Alan Greenspan died last night at the age of 100.
Most of today’s obituaries will remember “the Maestro”
They will remember “irrational exuberance” from his 1996 warning the tech bubble was already underway. They will remember the longest-serving Federal Reserve chairman of the modern era; the longest economic expansion in American history.
Some will remember a famous Time magazine cover from February 1999.
The cover showed Greenspan standing beside Treasury Secretary Robert Rubin and Deputy Treasury Secretary Lawrence Summers beneath a headline that read: “The Committee to Save the World.”
We met with Greenspan briefly in his Washington D.C. office while filming IOUSA in 2007, forecasting what would become the global financial crisis and housing collapse of 2008. Greenspan’s appearance in the film encouraged, among others, Treasury Secretary Robert Rubin, also pictured above, to sit for the film. (Source: Time Magazine)
The Time cover reflected the mood of the moment. The Asian financial crisis had ripped through emerging markets in 1997. Russia defaulted on its debt in 1998. Long-Term Capital Management teetered on the edge of collapse. Markets convulsed. The trio became the public face of Washington’s effort to stabilize the global financial system.
A decade later, after the housing collapse and the 2008 financial crisis, critics revisited many of the same decisions. Interest-rate policy, financial deregulation and repeated interventions that once appeared brilliant began attracting a less charitable interpretation.
Greenspan’s public life will go down as “complicated.” Few of today’s retrospectives will spend much time remembering the Maestro’s early affair with the novelist and philosopher Ayn Rand.
Greenspan’s passing gives us a rare opportunity today. We get a chance to follow the bread crumbs all the way from Greenspan’s intellectual mentor to Kevin Warsh’s first FOMC meeting and what he actually meant at his first press conference last Wednesday.
It’s a long story with lots of twists, but we’ll keep up the pace and make it quick, we promise.
📚 Ayn Rand’s Economist, Sort Of
During the 1950s and 1960s, in a small apartment in Lower Manhattan, Greenspan became part of Ayn Rand’s inner circle.
Writers, economists and intellectuals gathered in her apartment to debate politics, economics, freedom and capitalism. Rand was writing Atlas Shrugged. Greenspan was building a career as an economist.
Before meeting Rand, Greenspan approached economics largely through numbers, statistics and forecasting models. Rand supplied something different. She viewed capitalism not merely as an efficient mechanism for producing prosperity, but as a moral system grounded in individual liberty and private property.
When Atlas Shrugged was published in 1957, Greenspan attended the celebration.
When Gerald Ford appointed Greenspan chairman of the Council of Economic Advisers in 1974, Rand attended the swearing-in ceremony at the White House.
Ayn Rand was writing Atlas Shrugged – a dystopian, philosophical novel set in a decaying United States – when the impressionable Alan Greenspan hung out at her apartment in Manhattan in the 1950s. Economic historians are confounded to this day. How did this group of intellectuals produce the maestro of fiat currency and financial intervention… the very antagonists of Rand’s novels? (Source: Clifford Jones and Medium on substack)
Some members of her circle worried that Greenspan was abandoning the principles they had spent years discussing in her apartment. Government service seemed an unusual destination for a man who had spent much of his intellectual life criticizing government intervention.
Rand dismissed the concern.
“Alan is my disciple,” she reportedly said. “He’s my man in Washington.”
The phrase captured both her confidence in Greenspan and the peculiar path his career would take.
The young economist who spent evenings discussing capitalism, gold and individual liberty with Ayn Rand was now advising the president of the United States.
Thirteen years later, Ronald Reagan would place him at the Federal Reserve.
🪙 Gold and Economic Freedom
In 1966, Greenspan published a now rather infamous essay in Rand’s newsletter, The Objectivist.
The title: Gold and Economic Freedom. The timing was not accidental.
Lyndon Johnson was financing both the Great Society and the Vietnam War. Federal spending continued to expand. Foreign governments accumulated increasing quantities of dollars. The Bretton Woods monetary system remained officially tied to gold, but strains were beginning to appear beneath the surface.
