THE MASTER OF BUBBLES

With cheap money, Alan Greenspan fueled a boom that led directly into crisis. Who profits? Uwe Jean Heuser argues with his alter ego

By Uwe Jean Heuser

[This article published in: ZEIT Online, 3/38/2008 is translated from the German on the World Wide Web, images.zeit.de/text/online/2008/14/kolumne-heuser-finanzkrise.]

Alter ego: The great capitalist bet by Alan Greenspan had loose ends.

Ego: What do you mean?

Alter ego: Don’t be so ignorant! As the revered godlike head of the Federal Reserve, he pursued a policy of cheap money. Whenever the financial markets began to correct their own madness, he opened the floodgates for more money. The great boom on the stock exchange and with real estate was prolonged until the great crash occurred.

Ego: The power of a central banker is not absolute.

Alter ego: Obviously Greenspan did not act alone. The government of the US supported him through extraordinary tax cuts, spending programs and the war in Iraq. The rest of the world joined in by supplying the US with goods at a ridiculous dollar price and also lent them money. There was more than a bubble on the real estate market. The whole United States developed into a bubble.

Ego: The rest of the world, especially German exporters, joined in the game for their own prosperity. The whole world economy had something from the eight-year upswing of the US. The US and its consumers were the motor for an impressive phase of worldwide economic growth.

Alter ego: What is the solution now?

Ego: The economic model does not work. This was also clear to Greenspan. Still the core argument is: past years produced so much prosperity through higher stock prices and new jobs we can now get through this crisis in good shape.

Alter ego: But the game has been driven so far that the present crisis is more serious than any crisis since the world economic crisis in the 1930s. Banks collapse. Houses are put up in public auctions in Great Britain and Spain, not only in the US. More than a recession is coming to us. We live with the danger that the world finance system will break down. Then good night for a long while!

Ego: In any case, there is the Federal Reserve. The state has matters in hand.

Alter ego: But at what price? The public authority buys the toxic assets from the financial sector. It rescues whole banks for billions upon billions. The population rubs its eyes. Thousands upon thousands of banks put billions in their pockets, committed fraud and now Father State comes and generously helps them out.

Ego: When the domino gets going, the financial system collapses. Then normal savers and employees are impacted.

Alter ego: The price is enormous. The horde of bankers is given signals so they can play like madmen the next time and commit massive fraud. The state is ready to pay for their madness.

Ego: Wait a minute! Everyone joined in. Everyone – private banks and state banks, private and public pension funds, investment funds and hedge funds – wanted high profits.

Alter ego: Those profits were based on real estate fraud and collective blindness for risks. Greenspan and all those around him threw everything on bets. Today the master himself writes obscurely of behavior-guiding reality that is key for understanding the system. Amazing! He should face his responsibility.

Ego: Still his policy – unlike the European Central Bank – created an enormous prosperity in the US and other parts of the world like China.

Alter ego: How rich China is will be revealed when the price of the dollar ends its downhill run and the US forces up inflation. We know this mechanism from the 1970s. The US experiences a long growth phase, feels powerful, marches into war, becomes indebted like crazy – and then lets the rest of the world, especially its creditors, pay for that through inflation.

Ego: At that time, the world ran well. No other country consumed with such optimism and simultaneously pushed the development of the financial markets. The prosperity of the world grew enormously through the boom that is now ending.

Alter ego: But whose prosperity? In the US most employees have not gained more purchasing power since the 1990s. They only felt richer because their houses and perhaps their securities seemed to be worth more. What about the present? Now they have hit the ground again and depend on their wages that are not higher than in the past. Only those above won, above all the top one-percent of the US. Investment bankers and hedge fund managers keep a large part of the new prosperity for themselves. Top managers have multiplied their salaries. Many well to do have brought their share in dry dock. The rest have done nothing.

Ego: Many have jobs and chances for ascent. That is very important but obviously does not fit your distribution concept.

Alter ego: In the next crisis, their chances will be gone again.

Ego: The market economy does not function. Growth opens many new chances for education, earnings and ascent. Those above profit more than those below. People in China and India force down the price for labor and simultaneously drive up the price for oil and energy. Greenspan and the western market economy cannot really change this now.

Alter ego: At the end the average citizens in the US and Europe will have nothing of the big boom. That is the greatest mistake in Greenspan’s bet. The world stares at growth so intensely that it forgets distribution. Now when it is too late, the world reflects a little on this important question.

Ego: You don’t want to understand this. The distribution of prosperity is determined by the conditions in the world economy that are now often directed against western workers. Therefore the growth phase was so important because the spiral of high unemployment and falling wages could have been averted.

Alter ego: That is your sad theory that cannot be proven in retrospect.

Ego: Just as little as yours can be proven.