Was Greenspan Wrong

Posted 31 Oct 2008


Last week Alan Greenspan testified before the House Oversight and Reform Committee that "We are in the midst of a once-in-a century credit tsunami." 

Politicians, always looking for someone else to blame but the true cause (themselves), were thoroughly grilling Greenspan and seeking to expand their own illegitimate power. 

Greenspan pleaded that “I still do not understand exactly how it happened.”  Is it just me or does Greenspan’s nose look larger than usual?  I think I know what Greenspan is going as for Halloween this year.

Greenspan was thoroughly schooled in the Austrian economics tradition and gleaned some of his political philosophy from Ayn Rand.  Decades ago he vehemently argued for a gold standard. 

Recently Ron Paul asked him to sign an original copy of the essay Gold and Economic Freedom and asked ‘Would you change any of it?”  Ron Paul reports that Greenspan responded, “Not a word.” and signed it.

There is no free market but only governmental interventions.  I explained this thoroughly on the Korelin Economics Report.  Essentially, because Federal Reserve Notes are legal tender and because they make up 50% of every transaction in the economy there is massive governmental intervention in every aspect of the economy which causes the massive misallocations of capital and this ‘once-in-a-century credit tsunami.’

But Greenspan has understated the scope.  The current ‘tsunami’ is not just once in a century but once in the history of the planet.  This is the largest financial crisis ever because the US Dollar is the world’s reserve currency. 

The tsunami metaphor is apt because this receding of the tide is revealing all types of exotic creatures in the exposed seabed and most perplexed humans do not understand monetary science and are rushing out towards the ocean to inspect. 

The deadly tsunami of 2004 that killed over 200,000 people left one village destroyed but no casualties.  Why?  They knew a tsunami was coming.

The society of fishermen who live off the sea had intensely studied the ocean for hundreds if not thousands of years passing down the knowledge from father to son.  An essential part of their curriculum was that when the ocean receded soon would follow the ‘Laboon’ or a wave that eats people.

The elders saw the ocean recede and issued a warning to run to higher ground.  Not all hearkened.  Some did not believe and even called them liars.  But they would not relent until all had left the village and moved to safety.

The tsunami of hyperinflation is here and will intensify.  Helicopter Ben will hardly restrain himself.  The safest and most liquid place to be ensconced in an impregnable forcefield of gold or silver.

This is not the first time Greenspan has been looked to and trusted by mutual parties with adverse interests.  In 1967, Alcoa and Essex formed a contract whereby Alcoa was to process alumina supplied by Essex into aluminum.  The term of the contract was to run to 1983 with an option in Essex to extend it until 1988.  The price for each pound of converted aluminum was calculated by a complex pricing formula created by an economist selected by both parties, Alan Greenspan.

Essex knew that Alcoa expected a net income of about 4 cents per pound for converted aluminum over the term of the contract. Later, however, it became evident that the formula, from the inception of the contract, was flawed.  Alcoa stood to lose in excess of $60 million during the remaining term of the contract. 

Alcoa argued that it was entitled to recession because of mutual mistake and the court agreed, saying the ‘formula did not function effectively.’ 499 F. Supp. 55, (W.D. Pa.1989).

With promises being broken at such an alarming rate I wonder how many will make the same argument that the ‘formula [US$ as ‘risk-free rate’] did not function effectively’?  When the COMEX defaults on gold contracts, perhaps even this December, will a force majure be declared and contracts settled in worthless paper that is hyper-inflated away instead of bullion?

The largest transfer of wealth in the history of the world is happening.  Hopefully you have protected yourself and your assets and have nothing to fear with the coming onslaught.

Of course, some people think Greenspan is a horrible person.  But perhaps he is more like Aanakin Skywalker turned Darth Vader who intentionally destroyed the Emperor (Federal Reserve)?