The essay did not read like the work of a future central banker.
Greenspan argued that the gold standard protected savings by limiting governments’ and banking systems’ ability to expand credit indefinitely.
“The abandonment of the gold standard,” he wrote, “made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.”
Greenspan’s concern was not that politicians would suddenly become irresponsible.
His concern was that political incentives rarely reward restraint.
Government spending creates beneficiaries immediately. The costs often appear years later. Under a gold standard, those costs become more difficult to postpone because credit expansion ultimately runs up against a physical constraint.
Without that constraint, Greenspan argued, governments acquire a powerful mechanism for financing expenditures that taxpayers might otherwise resist.
“Deficit spending is simply a scheme for the confiscation of wealth,” he wrote.
The mechanism was inflation. New credit enters the financial system. Currency expands faster than production. Purchasing power declines. Savers discover that money set aside years earlier buys less than expected.
“In the absence of the gold standard,” Greenspan wrote, “there is no way to protect savings from confiscation through inflation.”
The line followed him for the rest of his life. So did the final sentence of the essay.
“Gold and economic freedom are inseparable.”
After his appointment to the chair of the Federal Reserve, the author of Gold and Economic Freedom became steward of the world’s largest fiat-currency system.
🏛️ The Greenspan Put
History has its way with even the greatest among us. Three months after Greenspan took office, the stock market crashed.
October 19, 1987, remains one of the most violent trading days in American financial history. The Dow Jones Industrial Average fell more than 22% in a single session. Traders watched liquidity disappear. Market makers struggled to quote prices. Nobody knew where the selling would stop.
Greenspan responded quickly. He announced that the Federal Reserve stood ready to provide liquidity to support the economic and financial system.
The statement was brief. Investors remembered it anyway. The crash of October 1987 became a formative experience for an entire generation of traders.
Seven years later, Mexico’s peso collapsed. The Clinton administration assembled a rescue package backed heavily by the United States. Financial markets again watched Washington and the Fed step in to contain a crisis that threatened to spread beyond national borders.
Four years after the stock-market crash, traders had seen one intervention. By the middle of the 1990s, they had seen two.
Then came Long-Term Capital Management.
The hedge fund had assembled one of the most impressive collections of financial talent ever gathered under a single roof. John Meriwether ran the firm. Myron Scholes and Robert Merton had recently won the Nobel Prize in economics.
Their models worked beautifully until Russia defaulted on its debt in 1998. As an attorney with LTCM, Grey Swan contributor Jim Rickards wrote many of the contracts that would need to be unwound.
Losses cascaded through the firm’s highly leveraged positions. Wall Street feared that a disorderly collapse might destabilize the broader financial system. The Federal Reserve Bank of New York organized meetings among major financial institutions and helped coordinate a private-sector rescue.
By the end of the decade, investors had watched policymakers intervene repeatedly when financial instability threatened the system.
The phrase “Greenspan Put” emerged from that experience.
Investors concluded that when financial conditions deteriorated severely enough, the Federal Reserve would likely intervene to stabilize the system.
Greenspan never described policy in those terms. Investors did. And started to believe that even the most outrageous bets would be covered by the Greenspan Put.
Meanwhile, another challenge was emerging.
💻 Irrational Exuberance
By the middle of the 1990s, unemployment had fallen to levels that made many economists uncomfortable.
Federal Reserve models suggested inflation should soon accelerate. The logic seemed straightforward. A tightening labor market would force employers to compete for workers. Higher wages would eventually translate into higher prices.
Yet month after month, the expected inflation failed to appear.
Greenspan spent much of the decade meeting with executives who described changes occurring inside their businesses that government statistics struggled to capture. Computers were replacing paper-based systems. Inventory management became more efficient. Supply chains became more responsive. Information moved across networks almost instantly.
Business leaders told Greenspan they were producing more with fewer resources. The productivity gains appeared real. The inflation everyone knew was coming… never arrived.
