An awakened sense of outrage has reporters and members of Congress playing a fierce game of hounds and hares with Enron executives and other bandits, which is most fortunate for Alan Greenspan. If the Federal Reserve were not treated with such deferential sanctimony, its chairman would also face browbeating questions concerning his role in unhinging the lately departed prosperity. Newly available evidence supports an accusation of gross duplicity and monumental error in the ways that Greenspan first permitted the stock market's illusions to develop into an out-of-control price bubble and then clumsily covered his mistake by whacking the entire economy. These offenses are not as sexy as criminal fraud but had more devastating consequences for the country.
The supporting evidence is found in newly released transcripts of the private policy deliberations of the Federal Open Market Committee (FOMC) back in 1996--the fateful season when the froth of asset-price inflation was already visible in the stock market. In a series of exchanges, one Fed governor, Lawrence Lindsey (now the President's chief economic adviser), described with prescient accuracy a dangerous condition that was developing and urged Greenspan to act. Greenspan agreed with his diagnosis, but demurred. If Greenspan had acted on Lindsey's observations, the last half of the nineties might have been different--a less giddy explosion of stock market prices without the horrendous financial losses and economic dislocations that are still unwinding.
Lindsey described back in 1996 a "gambler's curse" of excessive optimism that was already displacing rational valuations on Wall Street. The investment boom in high-tech companies and the rising stock prices were feeding off each other's inflated expectations, he explained, and investors embraced the improbable notion that earnings growth of 11.5 percent per year would continue indefinitely. "Readers of this transcript five years from now can check this fearless prediction: profits will fall short of this expectation," Lindsey said. Boy, was he right. The Federal Reserve has the power to cool off such a price inflation by imposing higher margin requirements on stock investors, who borrow from their brokers to buy more shares. That is what Lindsey recommended.
"As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst the bubble becomes overwhelming," he told his Fed colleagues. Acting pre-emptively is crucial; if the regulators wait too long, any remedial measure may be destabilizing. "I think it is far better to do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights," Lindsey warned.
Greenspan lacked the nerve (or the wisdom) to follow this advice. The chairman did make a celebrated speech in December 1996 observing the danger of "irrational exuberance" in the stock market, but he did nothing to interfere with it. In the privacy of the FOMC, the chairman agreed with Lindsey's diagnosis. "I recognize that there is a stock-market bubble problem at this point [the fall of 1996], and I agree with Governor Lindsey that this is a problem we should keep an eye on," Greenspan said. Raising the margin requirements on stock market lending would correct it, he agreed, but he worried about the impact on financial markets. "I guarantee that if you want to get rid of the bubble, whatever it is, that will do it," Greenspan said. "My concern is that I am not sure what else it will do."
In hindsight it's clear the Federal Reserve chairman got it wrong. But his private remarks in 1996 also reveal flagrant duplicity. As the market bubble grew more extreme and many called for action by the Fed, Greenspan repeatedly dismissed criticism by explaining that raising the margin requirements would have no effect. In testimony before the Senate Banking Committee in January 2000, Greenspan said that "the reason over the years that we have been reluctant to use the margin authorities which we currently have is that all of the studies have suggested that the level of stock prices have nothing to do with margin requirements."
By 1999 the stock market was in the full flush of the gambler's curse--remember Dow 36,000?--and at that point Greenspan finally did act. But instead of tightening credit for stock investors, Greenspan proceeded to tighten credit for the entire economy, steadily raising interest rates in 1999 and 2000 until the long-running expansion expired. So did the stock market bubble (although stock prices remain very high by historical standards). Greenspan has always denied that this action was designed to target the bubble, but Bob Woodward, who wrote an admiring account of Greenspan's years at the Fed, reported that the "Maestro" was stealthily deflating the bubble by slowing the economy. Greenspan got that wrong too, since a recession resulted.
Millions of Americans are now paying the price, either as hapless investors or unemployed workers. The democratic scandal is that public officials are supposed to be held accountable for their actions, including human error. Accountability is impossible when the Fed chairman is allowed to make policy decisions in closed meetings and keep his true opinions secret for five years. The FOMC's verbatim meeting minutes should be shared with the citizens who will be affected and made available for timely political debate. When reformers get finished with the funny-money accounting at Enron, they might turn their attention to some holy illusions surrounding the Federal Reserve.
