Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and “The Coming Collapse of the Municipal Bond Market” (Aucontrarian.com, 2009)
“Tomorrow is the 25th anniversary of one Sir Alan Greenspan’s confirmation vote. Fred, you doing anything special to celebrate?” wrote Scott Frew, General Partner of Rockingham Capital Partners L.P. hedge fund.
Well, no, but we have an obligation to remember. What follows is a draft of was later refined in Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession and in other publications. This includes comments of other senators that may not have been published elsewhere. Reading through this early version, it is notable how many senators were concerned the imbalances - federal budget deficit, trade deficit, the leveraging of corporate balance sheets - were about to crush the country. And here we are 25 years later.
Since I'm dragging out reruns, a frequently repeated warning:
"The sense of security more frequently springs from habit than from conviction, and for this reason it often subsists after such a change in the conditions as might have been expected to suggest alarm. The lapse of time during which a given event has not happened is, in this logic of habit, constantly alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent."
-George Eliot, Silas Marner
Now, to the hearing that preceded the Senate confirmation vote on August 11, 1987:
Greenspan's nomination hearing before the Committee on Banking, Housing and Urban Development took place on July 21, 1987. It was chaired by Senator William Proxmire of Wisconsin. In Proxmire's opening remarks, he churned out the requisite nonsense. He ticked off a pantheon of chairmen - Martin, Burns and Volcker - then extolled their backbone: "If there is one distinguishing hallmark of their service as chairman of the Fed it was their consistent independence. They were independent of the President and were independent of Congress." He then confirmed the legislators' support for such independence by asking the question: "From the time you take over this office you will be entreated to expand the nation's money supply.... Are you the man who can say no to the Administration and to Congress?" (This was in the early stages of Proxmire's remarks and no answer was expected, but we can be sure, what was expected would have been pronounced, with neither the candidate nor the interrogators believing a word of it. During the hearing, Greenspan would quote from the textbook: "It is absolutely essential" that the Fed's "central focus be on restraining inflation because, if that fails, then we have very little opportunity for sustained, long-term growth.")
Proxmire's exploration then grew more interesting. The senator told Greenspan he had voted against the CEA chairman's nomination in 1974. Greenspan had proved himself to be a "get along, go along, comfortable and increasingly popular chairman." (It is not clear if Proxmire considered this good or bad.) The Banking Committee chairman chided the candidate for a "dismal forecasting record" when he was chairman of the CEA. Proxmire reviewed the forecasts made by the Council of Economic Advisers between 1976 and 1986. The Senator was most interested in the CEA's projections made during Greenspan's term looking forward to the years 1976, 1977 and 1978. In Proxmire's words, the forecasts made by the candidate were "way off." Of the interest rate forecasts made by the Council of Economic Advisers (for the years 1976 through 1978), Greenspan's were wrong by the biggest margin of any of the 11 years..." Proxmire went on: "There you broke all records for the entire period in error." The man whose opinions President Ford weighed more heavily than "those of any other economist" had prophesized the Treasury bill rate would be 4.4% in 1978. It was 9.8%.
Of inflation: "There again, you broke all records." The only CEA chairman to adorn the front cover of Newsweek estimated the Consumer Price Index would rise 4.5% in 1978. It soared 9.2%.
In later years, Greenspan would control such quibbles; not this day. He replied to Proxmire: "That is not my recollection of the way the forecasts went." Proxmire, forecasts in his hand, read the date to Greenspan. The candidate admitted: "Well, if they're written down, those are the numbers."
The transcript follows:
GREENSPAN: "There is a very substantial difference, Senator, between forecasting in the Administration and forecasting outside."
PROXMIRE: "I sure hope so!"
Greenspan then embarked on the gobbledygook so familiar in later years. Proxmire waited patiently and then responded:
PROXMIRE "Every one of the chairmen of the Council of Economic Advisers had the same problem, and they didn't miss by as much as you did, not nearly as much..."
GREENSPAN: "I feel sorry for me and happy for them."
Proxmire, perhaps having anticipated Greenspan's public sector-private sector line of defense, had done his homework. The firm of "Greenspan & O'Neil" in the following discussion refers to a joint venture between Greenspan and Rory O'Neil that provided money management services to pension funds.
[Note: Rory O'Neil recently died, on July 31, 2012. Reading the obituaries, he was an accomplished investor and was a hard-working philanthropist, spending over 30 years restoring the dilapidated waterfront of Hartford, Connecticut. Of course, the obituaries had to fall under such headlines as: "Former Greenspan partner..." They spent less than one year together. Such are vagaries of history. - FJS]
"You had the opportunity to be forecaster with Greenspan & O'Neil. As you know, you put your forecasting to a direct test in the private sector." Proxmire then quoted a recent issue of Forbes Magazine. "'Greenspan & O'Neil turned in one of the least impressive records of all pension fund advisers.' "
Greenspan did not throw out an illusory defense this time: "All I can say is, I acknowledge that did not work out very well, and I take my share of the responsibility."
PROXMIRE: "...I hope... when you get to the Federal Reserve Board everything will come up roses. You can't always be wrong.
GREENSPAN: "All I can suggest to you, Senator, is that the rest of my career has been somewhat more successful."
As a taste of what was to come, this was an introduction to Greenspan's ever-present qualifiers: "suggest" and "somewhat" giving the candidate room to maneuver, should Proxmire pursue this course of interrogation. The Senator did.
Proxmire quoted a forecast Greenspan sent to clients on March 20, 1987. "The recession we had not expected until 1990 now appears more likely to emerge in the last quarter of 1989.... A stock-market led expansion of capital equipment in late-1987 is projected to lead to a final surge for the business credit cycle. This surge is expected to precipitate a recession shortly thereafter... [And the] recession is also expected to be somewhat more severe than we had projected in October ."
Proxmire asked Greenspan if he still stood by that forecast:
GREENSPAN: "May I ask you what the date on that is?"
PROXMIRE: "The date