Engdahl: FInancial Tsunami – Part 3


Richard Moore


The Financial Tsunami Part III:
Greenspan¹s Grand Design
By F. William Engdahl, January 22, 2008

The Long-Term Greenspan Agenda

Seven years of Volcker monetary ³shock therapy² had ignited a payments crisis 
across the Third World. Billions of dollars in recycled petrodollar debts loaned
by major New York and London banks to finance oil imports after the oil price 
rises of the 1970¹s, suddenly became non-payable.

The stage was now set for the next phase in the Rockefeller financial 
deregulation agenda. It was to come in the form of a revolution in the very 
nature of what would be considered money‹the Greenspan ³New Finance² Revolution.

Many analysts of the Greenspan era focus on the wrong facet of his role, and 
assume he was primarily a public servant who made mistakes, but in the end 
always saved the day and the nation¹s economy and banks, through extraordinary 
feats of financial crisis management, winning the appellation, Maestro.[1]

 Maestro serves the Money Trust

Alan Greenspan, as every Chairman of the Board of Governors of the Federal 
Reserve System was a carefully-picked institutionally loyal servant of the 
actual owners of the Federal Reserve: the network of private banks, insurance 
companies, investment banks which created the Fed and rushed in through an 
almost empty Congress the day before Christmas recess in December 1913. In Lewis
v. United States, the United States Court of Appeals for the Ninth Circuit 
stated that "the Reserve Banks are not federal instrumentalitiesŠbut are 
independent, privately owned and locally controlled corporations." [2]

Greenspan¹s entire tenure as Fed chairman was dedicated to advancing the 
interests of American world financial domination in a nation whose national 
economic base was largely destroyed in the years following 1971.

Greenspan knew who buttered his bread and loyally served what the US Congress in
1913 termed ³the Money Trust,² a cabal of financial leaders abusing their public
trust to consolidate control over many industries.

Interestingly, many of the financial actors behind the 1913 creation of the 
Federal Reserve are pivotal in today¹s securitization revolution including 
Citibank, and J.P. Morgan. Both have share ownership of the key New York Federal
Reserve Bank, the heart of the system.

Another little-known shareholder of the New York Fed is the Depository Trust 
Company (DTC), the largest central securities depository in the world. Based in 
New York, the DTC custodies more than 2.5 million US and non-US equity, 
corporate, and municipal debt securities issues from over 100 countries, valued 
at over $36 trillion. It and its affiliates handle over $1.5 quadrillion of 
securities transactions a year. That¹s not bad for a company that most people 
never heard of. The Depository Trust Company has a sole monopoly on such 
business in the USA. They simply bought up all other contenders. It suggests 
part of the reason New York was able for so long to dominate global financial 
markets, long after the American economy had become largely a hollowed-out 
³post-industrial² wasteland.

While free market purists and dogmatic followers of Greenspan¹s late friend, Ayn
Rand, accuse the Fed Chairman of hands-on interventionism, in reality there is a
common thread running through each major financial crisis of his 18 plus years 
as Fed chairman. He managed to use each successive financial crisis in his 
eighteen years as head of the world¹s most powerful financial institution to 
advance and consolidate the influence of US-centered finance over the global 
economy, almost always to the severe detriment of the economy and broad general 
welfare of the population.

In each case, be it the October 1987 stock crash, the 1997 Asia Crisis, the 1998
Russian state default and ensuing collapse of LTCM, to the refusal to make 
technical changes in Fed-controlled stock margin requirements to cool the 
dot.com stock bubble, to his encouragement of ARM variable rate mortgages (when 
he knew rates were at the bottom), Greenspan used the successive crises, most of
which his widely-read commentaries and rate policies had spawned in the first 
place, to advance an agenda of globalization of risk and liberalization of 
market regulations to allow unhindered operation of the major financial 

 The Rolling Crises Game

This is the true significance of the crisis today unfolding in US and global 
capital markets. Greenspan¹s 18 year tenure can be described as rolling the 
financial markets from successive crises into ever larger ones, to accomplish 
the over-riding objectives of the Money Trust guiding the Greenspan agenda. 
Unanswered at this juncture is whether Greenspan¹s securitization revolution was
a ³bridge too far,² spelling the end of the dollar and of dollar financial 
institutions¹ global dominance for decades or more to come.

Greenspan¹s adamant rejection of every attempt by Congress to impose some 
minimal regulation on OTC derivatives trading between banks; on margin 
requirements on buying stock on borrowed money; his repeated support for 
securitization of sub-prime low quality high-risk mortgage lending; his 
relentless decade-long push to weaken and finally repeal Glass-Steagall 
restrictions on banks owning investment banks and insurance companies; his 
support for the Bush radical tax cuts which exploded federal deficits after 
2001; his support for the privatization of the Social Security Trust Fund in 
order to funnel those trillions of dollars cash flow into his cronies in Wall 
Street finance‹all this was a well-planned execution of what some today call the
securitization revolution, the creation of a world of New Finance where risk 
would be detached from banks and spread across the globe to the point no one 
could identify where real risk lay.

