We can place booms, busts, bubbles and economic catastrophes firmly on the lap of the Federal Reserve System. Individuals such as Alan Greenspan and Ben Bernanke should have know better…yet they contributed to monstrous booms that finally collapsed, leaving many people’s financial and personal affairs in complete disarray.
Around the hard money camp, these “prestigious” Fed Chiefs are known by their nicknames “Bubbles” Greenspan and “Helicopter” Bernanke. I’m not sure if old Alan got his nickname from his preference for bubble baths or bubble economies. Bernanke once remarked something about tossing dollars out of helicopters.
In this article, we’re concentrating on the monetary policies of Alan Greenspan. Let’s find out if his tenure as Fed Chief violates the economic policies Objectivists believe in. Is he a traitor to Objectivism?
In all fairness, maybe he believed he had no choice but to keep the illusory prosperity party going. It’s possible that if he would have done the right thing and allowed interest rates to rise…members of the Elite would have removed him from his esteemed post as Fed Chairman. Still, Greenspan was a disciple of Ayn Rand and wrote the article “Gold and Economic Freedom”, showing his support for the Gold Standard. The article appeared in Rand’s excellent book Capitalism – The Unknown Ideal.
Selling Out Sound Economics
Alan Greenspan believed in laissez faire capitalism and the gold standard. As Fed Chief he supported government interventionism and fiat money. The following demonstrates why interest rate manipulation causes boom/bust cycles.
- In 1987, Greenspan stated that the Fed was ready “to serve as a source of liquidity to support the economic and financial system” following the stock market crash.
- Greenspan influenced each presidency during his tenure as chairman. He provided economic consultation for President Clinton and assisted in the deficit reduction program in 1993.
- He raised interest rates several times in 2000 which probably caused the bursting of the dot-com bubble. In 2001, Greenspan began to lower interest rates. By 2004, the Federal Funds rate was 1%.
- In 2004, Greenspan urged homeowners to take out ARMS. Over the next two years, the interest rates increased to 5.25% which contributed to the mortgage crisis in 2007.
He understood that monetary inflation causes bad investments in certain segments of the economy. Yet, he did his “job” with a passion. Up – down, in – out, boom – bust.
You think maybe Alan lacks integrity. Here’s what Ayn Rand says “ Integrity is loyalty to one’s convictions and values; it is the policy of acting in accordance with one’s values, of expressing, upholding and translating them into practical reality.”
Can we conclude Greenspan showed no loyalty to his convictions and values…or maybe the power of his position gave him economic amnesia. If that’s the case, let’s write him a letter explaining the error of his ways.
When you were a member of Ayn Rand’s Objectivism and wrote your brilliant analysis on Gold and Economic Freedom…you seemed like a pretty decent fellow. Here’s a friendly refresher course for your benefit.
The Boom Cycle
The classical definition of inflation is an increase in the quantity of money (money supply)…which causes economic distortions. During the past 30 years we’ve had considerable increases that resulted in the stock market boom, the tech boom and the housing boom. When you lowered the Federal Funds rate to practically nothing (to counterbalance the effects of the tech collapse), you guaranteed there would be an unsustainable boom somewhere in the economy. Conditions dictated the fiat money went into the housing market. Illusions are just that—illusions. All artificial booms end in busts.
We know it’s too late for you to undue the damage. We just hope you are willing to learn from your mistakes. It appears Ben Bernanke accelerated your quack monetary policies…and Janet Yellen is just clueless.
The Bust Cycle
Nobody wants to admit the party’s over. The partygoers have just about consumed all the booze and drugs of false prosperity. Soon it will be time for hangovers and drug withdrawals. The addicts of inflationary money must go into rehab. The recovery will be long and painful. Unfortunately, our government and the Federal Reserve System attempts to keep the party going with interest rate manipulation. It is all in vain. Lenders won’t lend money to people who can’t and won’t pay them back. The debtors will soon discover they’ve borrowed to the max. You can bet your bottom dollar the government is broke.
That makes me wonder. Did you like Bernanke’s idea of helicopter money? You do realize it’s possible the fiat money could cause a hyperinflationary boom…with the tragic result of goods and services disappearing from the marketplace. It definitely won’t stimulate the production of goods and services.
As you can see market works just fine if left alone. As long as we don’t have a 100% Gold Standard, boom and bust cycles will be a continuous drag on the economy…at least until we experience the final collapse.
Wait a minute. I shouldn’t have to explain the gold standard. Are you sure you’re “The Alan Greenspan” who was associated with Ayn Rand?
The 3 Components of Interest Rates
Another fact you completely disregarded is the 3 components of the interest rate. How something so fundamental slipped your mind is beyond me. Is it possible power lust causes a person to abandon reason?
The following straight is from the book “7 Destructive Economic Illusion’s Conquered.” Alan, it’s apparent you need a refresher course…so you might want to read it.
The three components are:
- Time Component
- Risk Component
- Inflation Component (Inflation Premium)
By the time, you finish reading this section, you’ll wonder how our political and financial leaders could possibly justify manipulating interest rates.
By the way, how did you justify tampering with the interest rate?
Federal Reserve manipulation of interest rates causes boom and bust cycles because it gives investors and entrepreneurs false signals…resulting in them diverting production from the consumers’ most urgent desires into areas of production that cannot be sustained.
Here’s a short, concise explanation. The rate of interest manifests as a market phenomenon that corresponds to reality.
First of all, the time component gives information on how people weigh the future against the present. If they prefer to delay consumption and save for the future, the rate of interest tends to fall. If they prefer immediate consumption at the expense of future savings, the rate tends to rise.
Leave it to politicians and inflationary bankers to attempt to eliminate the reality of time.
The risk component is just that…how risky a loan is. The riskier the loan is, the higher the rate of interest. A relatively safe loan tends to have a low or negligible rate of interest included in its final rate.
Obviously, the only risk politicians accept, is that you lose your money through inflation and taxation.
An inflation premium is included if lenders and borrowers expect prices to rise. The more they expect prices to increase, the higher the rate of interest. The final rate includes all three components.
Politicians love inflationary money because they can pay off their cronies and favorite sons with it. Plus, members of the Elite gain the advantage of purchasing goods and services before prices have increased. The real kick in the teeth for taxpayers happens when inflation rears its ugly head and knocks down their standard of living with higher prices.
As you can see, Fed policy of lowering the rate of interest to practically 0% is absurd. Unbelievably, Fed members blatantly ignore sound monetary theory by claiming:
People no longer wish to consume anything today, delaying all consumption until sometime in the future. Fact: This is ridiculous. If people actually eliminated all consumption of goods and services, the human race would perish.
There no longer exists any risk in extending loans to businesses and individuals. Fact: Talk about the height of absurdity; Federal Reserve easy money policies resulted in excessive debts that many debtors can never repay.
Inflation is past history. Fact: It looks as if bad economics will be our past, present and future. Price increases might seem tame now; however, by time our government completes its “evil inflationary mission” Atlas will have shrugged, causing production to come to an almost complete standstill. The result: Many goods and services will quickly vanish from the marketplace resulting in massive shortages of what people need and desire.
Greenspan…you are a traitor to Objectivism. Yes, you’re supposed to live for your own sake; however that doesn’t mean you violate basic Objectivist principles. You failed to live by your values…and you kicked Economic Law all over place. However……………………………………….
If you want to recapture reason and laissez faire capitalism…Objectivism will welcome you back with open arms.
RA Meyer – The Objectivist Masters the Social Maze