"Not over my dead body will they raise your taxes," George W. Bush cryptically proclaimed. The press dutifully translated what he really meant, but few commented on the tastelessness of a wartime leader with troops in the field saying he was willing to die for the cause of lower taxes for the wealthy.
Never mind. The President's speech had no high public purpose or occasion. It was a political document, intended to undercut Senate majority leader Tom Daschle's prescriptions for economic recovery the previous day; it had more to do with gearing up for the 2002 Congressional elections than with speeding up the economic recovery. Bush's riposte signaled that the not-so-great debate of '02 is on.
Besides standing foursquare against any tax hikes, Bush offered only the same prescription for economic recovery as he has in the past: Let those at the top of the heap keep more of what they've got. Despite a stratospheric approval rating and a nation united behind him, he reaffirmed his fealty to his corporate underwriters and offered tax cuts for the rich at a time of obscene inequality. His partisan posturing on the stimulus plan showed that he thinks the economy will recover on its own, leaving the swelling ranks of jobless folk on their own.
Although superior to Bush's package, Daschle's was securely in the lineage of Bill Clinton's efforts to be both fiscal conservative and compassionate centrist. It positioned Democrats to campaign, amid economic recession, as the hair-shirt party of "fiscal responsibility," blaming Bush's tax cuts for the vanished (and largely notional) budget surpluses and evoking public nostalgia for the giddy boom of the late 1990s, which actually began heading south before Bush came to town. Daschle's minimalist list of stimulus measures shows a party leader out of touch with real conditions who thinks this downturn is a nonthreatening event that will soon be over, just as the stock-market cheerleaders are forecasting. Wiser heads on Wall Street, however, warn that any recovery will be weak and perhaps transient.
Even if the recession proves less serious than feared, the Democrats should be advocating spending on badly needed long-term projects, from schools to railroads, while pushing for extended and expanded unemployment compensation and health insurance and aid to states hard hit by new national-security costs.
Along with this expansive agenda the Dems should overcome their timidity and make the case for repeal of the bulk of last year's Bush tax cuts, particularly those provisions that benefit the wealthiest Americans. Those cuts will do little to stimulate the economy (even if they operate as promised--a dubious assumption), since they don't take effect for another three to six years. Instead, by assuring a greater stream of revenue from those who can best afford to pay, the Democrats can help forestall inevitable GOP efforts to claim that social programs must be cut to allow for military needs, while at the same time providing funds to address housing, hunger and poverty.
Teddy Roosevelt, whose biography is on Bush's bedside table, may have been less a foe of the malefactors of great wealth than his rhetoric claimed, but he did espouse a progressive agenda of reform, which included antitrust, financial regulation, the eight-hour workday, even a living wage. And Franklin Roosevelt in 1944 outlined an economic bill of rights that would redeem wartime sacrifices and secure the gains in income of the working class. All Bush can come up with is a thank-you note for his campaign donors.
Food companies ship supplies to Cuba in the aftermath of Hurricane Michelle, in what could be the beginning of the end for the tediously long US embargo of the island country.
The connections between Enron and the Bush administration run deep—and they should be investigated.
The social safety net has become frayed because of welfare "reform."
President Bush is using his popularity in the wake of the September 11 terrorist attacks to push through some deeply partisan legislation.
Joe Stiglitz is no fan of Washington consensus-style globalization. Read "The Globalizer Who Came In From The Cold," an interview with Stiglitz on the IMF, World Bank and WTO conducted by Gregory Palast.
Moving to exploit a shifting political landscape in the aftermath of the September 11 terrorist attacks on the World Trade Center and the Pentagon, President Bush's Congressional point man on free
At a time when the economy needs vast and purposeful help from the federal government, America faces a peculiar handicap: Neither political party really believes in liberal economic intervention or knows how to do it. Democrats are still not over their infatuation with Hooverite fiscal austerity--embracing budget surpluses, bemoaning deficit spending. Other than serving their wealthy friends, Republicans work at dismantling government's ability to steer and stimulate the private economy. Both parties are enthralled by the most conservative advisers, Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Robert Rubin (now at Citigroup), who counsel caution. Democratic Senate majority leader Tom Daschle expressed doubts about any stimulus program, fearful that next year's budget might go into deficit.