When he came in 1987 again to Washington, Alan Greenspan, the man hand-picked by
Wall Street and the big banks to implement their Grand Strategy was a Wall 
Street consultant whose clients numbered the influential J.P. Morgan Bank among 
others. Before taking the post as head of the Fed, Greenspan had also sat on the
boards of some of the most powerful corporations in America, including Mobil Oil
Corporation, Morgan Guaranty Trust Company and JP Morgan & Co. Inc. His first 
test would be the manipulation of stock markets using the then-new derivatives 
markets in October 1987.

 The 1987 Greenspan paradigm

In October 1987 when Greenspan led a bailout of the stock market after the 
October 20 crash, by pumping huge infusions of liquidity to prop up stocks and 
engaging in behind-the scene manipulations of the market via Chicago stock index
derivatives purchases backed quietly by Fed liquidity guarantees. Since that 
October 1987 event, the Fed has made abundantly clear to major market players 
that they were, to use Fed jargon, TBTF‹Too Big To Fail. No worry if a bank 
risked tens of billions speculating in Thai baht or dot.com stocks on margin. If
push came to liquidity shove, Greenspan made clear he was there to bail out his
banking friends.

The October 1987 crash which saw the sharpest one day fall in the Dow 
Industrials in history‹508 points‹was exacerbated by new computer trading models
based on the so-called Black-Sholes Option Pricing theory, stock share 
derivatives now being priced and traded just as hog belly futures had been 

The 1987 crash made clear was that there was no real liquidity in the markets 
when it was needed. All fund managers tried to do the same thing at the same 
time: to sell short the stock index futures, in a futile attempt to hedge their 
stock positions.

According to Stephen Zarlenga, then a trader who was in the New York trading 
pits during the crisis days in 1987, ³They created a huge discount in the 
futures marketŠThe arbitrageurs who bought futures from them at a big discount, 
turned around and sold the underlying stocks, pushing the cash markets down, 
feeding the process and eventually driving the market into the ground.²

Zarlenga continued, ³Some of the biggest firms in Wall Street found they could 
not stop their pre-programmed computers from automatically engaging in this 
derivatives trading. According to private reports they had to unplug or cut the 
wiring to computers, or find other ways to cut off the electricity to them 
(there were rumors about fireman's axes from hallways being used), for they 
couldn¹t be switched off and were issuing orders directly to the exchange 

³The New York Stock Exchange at one point on Monday and Tuesday seriously 
considered closing down entirely for a period of days or weeks and made this 
publicŠIt was at this pointŠthat Greenspan made an uncharacteristic 
announcement. He said in no uncertain terms that the Fed would make credit 
available to the brokerage community, as needed. This was a turning point, as 
Greenspan¹s recent appointment as Chairman of the Fed in mid 1987 had been one 
of the early reasons for the market¹s sell off.² [3]

What was significant about the October 1987 one-day crash was not the size of 
the fall. It was the fact that the Fed, unannounced to the public, intervened 
through Greenspan¹s trusted New York bank cronies at J.P. Morgan and elsewhere 
on October 20 to manipulate a stock recovery through use of new financial 
instruments called derivatives.

The visible cause of the October 1987 market recovery was when the Chicago-based
MMI future (Major Market Index) of NYSE blue chip stocks began to trade at a 
premium, midday Tuesday, at a time when one after another Dow stock had been 
closed down for trading.

The meltdown began to reverse. Arbitrageurs bought the underlying stocks, 
re-opening them, and sold the MMI futures at a premium. It was later found that 
only about 800 contracts bought in the MMI futures was sufficient to create the 
premium and start the recovery. Greenspan and his New York cronies had 
engineered a manipulated recovery using the same derivatives trading models in 
reverse. It was the dawn of the era of financial derivatives.

Historically, at least most were led to believe, the role of the Federal 
Reserve, the Comptroller of the Currency among others, was to act as independent
supervisors of the largest banks to insure stability of the banking system and 
prevent a repeat of the bank panics of the 1930¹s, above all in the Fed¹s role 
as ³lender of last resort.²

Under the Greenspan regime, after October 1987 the Fed increasingly became the 
³lender of first resort,² as the Fed widened the circle of financial 
institutions worthy of the Fed¹s rescue from banks directly‹which was the 
mandated purview of Fed bank supervision‹to the artificial support of stock 
markets as in 1987, to the bailout of hedge funds as in the case of the Long 
-Term Capital Management hedge fund solvency crisis in September 1998.

