Capitalism in America: Alan Greenspan and Adrian Wooldridge in Conversation with Gillian Tett

it’s useful to understand how the system
works and the key turning point is a
very remarkable period it’s William
Jennings Bryan William Jennings Bryan in
1896 was a fairly young 36 year old
Nebraskan who got up in the middle of
that particular I guess you could say
Association of then the Democratic Party
and it was the one of those
extraordinary events which turns
politics around the Democratic Party was
a highly conservative party prior to
them and essentially it’s characterized
by presidents who thought that the least
government the best it was essentially
lazy fair he got up Bryan got up and
made this extraordinary speech which is
now historical and then cross of gold
speech about the American worker and the
American farmer of being crucified on a
cross of gold called being the gold
standard and that propelled him
strangely enough into the head of the
party he got nominated he never became
president because he kept losing
you think he went three times and failed
each time but left a very major
indelible stamp which led to Woodrow
Wilson and all the way through to
Franklin Roosevelt and I you know I
looked at Bryan as the root of Franklin
Roosevelt’s New Deal
that’s fascinating cause I think most
people that part of it’s often being
obscured in history it’s again one of
the reasons why this book is so
interesting is it throws up these
creating the existing tax pattern [M]y
view is that that’s the right thing to
do provided you funded the result of
that is a bit of variance is going to be
a very large federal budget deficit and
federal budget deficits invariably down
the road out qualification in gender
inflation at the moment we have the
tightest labor market I have ever seen
that is the number of job openings is
significantly greater than the number of
people looking for work and that must
inevitably begin to push on wages it
always has and always will but it’s
always delayed
and my told you that is something has
got to give and that’s I don’t know
where it all comes out well your blyat
comes out with inflation well the
problem basically is if we do nothing
we’re going to end up with probably
stagflation which is an inflation rate I
should say it’s partly stagnation which
as mentioned was very significantly
slowed output per our output per hour
now which used to be 3/4 percent per
back in the early post-world war ii
period it’s now well under 1% which
brings me very nicely on to the next
question from the audience which is
someone has asked for you to share your
thoughts about president Trump’s recent
criticism of Jay Powell and the Fed I
like him to answer that with all the
answers I think it’s very short-sighted
the issue of the Federal Reserve is
required by the Congress to maintain a
stable currency which means no inflation
no deflation and the policy they’re
embarked upon at the moment seems very
sense it will be caused as I mentioned
before the wage rates are beginning to
show signs of moving and you cannot have
real wages rising without it ultimately
think if they continue on the road would
that we will
going Pretlow I should say that the
president wants to go we’re gonna end up
with a very significant budget deficit
and very significant inflation
ultimately not not in the short term
that it takes a while
political system doesn’t care about
deficits what they do care about is
inflation when the inflation rate was 4%
in the 1970s
President Nixon imposed wage and price
controls were nowhere near there yet but
it’s wrong our way
if we are though heading towards a
potential rise in inflation rise in debt
at a time of growing populism do you
think there’s a chance that the Federal
Reserve will lose independence I’m
trying to follow you which I mean well
cheating is a chance at Congress or the
president will try to control the
Federal Reserve or take away some of its
independence I really don’t know one of
those forecasting aspects which is
difficult another question from the
audience as the Federal Reserve’s reach
grows do you think that leged of
oversight will become necessary again
that’s above my pay grade
or do you think that Congress should
exert more control or oversight of the
Fed I think the Federal Reserve is by
remember the Federal Reserve Act of 1913
which essentially did something very
unusual we had a long period we
discussed this in the book in which
financial crises kept surging up and
then collapsing which is a typical cycle
