“ I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.”
— Alan Greenspan
August 1, 2025 — By late 2000, investors still had high hopes for stocks.
That was not to deny that there had been losses — substantial losses.
Almost $1 trillion had already been lost on the Nasdaq. Companies such as Theglobe.com, Career Builder, Webvan, and Audible, Inc. were already nearly out of business.
Investors were still exuberant but thought they had become much more rational than they were the year before.
It was one thing for the loopy dot-coms to go belly-up. The Dow was quite another matter.
“There is no way,” investors would say, “Alan Greenspan will allow a serious bear market or a serious recession.”
Wasn’t that the real bargain that had been struck with the central bank, after all?
Americans would allow the bankers their profits, their limousines, and boardrooms; they would permit a gradual ruin of the nation’s currency too.
But in exchange, the Fed would manage the economy so that people did not have to worry about a serious decline. That was why savings rates were low in the United States. People did not have to save for a rainy day — because it never rained.
“In effect,” wrote Paul Krugman in Upside, “capitalism and its economists made a deal with the public; it will be okay to have free markets from now on, because we know enough to prevent any more Great Depressions.”
And so it was that the entire world turned its weary eyes to Greenspan. The capo di tutti capi (boss of bosses) of central bankers was meant to save not merely US investors, but the entire world.
Everyone knew that, worldwide, the United States was the “engine of growth” and that Americans were the best consumers — always ready to buy what they did not need with money they did not have.
And despite the damage done to the Nasdaq, it was widely known that Greenspan had what it took to keep the US wealth machine delivering the goods. Investors bought the Dow in the year 2000, confident that Greenspan would not allow prices to fall.
He would not want prices to fall because falling stock prices would make people feel poorer; and poorer people would buy less — threatening the entire world economy.
That he had the will to prevent stocks from falling was beyond question. Almost everyone agreed that he had the means, too — the so-called “Greenspan put.”
A put option allows its holder to sell at a predetermined price, that is to “put it to” the person on the other side of the trade.
In a falling market, a put option is a way to make profits by forcing the other fellow to buy at an above-market price.
Greenspan’s put option was his control of short-term interest rates.
Lowering rates, so nearly everyone thought (including central bankers), was the way to stimulate demand for money, which, in turn, would increase consumer spending and business investment, and practically force investors to buy stocks.
“In Greenspan We Trust,” proclaimed a Fortune cover in late 2000. Before the rate cuts began, the knowledge that the Fed would begin to cut seemed to be enough.
But in addition to the bad theory at the top of the bubble, Greenspan had bad information.
The Information Age brought more information to more people — including to central bankers — but the more information people had, the more opportunity they had to choose the misinformation that suited their purposes.
If only Greenspan were really at the controls of some vast machine! He might twist a knob . . . or push a lever . . . and the machine would do as he wanted.
Instead, Greenspan’s lever sent the machine going in an unexpected direction.
Great markets work like best-selling novels — with a plot that involves an ironic twist or two. We cannot imagine a blockbuster novel in which the dramatis personae get exactly what they expect.
Nor would we want to live in such a world; it would be as dull and earnest as a poem by Maya Angelou. “The mildness and brevity of the downturn are a testament to the notable improvement in the resilience and the flexibility of the economy,” said Alan Greenspan to a congressional committee during hearings in July 2002.
“The fundamentals are in place,” he continued (as the stock market rose) “for a return to sustained healthy growth: imbalances in inventories and capital goods appear largely to have been worked off; inflation is quite low and is expected to remain so; and productivity growth has been remarkably strong, implying considerable underlying support to household and business spending as well as potential relief from cost and price pressures.”
Again, Greenspan spoke with no smile on his face.
Nor, as far as we know, were his fingers crossed. He said what he said as though he meant it, as though he believed it himself. Certainly, his listeners seemed to believe it.
No one seemed to have the slightest idea of how ridiculous and pathetic the whole show really was.
The spectacle seemed designed for prime time, to reassure the Shareholder Nation that it faced nothing more troubling than a temporary “failure of confidence” on the part of skittish investors and that as soon as a few miscreants were behind bars, the whole nasty episode would soon be forgotten.
No one was rude enough to point out that it was the star witness, Greenspan himself, who bore much of the blame for the bubble and its aftermath.
Nor did anyone seem to wonder how the nation’s central banker could correct his mistake. After the crash of 1929, similar hearings were held by similar groups of Washington hacks.
That was before the days of air-conditioning. Few matters were important enough to sweat through a summer in the nation’s capitol.
But when the weather softened, the politicians turned up the heat for the benefit of the rubes and patsies in the home districts.