Greenspan¹s last legacy will be leaving the Fed and with it the American 
taxpayer with the role as Lender of Last Resort, to bail out the major banks and
financial institutions, today¹s Money Trust , after the meltdown of his 
multi-trillion dollar mortgage securitization bubble.

By the time of repeal of Glass-Steagall in 1999, an event of historic importance
that was buried in the financial back pages, the Greenspan Fed had made clear it
would stand ready to rescue the most risky and dubious new ventures of the US 
financial community. The stage was set to launch the Greenspan securitization 

It was not accidental, or ad hoc in any way. The Fed laissez faire policy 
towards supervision and bank regulation after 1987 was crucial to implement the 
broader Greenspan deregulation and financial securitization agenda he hinted at 
in his first October 1987 Congressional testimony.

On November 18, 1987, only three weeks after the October stock crash, Alan 
Greenspan told the US House of Representatives Committee on Banking, ³Šrepeal of
Glass-Steagall would provide significant public benefits consistent with a 
manageable increase in risk.²[4]

 Greenspan would repeat this mantra until final repeal in 1999.

The support of the Greenspan Fed for unregulated treatment of financial 
derivatives after the 1987 crash was instrumental in the global explosion in 
nominal volumes of derivatives trading. The global derivatives market grew by 
23,102% since 1987 to a staggering $370 trillion by end of 2006. The nominal 
volumes were incomprehensible.

 Destroying Glass-Steagall restrictions

One of Greenspan¹s first acts as Chairman of the Fed was to call for repeal of 
the Glass-Steagall Act, something which his old friends at J.P.Morgan and 
Citibank had ardently campaigned for. [5]

Glass-Steagall, officially the Banking Act of 1933, introduced the separation of
commercial banking from Wall Street investment banking and insurance. 
Glass-Steagall originally was intended to curb three major problems that led to 
the severity of the 1930¹s wave of bank failures and depression:

Banks were investing their own assets in securities with consequent risk to 
commercial and savings depositors in event of a stock crash. Unsound loans were 
made by the banks in order to artificially prop up the price of select 
securities or the financial position of companies  in which a bank had invested 
its own assets. A bank's financial interest in the ownership, pricing, or 
distribution of securities inevitably tempted bank officials to press their 
banking customers into investing in securities which the bank itself was under 
pressure to sell. It was a colossal conflict of interest and invitation to fraud
and abuse.

Banks that offered investment banking services and mutual funds were subject to 
conflicts of interest and other abuses, thereby resulting in harm to their 
customers, including borrowers, depositors, and correspondent banks. Similarly, 
today, with no more Glass-Steagall restraints, banks offering securitized 
mortgage obligations and similar products via wholly owned Special Purpose 
Vehicles they create to get the risk ³off the bank books,² are complicit in what
likely will go down in history as the greatest financial swindle of all 
times‹the sub-prime securitization fraud.

In his history of the Great Crash, economist John Kenneth Galbraith noted, 
³Congress was concerned that commercial banks in general and member banks of the
Federal Reserve System in particular had both aggravated and been damaged by 
stock market decline partly because of their direct and indirect involvement in 
the trading and ownership of speculative securities.

³The legislative history of the Glass-Steagall Act,² Galbraith continued, ³shows
that Congress also had in mind and repeatedly focused on the more subtle hazards
that arise when a commercial bank goes beyond the business of acting as 
fiduciary or managing agent and enters the investment banking business either 
directly or by establishing an affiliate to hold and sell particular 
investments.² Galbraith noted that ³During 1929 one investment house, Goldman, 
Sachs & Company, organized and sold nearly a billion dollars' worth of 
securities in three interconnected investment trusts--Goldman Sachs Trading 
Corporation; Shenandoah Corporation; and Blue Ridge Corporation. All eventually 
depreciated virtually to nothing.²

 Operation Rollback

The major New York money-center banks had long had in mind the rollback of that 
1933 Congressional restriction. And Alan Greenspan as Fed Chairman was their 
man. The major money -center US banks, led by Rockefeller¹s influential Chase 
Manhattan Bank and Sanford Weill¹s Citicorp, spent over one hundred hundreds 
million dollars lobbying and making campaign contributions to influential 
Congressmen to get deregulation of the Depression-era restrictions on banking 
and stock underwriting.

 That repeal opened the floodgates to the securitization revolution after 2001.

Within two months of taking office, on October 6, 1987, just days before the 
greatest one-day crash on the New York Stock Exchange, Greenspan told Congress, 
that US banks, victimized by new technology and ''frozen'' in a regulatory 
structure developed more than 50 years ago, were losing their competitive battle
with other financial institutions and needed to obtain new powers to restore a 
balance: ''The basic products provided by banks - credit evaluation and 
diversification of risk - are less competitive than they were 10 years ago.''