which went on to a decade upon decade
and the populism that evolved as a
consequence of this looked at
ever-increasing lead to find a way to
solve the problem of why the crises
occur and the general solution was if
the economy is accelerating and it’s
running out of gold species and you’re
going to get into a situation in which
they are always going to be crises so
what the Federal Reserve Act actually
did was very very interesting it
substituted the sovereign credit of the
United States for gold and then if no we
stayed on the gold standard technically
that was a major change in American
financial history and debate the basic
consequence of that is that Federal
Reserve determines what in effect is a
sensible level of money supply expansion
and one of the reasons the Federal
Reserve Act was actually passed was to
prevent the political system when
becoming so very dominant in determining
monetary policy which is exactly what
you don’t want to happen and I mean I
was you know eighteen and a half years
as you mentioned getting letters from
everybody who won very little
congressmen or otherwise who wants it’s
a the issue of and don’t worry about the
issue of inflation
and nobody was well when I would be
getting people who say we want lower
interest rates I got tons of that mail I
never got a single letter saying please
raise them and it tells you that there
are some views which go against reality
and reality always wins but if you look
at that the history of populism some of
the worst populism you got was in the
1970s some of the work that the anger
that was generated by inflation in the
nineteen seventies were roiled right the
way through the political system
eventually leads to the rise of of
Ronald Reagan because and who comes in
and then you know crushes crushes
inflation so inflation is is not a
solution to populism it drivers it makes
people very angry do you think the
current populism is going to get worse
chairman Greenspan well let’s remember
where populism comes from it’s I don’t
know whether this is a general
proposition but I find it’s difficult to
get around the answer that when the
inflation rate or that must the
inflation ratings as much as the levels
of income slow down when you get
productivity for example which is that
the major determinant of income and you
get productivity slowing down you get a
much lower increase in JD GDP and gross
domestic income and wages and salaries
alike and there’s a great deal of unease
in the population which is saying things
are not good somebody come help us and
somebody necessarily on the white horse
because comes up and says I’ve got a way
to handle this and if you look at Latin
America the history of
goodly part of Latin America is a
remarkable amount of people like Peron
coming in and all the subsequent post
World War two governments in Latin
America and it’s really quite
unfortunate and surprising it’s not that
they try it and it fails which it does
always it always fails but it doesn’t
eliminate the desire to do it in other
words of Peru Brazil and like they’ve
all undergone very significant periods
of huge inflation and collapsing and
nobody wears a lesson
yeah well we’re almost out of time but
there’s one other question from the
audience which I think cuts to the heart
of a lot of what we’re talking about
right now which is this does the success
of capitalism come at the cost of
enormous wealth disparity is it possible
to have this vision of creative
destruction of capitalism of dynamism
without having massive income inequality
I doubt it and I doubt it for the reason
I said earlier namely that we’ve got the
problem that human beings don’t change
but technology as it advances and it’s
embodied in the growth of an economy is
always growing and when you have
something that’s growing and the other
thing that’s flat you get obviously
inequality and the political
consequences of that can I qualify that
just a little bit I mean there – there
are different sorts of inequality
there’s a there’s the inequality that
you get from suddenly like Bill Gates or
Steve Jobs producing a fantastic new
innovation and idea which means that
they reap a lot of reward
for that but which means that society as
a whole gets richer and better off and
there’s the inequality that comes from
crony capitalism from people using
political influence blocking innovation
and and sucking out and do rewards for
themselves so I think we need to be
absolutely very very sensitive to the
wrong source of inequality while