Greenspan spent years speaking with executives, manufacturers and business owners who described productivity gains that government statistics struggled to capture.
In December 1996, he delivered a speech containing a phrase that became famous.
“Irrational exuberance.” The phrase is often remembered as a warning about speculation. Few remembered the dilemma behind it.
Greenspan openly questioned whether asset prices had become detached from underlying value. He also doubted that central bankers could accurately identify bubbles in real time or deflate them safely once identified.
💥 Bernanke’s Inheritance
To understand and appreciate what Kevin Warsh meant when he said the Fed has lost its way and announced an aggressive 5-part overhaul of the Federal Reserve’s operating practice last week, you have to understand what happened in the Bernanke, Yellen and Powell years in between.
The Fed became increasingly activist in policy far afield from simply ensuring stable prices. Its mandate toward “full employment: began targeting marginalized workers, including part-time and immigrants, in the economy and included a climate initiative consistent with global standards as well.
Early in the Bernanke years, a bank in Phoenix could originate a mortgage on Monday and sell it by Friday. Investment banks bundled thousands of mortgages together, divided them into tranches and distributed them throughout the global financial system. Pension funds purchased them. Insurance companies purchased them. European banks purchased them.
The underlying risk never disappeared. It simply became harder to identify. A mortgage issued to a homeowner in Las Vegas might eventually find its way into the portfolio of a pension fund in the Netherlands or a regional bank in Germany.
As long as housing prices continued rising, the arrangement appeared remarkably stable. Rising property values allowed struggling borrowers to refinance. Delinquencies remained manageable. Investors collected their payments and rating agencies continued assigning high grades to securities built from pools of mortgages.
The problems began when housing prices stopped rising.
Once prices flattened, refinancing became more difficult. Once refinancing became more difficult, mortgage delinquencies began increasing. The assumptions supporting the entire structure suddenly looked less certain than they had a few months earlier.
Investors who owned mortgage-backed securities started asking questions that had seemed unnecessary during the boom. How many of the underlying borrowers could actually repay their loans? How much were the securities worth if housing prices continued falling? Which financial institutions were holding the largest exposures?
Those questions proved surprisingly difficult to answer.
Bear Stearns collapsed in March 2008. Lehman Brothers followed six months later. Institutions that had spent years lending to one another became increasingly reluctant to do business together because no one knew with confidence where the losses might ultimately surface. Credit markets seized as trust evaporated throughout the financial system.
The Federal Reserve responded with measures that would have seemed extraordinary only a few years earlier. Interest rates moved toward zero. The central bank began purchasing Treasury and mortgage-backed securities in quantities without precedent in modern American history.
Before the crisis, the Federal Reserve’s balance sheet stood below $1 trillion. In the years that followed, it expanded several times over as policymakers attempted to stabilize markets and restore confidence.
The crisis changed the institution as much as it changed the balance sheet.
Confusing monetary policy with scientific experiments in the real world, the Federal Reserve started issuing “dot plots” to help banks and investors forecast where interest rates were going. Kevin Warsh, after a decade of criticizing the foolish practice, did not submit a dot plot during his first FOMC meeting as the Federal Reserve Chairman last week. (Source: Statistics by Jim)
Alan Greenspan rarely held press conferences because the Federal Reserve traditionally preferred some ambiguity. Those that he did, he layered admitted, were intentionally designed to obfuscate Fed policy behind big words.
Markets were expected to interpret policy decisions rather than receive detailed explanations of future intentions.
Under Bernanke, that culture began to change. Press conferences became regular events. Forward guidance became a formal policy tool. Policymakers increasingly published projections showing where they believed interest rates, inflation and economic growth might head in the years ahead.
The quarterly dot plot emerged from that environment.
Investors who once focused primarily on earnings reports, economic statistics and corporate balance sheets now spend increasing amounts of time studying Federal Reserve projections, speeches and policy statements.
The central bank was no longer merely setting policy. It was also attempting to shape expectations about future policy as well.