At the time the New York Times noted that ³Mr. Greenspan has long been far more 
favorably disposed toward deregulation of the banking system than was Paul A. 
Volcker, his predecessor at the Fed.²[6]

That October 6, 1987 Greenspan testimony to Congress, his first as Chairman of 
the Fed, was of signal importance to understand the continuity of policy he was 
to implement right to the securitization revolution of recent years, the New 
Finance securitization revolution. Again quoting the New York Times account, 
³Mr. Greenspan, in decrying the loss of the banks' competitive edge, pointed to 
what he said was a Œtoo rigid¹ regulatory structure that limited the 
availability to consumers of efficient service and hampered competition. But 
then he pointed to another development of Œparticular importance¹ - the way 
advances in data processing and telecommunications technology had allowed others
to usurp the traditional role of the banks as financial intermediaries. In other
words, a bank's main economic contribution - risking its money as loans based on
its superior information about the creditworthiness of borrowers - is 

The Times quoted Greenspan on the challenge to modern banking posed by this 
technological change: ŒExtensive on-line data bases, powerful computation 
capacity and telecommunication facilities provide credit and market information 
almost instantaneously, allowing the lender to make its own analysis of 
creditworthiness and to develop and execute complex trading strategies to hedge 
against risk,¹ Mr. Greenspan said. This, he added, resulted in permanent damage 
Œto the competitiveness of depository institutions and will expand the 
competitive advantage of the market for securitized assets,¹ such as commercial 
paper, mortgage pass-through securities and even automobile loans.²

He concluded, ŒOur experience so far suggests that the most effective insulation
of a bank from affiliated financial or commercial activities is achieved through
a holding-company structure.¹ [7] In a bank holding company, the Federal Deposit
Insurance fund, a pool of contributions to guarantee bank deposits up to 
$100,000 per account, would only apply to the core bank, not to the various 
subsidiary companies created to engage in exotic hedge fund or other 
off-the-balance-sheet activities. The upshot was that in a crisis such as the 
unraveling securitization meltdown, the ultimate Lender of Last Resort, the 
insurer of bank risk becomes the American public taxpayer.

It was a hard fight in Congress and lasted until final full legislative repeal 
under Clinton in 1999. Clinton presented the pen he used in November 1999 to 
sign the repeal act, theGramm -Leach-Bliley Act, into law as a gift to Sanford 
Weill, the powerful chairman of Citicorp, a curious gesture for a Democratic 
President, to say the least.

The man who played the decisive role in moving Glass-Steagall repeal through 
Congress was Alan Greenspan. Testifying before the House Committee on Banking 
and Financial Services, February 11, 1999, Greenspan declared, ³we support, as 
we have for many years, major revisions, such as those included in H.R. 10, to 
the Glass-Steagall Act and the Bank Holding Company Act to remove the 
legislative barriers against the integration of banking, insurance, and 
securities activities. There is virtual unanimity among all concerned--private 
and public alike--that these barriers should be removed. The technologically 
driven proliferation of new financial products that enable risk unbundling have 
been increasingly combining the characteristics of banking, insurance, and 
securities products into single financial instruments.²

In his same 1999 testimony Greenspan made clear repeal meant less, not more 
regulation of the newly-allowed financial conglomerates, opening the floodgate 
to the current fiasco: ³As we move into the twenty-first century, the remnants 
of nineteenth-century bank examination philosophies will fall by the wayside. 
Banks, of course, will still need to be supervised and regulated, in no small 
part because they are subject to the safety net. My point is, however, that the 
nature and extent of that effort need to become more consistent with market 
realities. Moreover, affiliation with banks need not--indeed, should not--create
bank-like regulation of affiliates of banks.² [8] (Italics mine‹f.w.e.)

Breakup of bank holding companies with their inherent conflict of interest, 
which led tens of millions of Americans into joblessness and home foreclosures 
in the 1930¹s depression, was precisely why Congress passed Glass-Steagall in 
the first place.

 ŒŠstrategies unimaginable a decade agoŠ¹

The New York Times described the new financial world created by repeal of 
Glass-Steagall in a June 2007 profile of Goldman Sachs, just weeks prior to the 
eruption of the sub-prime crisis: ³While Wall Street still mints money advising 
companies on mergers and taking them public, real money - staggering money - is 
made trading and investing capital through a global array of mind -bending 
products and strategies unimaginable a decade ago.²  They were referring to the 
securitization revolution.