celebrating the right sort of inequality
and also had that Joseph Schumpeter that

great man once said that the the nature
of capitalist progress doesn’t consist
of Queens having a million or two
million pairs of silk stockings it
consists of what used to be the
prerogative of a queen being spread
throughout the whole of society silk
stockings you know that become something
that go from being very rare and only
worn by Queens to being worn by all
sorts of people all over the place so
it’s the nature of capitalism is to
create new innovations which are at

first rare but spread throughout the
whole of society and everybody uses so
if you think think of the the iPhone or
something like that some that was
something that was incredibly rare and a
few people had those sort of
communications vais now everybody
carries them around all the time and the
great capitalists the Bill Gates the

Steve Jobs don’t get rich by selling one
really really good iPhone to one purpose
and they get into selling their products
to all sorts of people so there’s a
sense in which there is no real
trade-off between very rich people
getting very rich and the rest of
society getting getting better off you
know they only get rich because they
create things which everybody most
people want to have and buy you know
it’s it’s it’s it’s the Silk Stocking
question really I you know I accept that
qualifications let me just say one thing

you going back to his mentioning here
Walter Isaacson’s book on innovation he
wrote that book and I remember reading
it and my final conclusion was and I
asked him why is it that most innovation
is in the United States
it’s American and he said you know I’ve
never thought of that I don’t think he
was aware of the fact that he here and
all these innovation
to developers and they all turned out to
be American which leads me to conclude
that there’s something fundamental in
the psyche of American history in the
American public which creates it it’s
not an accident which is why I won in it
who too often so which is what you of
course you sought to explain the book so
if you had a chance to take this book
into the Oval Office today or into the

Treasury and give it to the President
and say this is a history of America
here are the key lessons what is a top
bit of advice that you would give to the
administration today to keep capitalism

growing in America well you know we do
have we haven’t mentioned that there’s
an underlying financial problem which we
haven’t addressed in the best way to
discuss it as when I first became aware
of it
I would haven’t been looking at data and
accidentally created a chart which
showed the relationship between
entitlements spending which is social
benefits in the rest of the world and
gross domestic savings and I’m from 1965

to the current period the ratio of
entitlements to the sum of those two is
flat as a percent of gross domestic
product which means or at least implies
that one is crowding out the other and
when you look at the individuals they
are actually looking different and
enable one goes up the other goes down
and so forth and I think that’s
suggestively the fact that there is
something in the sense of when we say
that entitlements by which a rising and
the baby boom generation is essentially
crowding out gross domestic savings
which in turn coupled with
the borrowing from abroad is how we
finance our gross domestic investment
which is the key factor in productivity
right so entitlement reform well I look
forward to a tweet about entitlement
reform I look forward to this very
important book being part of the
discussion about how to keep America
America’s economy great and growing but
in the meantime thank you both very much
indeed for sharing your thoughts it is
indeed a fascinating book and quite an

achievement and best of luck in getting
this very important message out so thank
you both very much indeed

President Trump Bashes the Fed. This Is How the Fed Chief Responds.

Jerome Powell’s playbook includes making allies outside the Oval Office, never talking politics and sticking to the economy.

Federal Reserve leaders for the past quarter-century have made decisions about interest rates without being pressured by the president.

President Trump has broken that streak, calling the central bank “crazy” for raising rates and more than once saying the Fed is damaging the economy. That has prompted Fed Chairman Jerome Powell to update playbook rules for dealing with a president annoyed by America’s central bank.

Rule 1: Speak not of Mr. Trump.

Rule 2: When provoked, don’t engage.

Rule 3: Make allies outside the Oval Office.

Rule 4: Talk about the economy, not politics.

.. Mr. Trump blamed the Fed for October’s stock market selloff, calling the central bank “out of control.” The president told The Wall Street Journal Oct. 23 that Mr. Powell seemed to enjoy raising rates.

Not since the 1990s has a president leaned so hard on the Fed chief and never so publicly. On Monday, Mr. Trump told the Journal: “I think the Fed right now is a much bigger problem than China.

.. The Fed’s benchmark interest rate is now in a range between 2% and 2.25%, well below long-run averages. The central bank is expected to raise rates by a quarter-percentage-point at its Dec. 18-19 meeting.

Mr. Powell says he is raising rates to return them to a more normal setting and avoid the type of boom-and-bust economy that ended in past recessions.

.. Mr. Trump has said he doesn’t plan on firing Mr. Powell, and it isn’t clear he could. The Federal Reserve Act states a Fed governor can only be removed for cause, a high bar that courts and legal scholars have interpreted to mean malfeasance or neglect.

.. The Fed’s credibility could suffer

  • if investors believe its commitment to guard against inflation has been compromised by politics, or
  • if Mr. Trump’s attacks sour the public’s view of the central bank.

“At some point, it becomes very damaging to the institution to be perceived as not acting in the best interest of America,” former Fed Chairwoman Janet Yellen said in an interview.