It was discovered that Albert Wiggins (no relation, the ‘s’ on the end has a long sortid history), head of Chase National Bank, shorted his own shares and made millions.
Sam Insull presided over the WorldCom of the 1920s — Commonwealth Edison — a $3 billion utility company whose books were audited by Arthur Andersen. He fled the country when the cops came looking for him.
And poor Richard Whitney, who had once headed the New York Stock Exchange, went to prison for embezzling as much as $30 million from the exchange’s pension fund.
Seventy years on, Greenspan, by contrast, was still greeted as a hero in congressional hearing rooms.
The politicians—and the lumpeninvestoriat— were still counting on him to save the world as we know it. People expected so much — perhaps too much — of Greenspan. They expected his aim to be perfect.
But in his first 11 tries, he failed to set interest rates at the precise level needed to revive the stock market. In every respect, Greenspan’s rate cuts were doomed.
They caused qualified borrowers to hesitate, while inviting unqualified ones to go more deeply into debt. And they produced a new round of inflation in an unintended sector: real property.
A recession is supposed to lower consumer spending and increase savings levels. But the recession of 2001 had not. Instead, consumers borrowed and spent more than ever before, confident of clear skies ahead.
Regards,
Addison Wiggin
Grey Swan Investment Fraternity
P.S., This essay is an excerpt from the third post-pandemic edition of Financial Reckoning: Memes, Manias, Booms & Busts, Investing in the 21st Century.
We selected this essay today to prove a point. Greenspan set in motion two trends we have been closely following for decades:
The googly-eyed central banker met every crisis during his tenure—1987, 1992, 1998, 2001, and again under Bernanke in 2008—with dramatic rate cuts and a flood of money.
During the Yellen Fed, keeping rates low – even longer than the financial crisis persisted – became the norm. As did rolling over U.S. government debt on the short end of the yield curve.
Treasury Secretary Bessent lampooned Yellen’s practice during Trump’s campaign last year, but as we profiled in Swan Dive this morning, he’s now adopted the same strategy.
When Jerome Powell succeeded Yellen at the Fed, he began to raise rates systematically, determined to “normalize” the rates for the economy to be healthy.
The pandemic changed that strategy. Overnight, rates were back to zero once again.
When rate cuts no longer worked, both Bernanke and Yellen resorted to successive rounds of quantitative easing (QE).
The practice ballooned the Fed’s balance sheet until the Federal Reserve began losing money for the first time in its 109-year history in September of 2022.
Under the charter, the Fed is supposed to remit its profits to the U.S. government to help balance the budget each year. Heh.
Since 2022, there have been no remittances from the Fed to the federal register.
But, out of curiosity, I Googled how much their various lending facilities have pumped directly into the banking system. It’s a reasonably large sum. This answer pertains to the Banking Crisis in 2023 after the Fed went broke:
Amounts involved:
- Discount Window Lending: During the banking stress of March 15, 2023, borrowing at the discount window spiked to $153 billion, up from $5 billion on March 9, 2023.
- Bank Term Funding Program: By March 26, 2025, the remaining $86 billion in BTFP loans had been repaid.
- Interest Expenses: Total interest expense, which includes interest expense on reserve balances held by depository institutions, increased by $179 billion from 2022 to 2023.
“It is important to note,” the Google AI assistant adds, “pinpointing a precise single figure for the ‘total amount given directly to banks’ can be complex due to the nature of these lending programs and their operational details.”
Additionally, “the Federal Reserve Board highlights that the total interest income earned on loans to depository institutions and other eligible borrowers, including from the Bank Term Funding Program and Paycheck Protection Program Liquidity Facility, was $10 billion in 2023.”
Back of the envelope: $261 billion to banks, including subtractions of lending repaid.
Today, Washington insiders aren’t playing nice with the Fed anymore. There have been too many crises and bailouts, most stemming, in one way or another, from politicians of any stripe’s inability to pay for promises they make without balancing the federal books.
President Trump is quick to blame Jerome Powell and the Federal Reserve for all the country’s economic ills. And on one level, he’s right.
However, Trump is more intently focused on lowering interest rates as part of his Great Reset plan to reduce the cost of financing America’s out-of-control debt. That’s what’s playing out on social media daily.
We have our doubts that Mr. Trump is concerned the Fed blows financial bubbles, pricks them with a rate pin, and then swoops in as the heroes by sweeping the trouble under the rug to grow bigger next time, creating numerous Grey Swan events along the way, but who knows? The gentleman’s a gambler at heart… maybe he is.
Your thoughts? Please send them here: addison@greyswanfraternity.com