The Times quoted Goldman Sachs chairman Lloyd Blankfein on the new financial 
securitization, hedge fund and derivatives world: ³We've come full circle, 
because this is exactly what the Rothschilds or J. P. Morgan, the banker were 
doing in their heyday. What caused an aberration was the Glass-Steagall Act.²[9]

Blankfein as most of Wall Street bankers and financial insiders saw the New Deal
as an aberration, openly calling for return to the days J. P. Morgan and other 
tycoons of the ŒGilded Age¹ of abuses in the 1920¹s. Glass-Steagall, Blankfein¹s
"aberration" was finally eliminated because of Bill Clinton. Goldman Sachs was a
prime contributor to the Clinton campaign and even sent Clinton its chairman 
Robert Rubin in 1993, first as ³economic czar² then in 1995 as Treasury 
Secretary. Today, another former Goldman Sachs chairman, Henry Paulson is again 
US Treasury Secretary under Republican Bush. Money power knows no party.

Robert Kuttner, co-founder of the Economic Policy Institute, testified before US
Congressman Barney Frank's Committee on Banking and Financial Services in 
October 2007, evoking the specter of the Great Depression:

³Since repeal of Glass Steagall in 1999, after more than a decade of de facto 
inroads, super-banks have been able to re-enact the same kinds of structural 
conflicts of interest that were endemic in the 1920s - lending to speculators, 
packaging and securitizing credits and then selling them off, wholesale or 
retail, and extracting fees at every step along the way. And, much of this paper
is even more opaque to bank examiners than its counterparts were in the 1920s. 
Much of it isn't paper at all, and the whole process is supercharged by 
computers and automated formulas.² [10]

Dow Jones Market Watch commentator Thomas Kostigen, writing in the early weeks 
of the unraveling sub-prime crisis, remarked about the role of Glass-Steagall 
repeal in opening the floodgates to fraud, manipulation and the excesses of 
credit leverage in the expanding world of securitization:

³Time was when banks and brokerages were separate entities, banned from uniting 
for fear of conflicts of interest, a financial meltdown, a monopoly on the 
markets, all of these things.

³In 1999, the law banning brokerages and banks from marrying one another ‹ the 
Glass-Steagall Act of 1933 ‹ was lifted, and voila, the financial supermarket 
has grown to be the places we know as Citigroup, UBS, Deutsche Bank, et al. But 
now that banks seemingly have stumbled over their bad mortgages, it¹s worth 
asking whether the fallout would be wreaking so much havoc on the rest of the 
financial markets had Glass-Steagall been kept in place.

³Diversity has always been the pathway to lowering risk. And Glass-Steagall kept
diversity in place by separating the financial powers that be: banks and 
brokerages. Glass-Steagall was passed by Congress to prohibit banks from owning 
full-service brokerage firms and vice versa so investment banking activities, 
such as underwriting corporate or municipal securities, couldn¹t be called into 
question and also to insulate bank depositors from the risks of a stock market 
collapse such as the one that precipitated the Great Depression.

³But as banks increasingly encroached upon the securities business by offering 
discount trades and mutual funds, the securities industry cried foul. So in that
telling year of 1999, the prohibition ended and financial giants swooped in. 
Citigroup led the way and others followed. We saw Smith Barney, Salomon 
Brothers, PaineWebber and lots of other well-known brokerage brands gobbled up.

³At brokerage firms there are supposed to be Chinese walls that separate 
investment banking from trading and research activities. These separations are 
supposed to prevent dealmakers from pressuring their colleague analysts to give 
better results to clients, all in the name of increasing their mutual bottom 

³Well, we saw how well these walls held up during the heyday of the dot-com era 
when ridiculously high estimates were placed on corporations that happened to be
underwritten by the same firm that was also trading its securities. When these 
walls were placed within their new bank homes, cracks appeared and ‹ it looks 
ever so apparent ‹ ignored.

³No one really questioned the new fad of collateralizing bank mortgage debt into
different types of financial instruments and selling them through a different 
arm of the same institution. They are nowŠ

³When banks are being scrutinized and subject to due diligence by third-party 
securities analysts more questions are raised than when the scrutiny is by 
people who share the same cafeteria. Besides, fees, deals and the like would all
be subject to salesmanship, which means people would be hammering prices and 
questioning things much more to increase their own profit ‹ not working together
to increase their shared bonus pool.

³Glass-Steagall would have at least provided what the first of its names 
portends: transparency. And that is best accomplished when outsiders are peering
in. When every one is on the inside looking out, they have the same view. That 
isn¹t good because then you can¹t see things coming (or falling) and everyone is
subject to the roof caving in.

³Congress is now investigating the subprime mortgage debacle. Lawmakers are 
looking at tightening lending rules, holding secondary debt buyers responsible 
for abusive practices and, on a positive note, even bailing out some homeowners.
These are Band-Aid measures, however, that won¹t patch what¹s broken: the system
of conflicts that arise when sellers, salesmen and evaluators are all on the 
same team.[11] (emphasis mine--f.w.e.)