.. Mr. Powell has told others that he knows the president’s criticism could make his life unpleasant, but that he wouldn’t respond to political pressure. People close to Mr. Powell said he understood that history would judge him on policy decisions made over his four-year term.

  • President Lyndon B. Johnson once summoned Fed Chairman William McChesney Martin to his Texas ranch to berate him for raising interest rates, saying it was despicable, according to Mr. Martin’s account.
  • One low point for the central bank came when President Richard Nixon privately pressured Fed Chairman Arthur Burns to keep rates low before the 1972 election, according to Oval Office recordings. Mr. Burns kept rates low and inflation accelerated.

.. Shortly after President Reagan’s inauguration, a White House staffer asked Fed Chairman Paul Volcker if he wanted to host the new president at the Fed. Mr. Volcker declined, but replied he would be happy to meet the president anywhere else. They settled on the Treasury Department as a neutral ground.

Top Reagan administration officials frequently criticized Mr. Volcker, who presided over rate increases that triggered recessions in 1980 and 1981. But President Reagan refrained. “He just never did it,” Mr. Volcker said in an interview last year.

.. President George H.W. Bush’s Treasury Secretary Nicholas Brady cut off regular breakfasts with Fed Chairman Alan Greenspan to show his disapproval of tight-money policies in 1992. Mr. Brady stopped inviting Mr. Greenspan to dinner parties and golf dates at Augusta National.

One of Mr. Brady’s deputies at the time was Mr. Powell, who served as an appointee in the Treasury’s domestic policy office. Mr. Powell, 65, graduated from Princeton and Georgetown University law school.

.. In 1994, President Clinton was upset that Mr. Greenspan’s rate increases threatened a delicate deficit-reduction plan that Mr. Clinton had guided through Congress.

Mr. Clinton’s unhappiness “never was communicated to me,” said Mr. Greenspan, who added he heard about it much later. Economic adviser Robert Rubin convinced the president it was best to lay off the central bank to show investors that the Fed was apolitical.

.. While Mr. Trump complains loudly, his top economic advisers conduct business as usual with Mr. Powell; that includes Treasury Secretary Steven Mnuchin, National Economic Council director Lawrence Kudlow and Council of Economic Advisers chairman Kevin Hassett.

Mr. Kudlow and Mr. Powell have bonded over their back troubles. Mr. Powell shared the name of his doctor, “who’s been a terrific help to me,” Mr. Kudlow said in an interview. “I’m not kidding.”

.. Before he became chairman, Mr. Powell was the Fed’s point person on bank regulation, just as the Trump administration took shape. That put Mr. Powell in regular contact with Mr. Mnuchin, a newcomer to Washington. Mr. Mnuchin later backed Mr. Powell for the chairman job.

Mr. Trump has since taken out his frustration on Mr. Mnuchin, according to a person familiar with the matter, saying recently, “I thought you told me he was going to be good.

.. After Mr. Trump publicly complained about Mr. Powell this summer, Mr. Mnuchin said in a TV interview that he was “a phenomenal leader at the Fed.”

 .. In fact, Mr. Powell is the kind of Fed leader the White House wants, Mr. Kudlow said, because he is skeptical of traditional economic models that say inflation rises when unemployment falls.

With an unemployment rate of 3.7%, near a half-century low, traditional models suggest the Fed engage in aggressive interest rate increases. Mr. Powell, who isn’t a trained economist, views the models with greater skepticism than some macroeconomists.

.. “Jay is questioning a lot of the traditional Fed dogma with the board staff and their models,” said Mr. Kudlow.

.. Mr. Trump’s economic advisers have helped Mr. Powell cement control of the central bank, securing a cast of Fed deputies and governors who appear to be allies. All three rate increases this year have passed by unanimous vote of the Fed’s rate-setting committee.

.. The president, on the other hand, sees no reason to continue with rate increases because inflation is modest, he has said. He wants rates low to foster fast growth.

.. Several people who know Mr. Trump say his long career in real estate informs his view of rising interest rates, which have put a damper on his businesses. Mr. Trump’s firms sought bankruptcy protection after borrowing costs rose in the early 1990s and in the mid-2000s.

