U.S. indebtedness.

Chart 1: Low real interest rates have resulted in record leverage in the U.S. economy.

Chart 2: Low real interest rates have led to record household borrowing.

Chart 3: Record household borrowing has led to escalating debt-service burdens despite low nominal interest rates.

Chart 4: Households spent a record annualized $531 billion more than they earned after taxes in the third quarter o f 2005, continuing the trend of net household deficits that began in the late 1990s.

Chart 5: Household spending is a record high 76% of GDP [gross domestic product].

Chart 6: Record household spending has led to household tangible assets rising to a record percentage of our total national stock of tangible assets.

Chart 7: Record household borrowing has led to record household leverage.

Chart 8: While leverage is at record highs, household liquidity is at near record lows.

Chart 9: Mortgage rates relative to house price increases are at record lows.

Chart 10: In a vicious cycle, low "real" mortgage rates have resulted in a record high market value of residential real estate relative to after-tax household income as house prices get bid up.

Chart 11: Record low "real" mortgage rates have resulted in record high leverage in residential real estate.

Chart 12: Part of the increase in housing leverage has resulted from home-"owners" treating their houses as their personal ATM machines.

Chart 13: The U.S. banking system has record exposure to the mortgage market.

Chart 14: The surge in household borrowing has led to record external deficits.

Chart 15: Record external deficits have led to record foreign ownership of U.S. tangible assets, meaning that earnings from these assets will accrue to foreign investors.

Chart 16: The potential adverse consequences of Greenspan’s legacy of debt are:

a. McMansions and SUVs will not make us more productive in the future.

b. Foreign creditors could start to question how we will be able to pay future interest and dividend payments without resorting to "printing" dollars.

c. If foreign creditors should question our ability and willingness to repay them without resorting to the currency printing press, there could be a run on the dollar.

d.. A run on the dollar would lead to sharply higher U.S. interest rates.

e. Sharply higher interest rates would do great harm to household finances and the housing market.

f. A sharp decline in the housing market would result in a spike in mortgage defaults.

g. A rise in mortgage defaults would cripple the banking system.

h. A crippled banking system would render Fed interest rate cuts less potent in reviving the economy.

[What this article explains is that Greenspan, at a time when every major economic indicator portends looming economic disaster, has chosen to abandon the ship he built. ~DWH]

Paul L. Kasriel is a Director of Economic Research for the Northern Trust Corporation and former officer of research at the Chicago Federal Reserve Bank.


Who is John Galt?

When one considers that Alan Greenspan has recently been on-record as stating that he still stands by his thesis paper on gold-backed economic systems (written in the 60s), how does one explain the $8 trillion in public debt—half of which has been amassed since his being confirmed as Federal Reserve Chairman in 1992? We have fallen so deeply in debt as a nation that no one ever talks about "balancing the budget" any more. When Greenspan leaves office January 21, 2006, he will leave in the midst of an orgy of uncontrollable, unaccountable government spending—activities that appear the perfect opposite of his most closely held economic policy beliefs. But are they? Greenspan is a student and devotee of Ayn Rand. They believe that charity should be a byproduct of profit and all forms of socialism (government redistribution of wealth) are evil. Is it possible Greenspan inherited an economic system (and nearly 300 million American brains) so hopelessly mired in debt and socialistic muck that he only saw one way out—set it up so that when it finally crashes the crash is so complete that it will never rise again? Though the looming economic catastrophe will be painful, is it possible that Greenspan has done the world a huge favor? I suspect a few clues (and the identrity of John Galt) are hidden in Atlas Shrugged.

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