Greenspan¹s dot.com bubble and its consequences

Before the ink was dry on Bill Clinton¹s signature repealing Glass-Steagall, the
Greenspan fed was fully engaged in hyping their next crisis‹the deliberate 
creation of a stock bubble to rival that of 1929, a bubble which then, 
subsequently the Fed would pop just as deliberately.

The 1997 Asia financial crisis and the ensuing Russian state debt default of 
August 1998 created a sea-change in global capital flows to the advantage of the
dollar. With Korea, Thailand, Indonesia and most emerging markets in flames 
following a coordinated, politically-motivated attack by a trio of US hedge 
funds, led by Soros¹ Quantum Fund, Julian Robertson¹s Jaguar and Tiger funds and
Moore Capital Management, as well as, according to reports, the 
Connecticut-based LTCM hedge fund of John Merriweather.

The impact of the Asia crisis on the dollar was notable and suspiciously 
positive. Andrew Crockett, the General Manager of the Bank for International 
Settlements, the Basle-based organization of the world¹s leading central banks, 
noted that while the East Asian countries had run a combined current account 
deficit of $33 billion in 1996, as speculative hot money flowed in, ³1998-1999, 
the current account swung to a surplus of $87 billion.² By 2002 it had reached 
the impressive sum of $200 billion. Most of that surplus returned to the US in 
the form of Asian central bank purchases of US Treasury debt, in effect 
financing Washington policies, pushing US interest rates way down and fuelling 
an emerging New Economy, the NASDAQ dot.com New Economy IT boom. [12]

During the extremes of the 1997-1998 Asia financial crises, Greenspan refused to
act to ease the financial pressures until Asia had collapsed and Russia had 
defaulted in August 1998 on its sovereign debt and deflation had spread from 
region to region. Then, as he and the New York Fed stepped in to rescue the huge
LTCM hedge fund that had become insolvent as a result of the Russia crisis, 
Greenspan made an unusually sharp cut in Fed Funds interest rates for the first 
time, by 0.50%. That was followed a few weeks later by a 0.25% cut. That gave 
the nascent dot.com NASDAQ IT bubble a nice little ³shot of whiskey.²

By late 1998, amid successive cuts in Fed interest rates and pumping in of ample
liquidity, the US stock markets, led by the NASDAQ and NYSE, went asymptotic. In
the single year 1999, as the New Economy bubble got into full-swing, a 
staggering $2.8 trillion increase in the value of equity shares owned by US 
households was registered. That was more than 25% of annual GDP, all in paper 

Glass-Steagall restrictions on banks and investment banks promoting the stocks 
they had brought to market‹the exact conflict of interest which prompted 
Glass-Steagall in 1933‹those restraints were gone. Wall Street stock promoters 
were earning tens of millions in bonuses for fraudulently hyping Internet and 
other stocks such as WorldCom and Enron. It was the ³Roaring 1920¹s² all over 
again, but with an electronic computerized turbo charged kicker.

 The incredible March 2000 speech

In March 2000, at the very peak of the dot.com stock mania, Alan Greenspan 
delivered an address to a Boston College Conference on the New Economy in which 
he repeated his by-then standard mantra in praise of the IT revolution and the 
impact on financial markets. In this speech he went even beyond previous praises
of the IT stock bubble and its putative ³wealth effect² on household spending 
which he claimed had kept the US economy growing robustly.

³In the last few years it has become increasingly clear that this business cycle
differs in a very profound way from the many other cycles that have 
characterized post-World War II America,² Greenspan noted. ³Not only has the 
expansion achieved record length, but it has done so with economic growth far 
stronger than expected.²

 He went on, waxing almost poetic:

³My remarks today will focus both on what is evidently the source of this 
spectacular performance--the revolution in information technologyŠWhen 
historians look back at the latter half of the 1990s a decade or two hence, I 
suspect that they will conclude we are now living through a pivotal period in 
American economic historyŠThose innovations, exemplified most recently by the 
multiplying uses of the Internet, have brought on a flood of startup firms, many
of which claim to offer the chance to revolutionize and dominate large shares of
the nation's production and distribution system. And participants in capital 
markets, not comfortable dealing with discontinuous shifts in economic 
structure, are groping for the appropriate valuations of these companies. The 
exceptional stock price volatility of these newer firms and, in the view of 
some, their outsized valuations indicate the difficulty of divining the 
particular technologies and business models that will prevail in the decades 

Then the Maestro got to his real theme, the ability to spread risk by technology
and the Internet, a harbinger of his thinking about the then infant 
securitization phenomenon:

