February 28, 2000
Sound Money Needed More Than Ever
Greenspan Admits Fed Flaw in Testimony
I have got to hand it to Alan Greenspan. Testifying last week before the House Banking Committee, he sounded so authoritative that my colleague Mel Watt from North Carolina said that he could not even understand the things Greenspan says. Mr. Watt attributed his lack of understanding not to some deficiency in Greenspan's communicative capabilities but rather to Watts' self-professed lack of understanding. Yes, it does seem that Greenspan can convince many, including some here in Congress, that up is down and vice versa.
For my part, I was intrigued by an admission that Greenspan made to my direct questions put to him. After I pressed him for an explanation of what he considered the best tool to measure the money supply, Greenspan plainly admitted that he was at a loss for picking out what such a measure might be. When I suggested that it must be difficult to manage something you cannot even define, he not only agreed with me but said it was (and this is Mr. Greenspan's word) "impossible" to manage something you could not define.
This is in fact an obvious truth but at the same time a startling admission from our nation's leading maker of monetary policy. Of course, one thing of which Greenspan is quite aware due to his familiarity with the economics of sound money, is the fact that the creation of units of monetary exchange out of thin air will lead to a recession.
In addition to Greenspan's admission regarding the difficulty of a centrally managed money supply there is a darker problem to which he is far less likely to own up. That is the fact that centrally planned monetary policy is open to political pressures as well. For years Chairman Greenspan had been concerned about the over-expansion of the money supply, dating back at least to his "irrational exuberance" statements. So why did Greenspan not begin the monetary tightening that he now counsels at a much earlier period?
Well, perhaps the best way to answer the question is to consider when the Fed did indeed take the first step on the path of its current policy direction toward raising the Fed funds rate. If you'll recall, it was at the very first Fed meeting after President Clinton's impeachment trial had been wrapped up in the US Senate.
So, as the President faced a stiff challenge that could threaten the very existence of his Presidency, Mr. Greenspan kept the money flowing and the good times rolling, even as he was speaking the rhetoric of increased concern for the economy. Now if anybody is surprised that the future of our US economy would be subjected to political manipulation to assist a troubled President you ought not to be. Indeed it is the history of the Fed to be responsive to certain political needs of, and pressures from, the political power brokers who have influence over the appointment and confirmation of Fed board members, including the Fed chair. Nobody who has seriously considered Fed action in light of election-year politics and troubled political leaders could argue with a straight face that the one does not directly affect the other.
The bottom line is that Greenspan's admission suggests that, even without the negative affects of political considerations, a fiat monetary policy is doomed to fail. When we add to the mix the all-too-human tendency of central planners responding to political pressure, as Greenspan and the fed money making machine clearly did throughout the impeachment process, what we have is a recipe for disaster. Unfortunately, Greenspan's admission points anew to the fact that a big mess is coming. But fortunately for those who are listening, it also presents proof-positive that the best way to avoid such calamities in the future is to reset our monetary policy on a firm and sound basis.