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the folly of a Wounded King |
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Incumbent Vice President Richard Nixon lost the Presidential election in 1960 to John Kennedy by 0.1% of the popular vote. He was devastated, furious. He blamed his loss on the Chairman of the Federal Reserve, William McChesney Martin, for raising INTEREST RATES during the election season. After he was finally elected President in 1968, Nixon set out to make sure he would be re-elected in 1972. He replaced Martin at the Fed with Arthur F. Burns, extracting a promise that Burns would keep INTEREST RATES low during the 1972 Presidential race.:
When it came time for that race, Burns wanted to raise the Interest Rate to stop INFLATION. Nixon wouldn’t have it, "… negative press about him [Burns] was planted in newspapers and, under the threat of legislation to dilute the Fed’s influence, Burns and other Governors succumbed." Burns never did definitively deal with inflation by raising INTEREST RATES and the various stop-gap measures were only temporarily effective. INFLATION went on for years. The great irony is that Nixon won every State but one in 1972. There was absolutely no reason for him to worry about that election at all. He was, in fact, later forced to resign the Presidency over another one of his behind the scenes attempts to assure that election – the Watergate break-in and cover-up. The Federal Reserve is supposed to be independent from outside control, even though the Board and Chairman are appointed by the President and confirmed by the Senate. Yet Nixon is quoted as saying to Arthur Burns before his confirmation hearing, "I know there’s the myth of the autonomous Fed… [short laugh] and when you go up for confirmation some Senator may ask you about your friendship with the President. Appearances are going to be important, so you can call Ehrlichman to get messages to me, and he’ll call you."
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the fate of the Wise Counsel |
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That INFLATION that was not dealt with by Nixon/Ford/Burns persisted into the Carter years. Jimmy Carter appointed Paul A. Volcker as Chairman of the Federal Reserve in 1979. Volcker set to work immediately raising the INTEREST RATES to levels previously unknown in our history. In the process, he helped precipitate our biggest Recession to date [UNEMPLOYMENT up to 12%] and the REAL DOW fell significantly. In spite of wide criticism from the construction and farming sectors [with Tractors surrounding the Federal Reserve in Washington], Volcker held his ground until INFLATION yielded, then he lowered the INTEREST RATES to end the Recession.
It was a masteful piece of work, proving the wisdom of William McChesney Martin‘s injunction to raise INTEREST RATES to combat INFLATION, and lower them to fight UNEMPLOYMENT – "the job of the Federal Reserve is ‘to take away the punch bowl just as the party gets going,’ referring to the need to raise interest rates when the economy is at its most active.". Meanwhile, President Reagan had busied himself with "Reaganomics." He slashed Income Taxes, particularly in the upper brackets. He increased Military spending. He tripled the National Debt. And he sponsored legislation that radically effected the economy – known as Deregulation. One result was the Savings and Loan Crisis as the deregulated S&L’s failed in droves. And Paul Volcker’s reward for his work? He was replaced by President Reagan with Alan Greenspan in 1987. In the words of Nobel Economist, Joseph Stiglitz, "Paul Volcker, the previous Fed Chairman known for keeping inflation under control, was fired because the Reagan administration didn’t believe he was an adequate de-regulator."
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in the time of a Blind Courtier |
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When Alan Greenspan took over the Fed in 1987, he took the INTEREST RATE up to ~10%. With his first Recession in 1990, he dropped it to a low of 3% but as UNEMPLOYMENT fell, he only raised it back up to between 5 and 6%. What’s more, he kept it there for six years, six of the most prosperous years in our history. The Stock Market [REAL DOW] tripled during that time. HOUSING STARTS rose uninterrupted, and HOME VALUES began to climb like never before. INFLATION was a flat line [at least the INFLATION that’s measured by the CPI-U]. It was, indeed, the land of milk and honey.
It’s obvious now that the rising HOUSING STARTS, HOME VALUES, and REAL DOW were a form of INFLATION – big time INFLATION. I don’t know if President Clinton was involved in Greenspan’s decision to keep INTEREST RATES low during those years, or was leaving the Federal Reserve to the Wizard, Alan Greenspan. But as things have played out over time, the only question now is whether Greenspan didn’t see what was happening, didn’t want to see what was happening, or was blinded by his ideologic attachment to Deregulation. Whatever the reason, it was a mistake that ultimately plunged us into a deeper Recession than we knew was possible…
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When he was warned that it was dangerous to leave the monetary policy so loose for so long, Greenspan replied that there was no reason to raise INTEREST RATES because there was no INFLATION. And it’s hard to argue with prosperity. As it became apparent that the rising HOME VALUES might be a dangerous FINANCIAL BUBBLE that might "burst," Greenspan first resisted the idea, then later said that the "Market could handle it" – his stock answer. He retired literally at the exact time the HOUSING BUBBLE did, in fact, burst.
In a way, each of these tales is related to the others. Each of these stories is about the misuse of political power for idiosyncratic reasons – Nixon’s paranoia, Reagan’s campaign against FDR’s New Deal, and Alan Greenspan’s allegiance to continuous growth and his irrational faith in the Market to self-correct. Each tale is a chapter in the chronicle of the darkness that’s covering our land…
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