Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession Read Online Free PDF Page A
Author: Frederick Sheehan
Greenspan, only 32 years old, was given the opportunity to buy out the Townsend family interests. He did, but he retained the firm’s name of TownsendGreenspan & Co. His clientele included U.S. Steel, Owens Corning, Weyerhaeuser, and Alcoa. 29 Greenspan continued to operate the firm until it was liquidated in 1987, when he became Federal Reserve chairman.
24 Ibid.
25 Ibid., p. 212.
26 Martin, Greenspan , p. 54.
Fellow economists and clients assayed the future chairman’s strength to be numbers. Greenspan’s job was to collect data and project the demand for steel in six months’ time. He was thorough and conscientious when collecting the inflow; however, the value of his forecasts is not clear. We do know that he warned Fortune magazine readers in March 1959 of “overexuberance” in the stock market after the Standard & Poor’s 500 (S&P 500) rose 43 percent in 1958. The market bumped and skidded for the next two years—in sum, neither making nor losing money for investors—before rocketing again in 1961.
His “overexuberance” claim is well known (as a precursor to his “irrational exuberance” worry in 1996). More interesting is the context. He explained to Fortune that there were automatic stabilizers prior to World War I that held overexuberance in check. In the words of Fortune reporter Gilbert Bruck, Greenspan explained that “prices could not get too far out of line with real values because the supply of credit was automatically constricted by a limited money supply.” These constraints, Greenspan explained, were severed once the Federal Reserve came into existence. 30
The data that Greenspan collected were of physical properties that could be counted. As his biographer Justin Martin wrote: “The economy of the 1950s was a physical economy in very real and quantifiable terms: X number of men worked Y number of hours to produce Z tons of steel. It all got loaded onto so many railcars and wound up pounded into so many girders and aircraft struts and auto fins.” 31
27 Greenspan, The Age of Turbulence , p. 45.
28 Martin, Greenspan , p. 56.
29 Ibid., p. 58.
30 Gilbert Burck, “A New Kind of Stock Market,” Fortune , March 1959, p. 201.
But structural changes in the U.S. economy made Greenspan’s specialty less authoritative. The numbers became more elusive as the economy grew less physical and more conceptual.
Greenspan’s forte was staying ahead of his peers in the collection of previously under cataloged data. Yet, he was falling behind the times. Econometrics was the future.
Greenspan was skeptical of econometric modeling. In 1958, he wrote in The American Economic Review : “[Stephen] Taylor is right in pointing out that the basic problem in handling flow-of-funds accounts is the primitiveness of our financial theory. These accounts are extremely elaborate and extraordinarily well constructed. But unless we know what we want to use them for, they are of as much practical value as a table of random numbers. …” 32
Econometrics substitutes statistical tests for understanding (such as “what we want to use them for”). Greenspan was skeptical, yet, he succumbed—in his fashion. TownsendGreenspan purchased a $100,000 computer that was the size of a car. 33 Greenspan “was especially inclined to tinker with the findings. He would often make substantial changes, certain that punch cards were no substitute for good old-fashioned observation.” 34 Later, as Fed chairman, he was admired for ignoring models and conceptualizing Fed policy.
31 Martin, Greenspan , p. 56.
32 Alan Greenspan, American Economic Review , May 1958, vol. 48, (May 1958), p. 171.
33 Martin, Greenspan , p. 56.
34 Ibid, p. 59.
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2
The Dark Side of Prosperity
1958–1967
Mr. Greenspan declared that a rising stock market tended to put strong upward pressure on stockholder inclination to spend. If market values rise, and do not quickly fade again, he said, the gain gets built into an
24 Ibid.
25 Ibid., p. 212.
26 Martin, Greenspan , p. 54.
Fellow economists and clients assayed the future chairman’s strength to be numbers. Greenspan’s job was to collect data and project the demand for steel in six months’ time. He was thorough and conscientious when collecting the inflow; however, the value of his forecasts is not clear. We do know that he warned Fortune magazine readers in March 1959 of “overexuberance” in the stock market after the Standard & Poor’s 500 (S&P 500) rose 43 percent in 1958. The market bumped and skidded for the next two years—in sum, neither making nor losing money for investors—before rocketing again in 1961.
His “overexuberance” claim is well known (as a precursor to his “irrational exuberance” worry in 1996). More interesting is the context. He explained to Fortune that there were automatic stabilizers prior to World War I that held overexuberance in check. In the words of Fortune reporter Gilbert Bruck, Greenspan explained that “prices could not get too far out of line with real values because the supply of credit was automatically constricted by a limited money supply.” These constraints, Greenspan explained, were severed once the Federal Reserve came into existence. 30
The data that Greenspan collected were of physical properties that could be counted. As his biographer Justin Martin wrote: “The economy of the 1950s was a physical economy in very real and quantifiable terms: X number of men worked Y number of hours to produce Z tons of steel. It all got loaded onto so many railcars and wound up pounded into so many girders and aircraft struts and auto fins.” 31
27 Greenspan, The Age of Turbulence , p. 45.
28 Martin, Greenspan , p. 56.
29 Ibid., p. 58.
30 Gilbert Burck, “A New Kind of Stock Market,” Fortune , March 1959, p. 201.
But structural changes in the U.S. economy made Greenspan’s specialty less authoritative. The numbers became more elusive as the economy grew less physical and more conceptual.
Greenspan’s forte was staying ahead of his peers in the collection of previously under cataloged data. Yet, he was falling behind the times. Econometrics was the future.
Greenspan was skeptical of econometric modeling. In 1958, he wrote in The American Economic Review : “[Stephen] Taylor is right in pointing out that the basic problem in handling flow-of-funds accounts is the primitiveness of our financial theory. These accounts are extremely elaborate and extraordinarily well constructed. But unless we know what we want to use them for, they are of as much practical value as a table of random numbers. …” 32
Econometrics substitutes statistical tests for understanding (such as “what we want to use them for”). Greenspan was skeptical, yet, he succumbed—in his fashion. TownsendGreenspan purchased a $100,000 computer that was the size of a car. 33 Greenspan “was especially inclined to tinker with the findings. He would often make substantial changes, certain that punch cards were no substitute for good old-fashioned observation.” 34 Later, as Fed chairman, he was admired for ignoring models and conceptualizing Fed policy.
31 Martin, Greenspan , p. 56.
32 Alan Greenspan, American Economic Review , May 1958, vol. 48, (May 1958), p. 171.
33 Martin, Greenspan , p. 56.
34 Ibid, p. 59.
This page intentionally left blank
2
The Dark Side of Prosperity
1958–1967
Mr. Greenspan declared that a rising stock market tended to put strong upward pressure on stockholder inclination to spend. If market values rise, and do not quickly fade again, he said, the gain gets built into an
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