Fed Scrambles To See Greenspan's Scathing Critique of U.S. Economy

Ahead of tomorrow's critical meeting in Washington to discuss whether to reduce interest rates further to avoid the economy tipping into recession, Chairman Ben Bernanke and the other six members of the Federal Reserve Board have been scrabbling to get hold of an advance copy of the memoirs of Alan Greenspan. After 18 years as chairman, during which even the twitch of an eyebrow could send the markets tumbling, Mr. Greenspan was scheduled to let loose today with a 200,000-word closely argued critique of the state of the American economy and a prognostication of how it will progress in the next 20 years.

Not since Al Jolson uttered the words "You ain't heard nothing yet" 80 years ago in "The Jazz Singer," ushering in the first dialogue to be heard in a motion picture, has the breaking of a silence been so eagerly anticipated. Little wonder that Penguin parted with a reported $8.5 million advance for the rights to what is set to become an instant worldwide best seller.

Nor does Mr. Greenspan, 81, disappoint. The former Fed chairman abandons his Trappist vows with a scathing assault on President Bush, for downplaying the problems of the public spending deficit; a resentful sneer at Karl Rove and Vice President Cheney, for perpetually putting party politics before financial continence; and a scalding criticism of the former Republican Congress, for their spendthrift ways.

Of keen interest to the Federal Reserve board, which in tomorrow's meeting faces contrary advice on whether to raise interest rates to dampen inflation or lower them to prevent a rash of home foreclosures, are Mr. Greenspan's ruminations on the effect of his years of low interest rates, which he accelerated in the wake of the attacks of September 11, 2001, the aftermath of the faltering housing boom, and the prospect of a return to price inflation through all sectors of the economy.

No longer bound by his decades of discretion, which caused economists to ponder the meaning of cryptic phrases like his famous "irrational exuberance," Mr. Greenspan expresses irritation and disappointment that his repeated advice on fiscal rectitude was ignored by the Bush White House and the Republican leadership in Congress.

"Most troubling to me was the readiness of both Congress and the administration to abandon fiscal discipline," he writes. "Congress and the president viewed budgetary restraint as inhibiting the legislation they wanted. ‘Deficits don't matter,' to my chagrin, became part of the Republicans' rhetoric. … It became clear that there was no room in the administration for an outspoken deficit hawk. … My sensibilities as a libertarian Republican were offended."

Mr. Greenspan is happy to name names. "House Speaker Hastert and House majority leader Tom DeLay seemed readily inclined to loosen the federal purse strings any time it might help add a few more seats to the Republican majority," he writes. "Majority leader Bill Frist, an exceptionally intelligent physician who favored fiscal discipline, lacked the force of personality to do the necessary head-knocking."

The former Fed chief condemns the rush in the wake of the September 11 attacks to add pork barrel spending projects to the essential spending needed to counter terrorism. "Earmarks are the canaries in the coal mine when it comes to the collapse of fiscal discipline," he writes. "And the canaries looked sick."

Mr. Greenspan blames Mr. Bush for not vetoing measures that, he warned Congress, would "eventually push up interest rates, crowd out capital spending, lower productivity growth, and force harder choices upon us in the future."

"There is a remedy for legislative excess: it's called a presidential veto," he writes. "In conversations behind the scenes with senior economic officials, I made no secret of my view that President Bush ought to reject a few bills. … But the answer I received from a senior White House official was that the president didn't want to challenge House Speaker Dennis Hastert. ‘He thinks he can control him better by not antagonizing him,' the official said. … Bush's collaborate-don't-confront approach was a major mistake — it cost the nation a check-and-balance mechanism essential to fiscal discipline."

Mr. Greenspan's verdict on the Democrats' victory in the elections last year? "The Republicans in Congress lost their way. They swapped principle for power. They ended up with neither. They deserved to lose."

The stridency of Mr. Greenspan's appeal for a return to sound money policies, and the temptation to bow to pressures to trade higher inflation for lower interest rates, is sure to make fiscal conservatism a key issue in the debate among presidential hopefuls on both sides.

He discounts the effect of the cost of the Iraq war or terrorism prevention. "Appropriations for both totaled $120 billion in fiscal year 2006, the Congressional Budget Office estimated. This is a large sum, but in a $13 trillion economy, it's readily absorbable." Defense spending amounted to 4.1% of GDP last year; by comparison, the Vietnam War cost 9.5% and the Korean War 14%.

Mr. Greenspan says that out of office, watching the deficit mount, the housing market boom, the economy slow, and the stock market falter, he has felt like Cassandra. His predictions for the American economy in the next 20 are also filled with foreboding.

With the end of the wave of post-communist cheap but educated labor coming onto the market in, above all, China, he sees an increase in the cost of imports from the Far East and a significant slowing in concomitant productivity gains in American industry.

In a position that puts him at odds with a number of Republican presidential hopefuls, he advocates "opening our borders to the world's skilled workforce" to maintain our competitiveness and prosperity.

The pace of innovation, too, will likely decline, he believes, as the productivity boom fueled by the introduction of the silicon chip and digital information runs out of steam. We must become used to lower growth rates than we have taken for granted in recent years.

As an fiscal conservative, Mr. Greenspan makes clear that — although the dollar along with most other major world currencies began floating in 1971 rather than be tied to the gold standard — he has a hankering for the stability that the link between the dollar and gold brought the currency.

During his time at the Federal Reserve, the gold value of the dollar slumped, as investors in currencies moved away from the gold value and based their calculations instead on their assessment of the value of government debt.

Given his way, Mr. Greenspan suggests, he would return to the gold standard, though he acknowledges that such a move is now impossible.

He consoles himself, however, with the belief that the independence of the Federal Reserve is an equivalent to gold in guaranteeing low inflation and currency stability. He senses, however, that we may be in for a period when the Federal Reserve may come under inappropriate and possibly ruinous political pressure.

Mr. Greenspan warns that to continue to keep inflation in check we may again have to endure interest rates in double figures.

He is anxious that the independence of the Federal Reserve Board, which has until now guaranteed low inflation, may be abandoned in favor of political demands for lower interest rates, and that the ensuing rise in inflation may reduce prosperity and wipe away life savings.

There is already considerable pressure to abandon sound money policies, he argues. "In the political arena, the pressure to make low-interest-rate credit generally available and to use fiscal measures to boost employment and avoid the unpleasantness of downward adjustments in nominal wages and prices has become nearly impossible to resist," he writes.

Perhaps most alarming, Mr. Greenspan predicts that unless we fix our education system to bring all Americans up to speed, we may face the return of rioting in our cities.

"The impact that fixing our school system would have on our future levels of economic activity may not be easy to measure," he writes, "but unless we do so and begin to reverse a quarter century of increases in income inequality, the cultural ties that bind our society could become undone. Disaffection, breakdowns of authority, even large-scale violence could ensue, jeopardizing the civility on which growing economies depend."

Alan Greenspan's "The Age of Turbulence: Adventures in a New World," is published today by the Penguin Press.