Mr. Trump told the Journal in October the Fed chief has surprised him, because he thought Mr. Powell was a “low interest-rate guy.”

.. Mr. Powell, a Republican and Washington native with a 40-year career spanning government, finance and law, recognizes that Fed authority depends more on Congress than the White House

“Our decisions can’t be reversed by the administration,” Mr. Powell said earlier this month in Dallas. “Of course, Congress can do whatever it wants.”

.. Messrs. Coons and Sen. Jeff Flake (R., Ariz.) later decided to send Mr. Trump a letter telling him to lay off the Fed.

“You appear to be telling the Fed what to do with interest rates, which we believe is unconstructive and dangerous,” the senators wrote the president.

.. In his new memoir, Mr. Volcker described how White House chief of staff James A. Baker III, with President Reagan watching silently, ordered the Fed chairman not to raise interest rates before the 1984 election.

Mr. Volcker, who wasn’t planning to lift rates anyway, didn’t tell colleagues or lawmakers about the episode. Mr. Baker has said he didn’t recall that.


The dangerous myth we still believe about the Lehman Brothers bust

The central error in the popular post-crisis consensus was the idea that naive believers in the self-policing efficiency of markets led us over the precipice. Greenspan was painted as the high priestof this laissez-fairy-tale delusion, and people seized on a moment when he appeared to plead guilty: Under the pressure of congressional questioning, he confessed to a “flaw” in his pro-market ideology. What Greenspan meant was that all belief systems — whether pro-government or pro-market — are imperfect. But that subtlety was lost. Quoted and requoted without proportion or context, Greenspan’s purported mea culpa threatened to define his legacy.

.. Bestsellers by two Nobel Prize-winning behaviorists — Daniel Kahneman and Richard Thaler — encouraged people to see the crisis as proof that this new science had been ignored, as did contributions from the sublime storyteller Michael Lewis.

.. Contrary to myth, Greenspan himself never believed that markets were efficient. In his youth, he wrote lucidly about bubbles and crashes and regarded market inefficiencies as so obvious that he sought to exploit them by day trading

.. As Fed chairman years later, Greenspan frequently reminded his colleagues that periods of prosperity could be punctured by “irrational exuberance” in financial markets.

.. political constraints, not intellectual failures, prevented policymakers from curbing the housing mania. Nobody remembers that in 2001 the Greenspan Fed banned the most abusive subprime mortgages, for the good reason that the ban was circumvented. But why was it circumvented? The answer is that the capture of Congress by financial lobbies ensured the balkanization of regulation into an alphabet soup of agencies, many of them underfunded and ineffective.

.. Nonbank mortgage lenders, for example, came under the authority of the Federal Trade Commission, which had no resources to conduct preemptive supervision. Small wonder that the sharp practices in the industry became egregious, or that nonbanks continue to dominate today’s mortgage business.

.. The Greenspan Fed also tried to force more capital into the banks it supervised, but it soon realized that this would drive risk-taking into various “shadow banks” that lay outside its authority

.. Greenspan also pushed for tougher regulation of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (a.k.a. Fannie Mae and Freddie Mac), the government-backed mortgage giants, presciently observing that they posed “a systemic risk sometime in the future.” Fannie’s lobbyists hit back with a TV ad warning Congress not to back the Greenspan plan. That buried it.

.. The important lesson of the crisis is not that markets are fallible, which every thoughtful person knew already. It is that essential regulations — the sort that the supposedly anti-regulation Greenspan actually favored — are stymied by fractured government machinery and rapacious lobbies.

.. Even today, the financial system has multiple overseers answerable to multiple congressional committees, because all this multiplying produces extra opportunities for lawmakers to extract campaign contributions.

.. Vast government subsidies still encourage Americans to take big mortgages; Fannie Mae and Freddie Mac still operate, despite endless talk of breaking them up. And although post-2008 regulations have ensured that banks are better capitalized, the lobbyists are pushing back. Merely a decade after the Lehman bankruptcy brought the world economy to its knees, the Trump administration is listening to them.