⚓Yellen And Powell At The Helm
Janet Yellen did not formally alter the Federal Reserve’s statutory mandate; however, as chair, she subtly shifted operational implementation by placing unprecedented emphasis on tackling long-term unemployment and by using clearer forward guidance to aid the post-crisis recovery.
Yellen expanded the Fed’s view of the labor market by explicitly focusing on structural unemployment and the harm long-term joblessness caused to worker skills. She argued that aggressive monetary policy was needed to heal these labor market “scars.”
During Ben Bernanke’s tenure, quantitative easing (QE) was heavily tied to open-ended asset purchases. Yellen made it common practice.
The Jerome Powell-led Federal Reserve explicitly extended Janet Yellen’s labor-centric philosophy by shifting from a defensive strategy to an aggressive, pro-worker policy framework. Under the Biden administration, Powell was overly confident in the “transitory” nature of the worst inflation since the 1970s. And refused to accept the data showed otherwise.
While Yellen prioritized the long-term unemployed, Powell codified this priority into official Fed doctrine, creating a structural shift in how the central bank handles its dual mandate. Powell accommodated the climate agenda baked into the Inflation Reduction Act (IRA), which only poured more spending on the pandemic-induced blaze. Trump’s war in Iran hasn’t helped the inflation picture much.
Despite having been on the board of governors during the Bernanke bailout period, Kevin Warsh has consistently argued against the mission creep that has accompanied each Fed chairman’s tenure since Greenspan’s term ended on February 1, 2006.
⚙️ The Warsh Echo
Last week, Kevin Warsh walked into his first press conference as chairman of the Federal Reserve carrying an unusual burden. Most new chairmen inherit interest rates.
Warsh inherited an institution he intends to restore to its original focus.
The Federal Reserve he now oversees bears little resemblance to the one Alan Greenspan led during the 1990s. After the financial crisis, Bernanke transformed the balance sheet into an active policy tool. Press conferences became routine. Policymakers began publishing detailed forecasts. Markets learned to scrutinize dot plots, economic projections and carefully crafted statements for clues about future policy decisions.
Under Janet Yellen and Jerome Powell, that framework became deeply embedded in the institution. Investors came to expect guidance. They expected projections. They expect bailouts.
Warsh has spent much of the last decade criticizing that evolution.
He has repeatedly argued that central bankers know less about the future than they sometimes pretend to. Economic forecasts fail. Models break down. Unexpected events occur. Institutions become trapped by commitments they made under different circumstances.
Those direct criticisms moved from speeches into policy last week.
Rather than immediately adjusting interest rates, Warsh announced a broad review of how the Federal Reserve communicates, forecasts economic outcomes and implements monetary policy.
Three task forces will conduct those reviews. One will examine communications and forward guidance — the machinery through which the modern Federal Reserve attempts to shape expectations. Another will examine forecasting methods and economic models that influence policy decisions.
The third will examine balance-sheet policy and market operations, areas that became central to monetary policy after 2008.
Then a gesture.
Warsh declined to submit his own projection to the quarterly dot plot. Federal Reserve chairmen are not required to participate. Bernanke, Yellen and Powell all did.
The dot plot has become one of the most closely watched documents in global finance because it provides investors with a glimpse into how policymakers expect interest rates to evolve.
By declining to participate, Warsh signaled something he has been saying for years.
The future is uncertain. Central bankers should be careful not to pretend otherwise.
~ Addison
P.S. One of the enduring mysteries of Alan Greenspan’s career is whether the young economist who wrote Gold and Economic Freedom changed his mind, or whether decades inside the Federal Reserve simply taught him how difficult it is to impose monetary discipline on a democratic society.
Warsh now occupies the same chair. Investors will spend the next several years discovering which lessons he took from Greenspan’s career.
On Thursday, we’ll host Dan Amoss for Grey Swan Live! In a brief conversation we had with Dan following Warsh’s first press conference, Dan, skeptical, explained how he believes the Fed, even under Warsh, will be forced into “financial dominance,” a fancy way of saying monetary policy will be under Trump’s thumb at least until November.