This reluctance to act boldly will have to change very quickly. The economy was already in contraction before September 11. It needs hundreds of billions in new federal spending--yes, deficit spending--to counteract the great shrinkage under way in consumption and business investment. No one knows the severity of what's unfolding, but false optimism will make things much worse. Acting too fast and spending too much have economic risks, but none compare to what can unfold if Washington is too timid.
Back to basics. As John Maynard Keynes and American originals like Marriner Eccles, FDR's Fed chairman, taught, when the economic engine starts to seize up, government is the only force capable of jump-starting it--pulling idle capital into real investment while bolstering the incomes and confidence households need to buy things. It does this by borrowing the money from private sources--running large federal deficits financed by Treasury bonds--and spending the money in ways that generate waves of collateral economic activity. Deficit spending is not an unfortunate side effect. It is the necessary cure. America is especially vulnerable now to a deepening contraction because Washington is flush while companies as well as households, particularly those in the bottom half, are mired in debt. An aggressive government stimulus program is essential to regenerate the wherewithal--and the motivation--for business and families to renew their spending. If we are truly at war, the government must also do this in ways that renew social trust and a sense of equity. Patriotism cannot endure if the reigning ethos continues to be "winner takes all."
The $15 billion bailout for the airlines is a disgraceful start. Washington couldn't avoid aiding these terribly mismanaged companies, but it demanded nothing in return for the taxpayers or the workers being laid off by the tens of thousands. When Congress bailed out Chrysler twenty years ago, Lee Iacocca volunteered to work for $1 a year, labor got a seat on the board and the government took warrants in exchange for its cash infusion, later redeemed in full. This time hapless Democratic Party leaders refuse even to demand that the CEOs stop ripping up union contracts. The insurance industry is next in line for a handout, and there will be others. If more bailouts follow the same pattern, America's newfound unity will swiftly curdle into bitter resentments.
The agenda must be of sufficient scale to make a difference--and pump out money quickly. Top-end tax cuts, the Republican answer to all questions, are particularly inappropriate; companies and capitalists aren't likely to invest when consumers are cutting back. Particularly laughable is the reflexive Republican call for a capital gains tax cut, as if investors need an incentive to sell stocks.
The government's $40 billion emergency appropriation for reconstruction and the military is only a hesitant start. Washington should immediately ship $40 billion or $60 billion (or more) in revenue sharing to state governments that are being forced by balanced budget requirements to cut spending or raise taxes. And rather than cut domestic spending to pay for the huge bundle just approved for the Pentagon, Congress should fully fund domestic programs--particularly those in education, nutrition, housing and health. Congress should also act immediately to aid those workers being laid off through no fault of their own. A sensible program would extend unemployment insurance to thirty-six weeks and raise the average benefit to $300 a week. Special provisions are needed for short-term, contract and part-time workers, who would otherwise not be eligible for assistance. The Economic Policy Institute estimates that a decent unemployment insurance program might cost $30 billion a year.
On a grander scale, America has huge unfilled public investment needs that can easily cost more than $1 trillion over the next five years. The money can buy things people and society want and need:
§ Education. School boards have a backlog of thousands of desperately needed school construction and repair proposals. A $40 billion school fund could generate construction jobs and contracts across the country in a matter of weeks.
§ Health. One essential defense against terrorist attack with biological or chemical weapons is to rebuild our decayed public health infrastructure--laboratories, public hospitals and clinics, and properly staffed public health departments with modern computer and communications systems.
§ Transportation. To counter highway congestion and the nightmare of air travel, the country needs to develop alternatives like high-speed trains. This takes planning and time, but many projects are ready to go. For example, MAGLEV Inc., a Pittsburgh consortium, has been seeking federal funds to demonstrate a high-speed train that could get to Philadelphia in ninety minutes.
In addition, Congress can swiftly get money into the hands of those most likely to spend it. The next tax rebate can be targeted to low-wage workers who got nothing from the Bush tax cut; it would pump about $10 billion into the economy. The government could require all contractors to boost pay to a living-wage level. Aggressive new wage standards should be part of the government's quid pro quo for corporate bailouts. Indebted families need "stretched out" payment terms so they can keep spending.
After decades of conservative government, the list of needs and possibilities is long. Alert citizens must understand that it's time for Washington to act boldly, on a scale commensurate with the challenge. They must awaken Washington politicians from the stupor that suffocates imagination.
The facts about Bush's tax cuts are being kept from the public.