GREENSPAN’S FRAUD HOW TWO DECADES OF HIS POLICIES HAVE UNDERMINED THE GLOBAL ECONOMY Ravi Batra 01-Raba_FM.qxd 2/3/05 3:28 PM Page i Greenspan’s Fraud 01-Raba_FM.qxd 2/3/05 3:28 PM Page ii Also by Ravi Batra The Crash of the Millennium Stock Market Crashes of 1998 and 1999 The Great American Deception Japan: The Return to Prosperity The Myth of Free Trade The Great Depression of 1990 Surviving the Great Depression of 1990 The Downfall of Capitalism and Communism Muslim Civilization and the Crisis in Iran The Pure Theory of International Trade The Theory of International Trade under Uncertainty Prout and Economic Reform in India 01-Raba_FM.qxd 2/3/05 3:28 PM Page iii GREENSPAN’S FRAUD HOW TWO DECADES OF HIS POLICIES HAVE UNDERMINED THE GLOBAL ECONOMY RAVI BATRA 01-Raba_FM.qxd 2/3/05 9:35 PM Page iv GREENSPAN’S FRAUD © Ravi Batra, 2005. All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles or reviews. First published in 2005 by PALGRAVE MACMILLAN™ 175 Fifth Avenue, New York, N.Y. 10010 and Houndmills, Basingstoke, Hampshire, England RG21 6XS Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–6859–4 hardback Library of Congress Cataloging-in-Publication Data Batra, Raveendra N. Greenspan’s fraud : how two decades of his policies have undermined the global economy / Ravi Batra. p. cm. Includes bibliographical references and index. ISBN 1–4039–6859–4 (alk. paper) 1. Greenspan, Alan, 1926– 2. Government economists—United States—Biography. 3. Board of Governors of the Federal Reserve System (U.S.) 4. Monetary policy—United States. 5. United States—Economic policy—1981–1993. 6. United States—Economic policy—1993–2001. 7. United States—Economic policy—2001– I. Title. HB119.G74B38 2005 332.1Ј1Ј092—dc22 2004065030 A catalogue record for this book is available from the British Library. Design by Newgen Imaging Systems (P) Ltd., Chennai, India. First edition: May 2005 10987654321 Printed in the United States of America. 01-Raba_FM.qxd 2/3/05 3:28 PM Page v In the memory of my late teacher P. R. Sarkar This page intentionally left blank 01-Raba_FM.qxd 2/3/05 3:28 PM Page vii CONTENTS ❖ Acknowledgments ix 1 The Two Faces of Alan Greenspan 1 2 The Social Security Fraud 11 3 Greenomics: Free Profits Define Free Markets 47 4 Greenspan’s Intellectual Fraud 73 5 Greenspan and the Globe 123 6 What Causes a Stock Market Bubble and Its Crash? 141 7 The Income Tax Rate and Our Living Standard 169 8 Does the Minimum Wage Create Unemployment? 183 9 Greenspan and the Galloping Trade Deficit 195 10 The Legacy of Greenomics 217 11 Economic Reform 235 Notes 261 Index 273 This page intentionally left blank 01-Raba_FM.qxd 2/3/05 3:28 PM Page ix ACKNOWLEDGMENTS ❖ n completing this project I gratefully acknowledge help from the group of ten (the G-10): first and foremost, my wife, Sunita, without I whose prodding and inspiration this work might still be in incuba- tion; Airié Stuart, my editor at Palgrave Macmillan, who read, edited, and accepted the work enthusiastically; my agents Michael Broussard and Jan Miller at Dupree Miller,who led me to Airié; Abdullah Khawaja for timely research assistance; Chris Hartman of United for a Fair Economy (UFE.com) for permission to use a graph; my copyeditor, Bruce Murphy, and production editor, Alan Bradshaw,for forcing me to add more expla- nations in the text; Ellis Levine for checking out the legalities, and, last but not least, Melissa Nosal, Airié’s assistant, for never being too busy to take my call. Many books and articles have provided the supporting material. Among them are: Alan Shrugged: Alan Greenspan, the World’s Most Powerful Banker by Jerome Tuccille; Greenspan: The Man Behind Money by Justin Martin; Maestro: Greenspan’s Fed and the American Boom by Bob Woodward; Dot.con: The Greatest Story Ever Sold by John Cassidy; Origins of the Crash by Roger Lowenstein; Bull!: A History of the Boom, 1982–1999 by Maggie Mahar; several newspapers such as The New York Times, The Wall Street Journal, The Washington Post, The Dallas Morning News, The Financial Times, The Boston Globe, The San Francisco Chronicle, The Christian Science Monitor, The Daily Telegraph, The Guardian, The Irish Examiner, The Buffalo News, The Toronto Star, The Pittsburgh-Post Gazette, The Ottawa Citizen; several magazines including Time, Newsweek, The New Yorker, The Nation, The Economist, Forbes, CNN/Money; above all, I am grateful to that amazing contraption called the Internet, which was indispensable in providing speedy information. This page intentionally left blank 02-Raba_Ch01.qxd 2/3/05 3:29 PM Page 1 1 THE TWO FACES OF ALAN GREENSPAN ❖ ctober 19, 1987, is known as Black Monday, the