C’mon Alan! Bubbles Are Caused By Central Bankers, Not “Human Nature”

Alan Greenspan just cannot give up the ghost. During his baleful 18-year reign, the Fed was turned into a serial bubble machine—and thereby became a clear and present danger to honest free market capitalism and an enemy of the 99% who do not benefit from the Wall Street casino and the vast inflation of financial assets which it has enabled.  His legacy is a toxically financialized economy that has extracted huge windfall rents from main street, and left it burdened with overwhelming debts and sharply reduced capacity for gains in real living standards and breadwinner jobs.

Yet after all this time Greenspan still insists on blaming the people for the economic and financial havoc that he engendered from his perch in the Eccles Building. Indeed, posturing himself as some kind of latter day monetary Calvinist, he made it crystal clear that the blame cannot be placed at his feet where it belongs:

I have come to the conclusion that bubbles, as I noted, are a function of human nature.

C’mon. The historical record makes absolutely clear that Greenspan panicked time and again when speculation reached a fevered peak in financial markets. Instead of allowing the free market to cleanse itself and liquidate reckless gamblers employing too much debt and too many risky trades, he flooded Wall Street with liquidity and jawboned the speculators into propping up the casino.  Within months of his August 1987 arrival, for example, he panicked on Black Monday and not only inappropriately flooded with liquidity a Wall Street that was rife with rotten speculation and a toxic product called “portfolio insurance”, but also intervened directly to garrote the markets attempt at self-correction.

In that context he sent his henchman, Gerald Corrigan who was head of the New York Fed, down to Wall Street to break arms and bust heads in an effort to insure that firms continued to trade with each other and extend credit where there own risk control managers appropriately wanted to cancel credit lines to insolvent counter-parties.  Then and there, the Greenspan “put” was born, and the stock market was en route to becoming a Fed-driven casino rather than an honest venue for real price discovery. Indeed, the entire Greenspan-Corrigan mission in the wake of Black Monday was to force Wall Street firms and banks into price “undiscovery”.

Incidentally, in yesterday’s interview Greenspan belatedly confessed that he had caused Goldman Sachs to “undiscover” that Continental Illinois was a bad credit risk, and that, instead of demanding a payment, they needed to see it Corrigan’s way. Not surprisingly, Corrigan went on to become a Goldman partner in charge of hand-holding the New York Fed’s open market desk, which is to say, an exemplar of how crony capitalism is done.