The impact of information technology has been keenly felt in the financial 
sector of the economy. Perhaps the most significant innovation has been the 
development of financial instruments that enable risk to be reallocated to the 
parties most willing and able to bear that risk. Many of the new financial 
products that have been created, with financial derivatives being the most 
notable, contribute economic value by unbundling risks and shifting them in a 
highly calibrated manner. Although these instruments cannot reduce the risk 
inherent in real assets, they can redistribute it in a way that induces more 
investment in real assets and, hence, engenders higher productivity and 
standards of living. Information technology has made possible the creation, 
valuation, and exchange of these complex financial products on a global basisŠ

Historical evidence suggests that perhaps three to four cents out of every 
additional dollar of stock market wealth eventually is reflected in increased 
consumer purchases. The sharp rise in the amount of consumer outlays relative to
disposable incomes in recent years, and the corresponding fall in the saving 
rate, is a reflection of this so-called wealth effect on household purchases. 
Moreover, higher stock prices, by lowering the cost of equity capital, have 
helped to support the boom in capital spending.

Outlays prompted by capital gains in equities and homes in excess of increases 
in income, as best we can judge, have added about 1 percentage point to annual 
growth of gross domestic purchases, on average, over the past half-decade. The 
additional growth in spending of recent years that has accompanied these wealth 
gains, as well as other supporting influences on the economy, appears to have 
been met in equal measure by increased net imports and by goods and services 
produced by the net increase in newly hired workers over and above the normal 
growth of the workforce, including a substantial net inflow of workers from 
abroad. [13]

What is perhaps most incredible was the timing of Greenspan¹s euphoric paean to 
the benefits of the IT stock mania. He well knew that the impact of the six 
interest rate increases he had instigated in late 1999 were sooner or later 
going to chill the buying of stocks on borrowed money.

The dot-com bubble burst one week after the Greenspan speech. On March 10, 2000,
the NASDAQ Composite index peaked at

5,048, more than double its value just a year before. On Monday, March 13 the 
NASDAX fell by an eye-catching 4%.

Then, from March 13, 2000 through to the market bottom, the market lost paper 
values worth nominally more than $5 trillions, as Greenspan¹s rate hikes brought
a brutal end to a bubble he repeatedly claimed he could not confirm until after 
the fact. In dollar terms, the 1929 stock crash was peanuts by comparison with 
Greenspan¹s dot.com crash. Greenspan had raised interest rates six times by 
March, a fact which had a brutal chilling effect on the leveraged speculation in
dot.com company stocks.

 Stocks on margin: Regulation T

Again Greenspan had been present every step of the way to nurture the dot.com 
stock ³irrational exuberance.² When it was clear even to most ordinary members 
of Congress that stock prices were soaring out of control, and that banks and 
investment funds were borrowing tens of billions of credit to buy more stocks 
³on margin,² a call went out for the Fed to exercise its power over stock margin
buying requirements.

By February 2000, margin debt had hit $265.2 billion, up 45 percent in just four
months. Much of the increase came from increased borrowing through online 
brokers and was being channeled into the NASDAQ New Economy stocks.

Under Regulation T, the Fed had the sole authority to set initial margin 
requirements for the purchase of stocks on credit, which had been at 50% since 

If the stock market were to take a serious fall, margin calls would turn a mild 
downturn into a crash. Congress believed that this was what happened in 1929, 
when margin debt equaled 30 percent of the stock market's value. That was why it
gave the Fed power to control initial margin requirements in the Securities Act 
of 1934.

The requirement had been as high as 100 percent, meaning that none of the 
purchase price could be borrowed. Since 1974, it had been unchanged, at 50 
percent, allowing investors to borrow no more than half the purchase price of 
equities directly from their brokers. By 2000 this margin mechanism acted like 
gasoline poured on a raging bonfire.

Congressional hearings were held on the issue. Investment managers such Paul 
McCulley of the world¹s then-largest bond fund, PIMCO, told Congress, ³The Fed 
should raise that minimum, and raise it now. Mr. Greenspan says ³no,² of course,
because (1) he cannot find evidence of a relationship between changes in margin 
requirements and changes in the level of the stock market, and (2) because an 
increase in margin requirements would discriminate against small investors, 
whose only source of stock market credit is their margin account.² [14]

On the margin

But in the face of the obvious 1999-2000 US stock bubble, not only did Greenspan
repeatedly refuse to change stock margin requirements, but also in the late 
1990s, the Fed chairman actually began to talk in glowing terms about the New 
Economy, conceding that technology had helped increase productivity. He was 
consciously fuelling the market¹s ³irrational exuberance.²

Between June 1996 and June 2000, the Dow rose 93% and the NASDAQ rose 125%. The 
overall ratio of stock prices to corporate earnings reached record highs not 
seen since the days before the 1929 crash.