day the New York Stock Exchange suffered the worst crash in history, O with a bang that echoed around the world. The Dow Jones Index (the Dow in short) then sank 22.6 percent, almost double the single-day drop in the notorious crash of 1929. From Toronto to Tokyo, London to Sydney,Buenos Aires to Brasilia, share markets shed tears, mourning the demise of the Dow. Wall Street and investors across the globe agonized over a bleak future. They had been caught off guard, because no financial wizard had foreseen the debacle. But in one of financial history’s biggest ironies, Black Monday launched the brilliant future of someone named Alan Greenspan. It propelled him into glory and celebrity, giving him unprecedented influence over the global economy. Barely two months before the disaster of the Dow, with large biparti- san support, Greenspan had been appointed the chairman of the Federal Reserve (the Fed in short), a coterie of 12 regional banks that control the levers of money supply in the United States. He came with no bank- ing experience; his credentials as an economist were considered by some to be mediocre, but he had foresight and business acumen that few can develop from their scholarship alone. He had not done any path-breaking work in economics, at least none that was commonly cited. Yet he was savvy enough to know when to open and shut the money pump that lubricates financial markets. He had made his mark through business forecasting, which had brought him close to big firms on Wall Street. 02-Raba_Ch01.qxd 2/3/05 3:29 PM Page 2 2 ❖ GREENSPAN’S FRAUD ❖ Actually, Wall Street’s first choice in 1987 was not Greenspan but Paul Volcker, who had been selected as the Fed chairman by President Jimmy Carter in 1979. Volcker had done such a good job of taming inflation, which had plagued the globe since the early 1970s, that the financial world had come to adore him. But an inflation fighter is rarely popular with politicians, because he tends to keep interest rates high and raise the rate of unemployment. Volcker was not on amicable terms with the reigning president, Ronald Reagan, who preferred his pal and adviser, Wall Street’s second choice, Alan Greenspan. Following his swearing-in ceremony as Fed chairman in the month of August, Greenspan must have disappointed the president, as he raised the interest rates a notch, presumably to display his own credentials as an inflation fighter. This appeared to be a clear attempt to woo Wall Street, which was uneasy with Volcker’s departure.Within weeks of Greenspan’s arrival as the head of the Fed, financial brokers felt reassured. But then the stock market, which had been soaring since 1982, roared into a frenzied crash, shaking investors around the planet. Everyone wondered: Would the new chairman be up to the Herculean task of stabilizing the markets? With the shareholder world in shambles, Greenspan swung into action to prevent the kind of economic collapse that had followed the much leaner 1929 crash. As Fed chairman, he had enormous power over interest rates and commercial banks. He flooded the financial world with money,made loans cheaply available to investors, and persuaded bankers across continents to follow his lead. The rest is history. Share prices stabilized around the globe in a matter of weeks, and economic calamity was averted. In fact, the Dow, along with global stock indexes, ended the year with a gain, mocking the October Massacre. Black Monday presented one of the stiffest challenges to Chairman Greenspan, but he rose to the occasion, becoming a celebrity in the process. Henceforth, he became the darling of Wall Street and investors all over the planet. Greenspan had remained calm amidst financial jitters. Alan Murray of The Wall Street Journal commended Greenspan for “Passing a Test.” Later, Forbes and other influential magazines described his handling of the crisis as “Greenspan’s Finest Hour. He got on the horn and told the banks they had to lend money to Wall Street. Then he dropped money market rates and long-term rates fell sympathetically.”1 Still later, the Associated Press recalled: “The 1987 crash occurred only two months after Greenspan was sworn in as Fed chairman. He received a large amount of praise for his handling of that financial crisis.”2 02-Raba_Ch01.qxd 2/3/05 3:29 PM Page 3 ❖ The Two Faces of Alan Greenspan ❖ 3 However, for Greenspan this was just the beginning of his climb to stardom on the global stage.Countless articles were written about his per- sonality and life, heads of central banks envied him, politicians kowtowed to him, experts and economists, including Nobel laureates, lauded him.