A few years ago I was milling about—I think it was at an airport—with nothing to do while I waited for someone or something. I hadn’t brought any reading material with me, so I wandered into one of those junk book stores that terminals have, filled with just enough material to keep the mind occupied for an hour or so. On this particular day I found Bob Woodward’s book Maestro, which is all about Alan Greenspan. Written in the early parts of this decade, the book does not cover the last few years of Greenspan’s tenure at the central bank.
When I first tried to read the book, it bored me to tears, so it was consigned to a box in a spare room of my apartment, where it languished for years. Until recently. I began using this book, which is, despite its subject matter, light reading, for bed-time reading early this spring, and in a flourish of activity I finished it early this weekend.
Parts of it are fascinating—Greeenspan’s advice to Bill Clinton to reduce the deficit, for instance. (Perhaps this brings another irony to Rush Limbaugh’s deficit spending sensitivity ribbon, which was made by folding a dollar bill. Given inflation, if Limbaugh were to pull this same stunt today, he’d have to use a five dollar bill.) Other parts of the book are maddening. Pages of this volume mention one act of central planning hubris after another, with nary a word about how the oligarchs suppose that their magic potions help the economy. Greenspan is lauded for orchestrating a “soft landing” in the early 90’s, but really this was dumb luck, and given some of the other things that happened in that decade (the .com burst, for instance), one can hardly call him an unmitigated miracle worker.
Then, near the end of the book, on p. 210, there’s a real laugh, a quote which sums up the foolishness of the Fed, and the irony is that none of the main players, nor the author, seem to perceive the power of this sentence. The two thuds you hear are the truth about central banking bouncing off of the foreheads of Greenspan and Woodward. The money quote (slightly abridged for clarity, and yes…pun intended): “What the hell did interest rates mean if you couldn’t buy or sell at those rates?”
This dates from the late 90’s, after the troubles in the Asian markets and with a few American companies, as well. The stock market had come to a standstill because of unfavorable interest rates, and all the “geniuses” at the Fed stood around scratching their heads. The laugh here is that anyone who understands economics sees how simple this problem really was: the market was not allowed to set the rates naturally. Instead, we have a secretive board in an ivory tower who sets the interest rates. Money is not allowed to have a market price the way fish or milk has a market price.
In a sense, having a board set interest rates is a lot like price controls in general. It screws up the rules of supply and demand, and it screws the consumer first, of course. The oligarchs count on people thinking that they need a degree in economics to understand all this, but it is really simple, and common sensical.