Then, in 1999, Greenspan initiated a series of interest rate hikes, when 
inflation was even slower than it was in 1996 and productivity was growing even 
faster. But by refusing to tie rate rises to a rise in margin requirements, 
which would clearly have signaled that the Fed was serious about cooling the 
speculative bubble in stocks, Greenspan impacted the economy with higher rates, 
evidently designed to increase unemployment and press labor costs lower to 
further raise corporate earnings, not to cool the stock buying frenzy of the New
Economy. Accordingly, the stock market ignored it.

Influential observers, including financier George Soros and Stanley Fischer, 
deputy director at the International Monetary Fund, advocated that the Fed let 
the air out of the credit boom by raising margin requirements.

 Greenspan refused this more sensible strategy. At his

re-confirmation hearing before the US Senate Banking Committee in 1996, he said 
that he did not want to discriminate against individuals who were not wealthy 
and therefore needed to borrow in order to play the stock market (sic). As he 
well knew, the traders buying stocks on margin were mainly not poor and needy 
but professional traders out for a free lunch, which Greenspan well knew. 
Interesting, however, was that that was precisely the argument Greenspan would 
repeat for justifying his advocacy of lending to sub-prime poor credit persons, 
to let the poorer get in on the home ownership bonanza his policies after 2001 
had created. [15]

The stock market began to tumble in the first half of 2000, not because labor 
costs were rising, but because limits of investor credulity were finally 
reached. The financial press including the Wall Street Journal, which a year 
before was proclaiming dot.com executives as pioneers of the new economy, were 
now ridiculing the public for having believed that the stock of companies that 
would never make a profit could go up forever.

The New Economy, as one Wall Street Journal writer put it, now ³looks like an 
old-fashioned credit bubble."[16] In the second half of that year, American 
consumers whose debt-to-income ratios were at record highs, began to pull back. 
Christmas sales flopped, and by early January 2001 Greenspan reversed himself 
and lowered interest rates. In twelve successive rate cuts, the Greenspan Fed 
brought US Fed funds rates, rates that determined short-term and other interest 
rates in the economy, from 6% down to a post-war low of 1% by June 2003.

Greenspan held Fed rates to those historic lows, lows not seen for that length 
of time since the Great Depression, until June 30, 2004, when he began the first
of what were to be fourteen successive rate increases before he left office in 
2006. He took Fed funds rates from the low of 1% up to 4.5% in nineteen months. 
In the process, he killed the bubble that was laying the real estate golden egg.

In speech after speech the Fed chairman made clear that his ultra-easy money 
regime after January 2001 had as prime focus the encouragement of investing in 
home mortgage debt. The sub -prime phenomenon‹something only possible in the era
of asset securitization and Glass-Steagall repeal, combined with unregulated OTC
derivatives trades‹was the predictable result of deliberate Greenspan policy. 
The close scrutiny of the historical record makes that abundantly clear.

[1]  Woodward, Bob, Maestro: Alan Greenspan's Fed and the American Economic 
Boom, Nov 2000. Woodward¹s book is an example of the charmed treatment Greenspan
was accorded by the major media. Woodward¹s boss at the Washington Post, 
Katharine Meyer Graham, daughter of the legendary Wall Street investment banker 
Eugene Meyer, was an intimate Greenspan friend. The book can be seen as a 
calculated part of the Greenspan myth-creation by the influential circles of the
financial establishment.

[2]  Lewis vs United States, 680 F.2d 1239 (9th Cir. 1982).

[3] Zarlenga, Stephen, Observations from the Trading Floor During the 1987 
Crash, in http://www.monetary.org/1987%20crash.html.

[4] Greenspan, Alan, Testimony before the Subcommittee on Financial Institutions
Supervision, US House of Representatives, Nov. 18, 1987

[5]Hershey jr., Robert D., Greenspan Backs New Bank Roles, The New York Times, 
October 6, 1987.

[6] Hershey, op.cit.
[7] Ibid.

[8] Greenspan, Alan,  Statement by Alan Greenspan, Chairman, Board of Governors 
of the Federal Reserve System, before the Committee on Banking and Financial 
Services, U.S. House of Representatives, February 11, 1999, in Federal Reserve 
Bulletin, April 1999.

[9] Anderson, Jenny, Goldman Runs Risks, Reaps Rewards, The New York Times,  
June 10, 2007.

[10] Kuttner, Robert, Testimony of Robert Kuttner Before the Committee on 
Financial Services, Rep. Barney Frank, Chairman,

U.S. House of Representatives, Washington, D.C., October 2, 2007

[11] Kostigen, Thomas, Regulation game: Would Glass-Steagall save the day from 
credit woes?, Dow Jones MarketWatch, Sept. 7, 2007.

[12] Engdahl, F. William, Hunting Asian Tigers: Washington and the 1997-98 Asia 

[13] Greenspan, Alan, The revolution in information technology
Before the Boston College Conference on the New Economy,
Boston, Massachusetts, March 6, 2000.
[14] McCulley, Paul, A Call For Fed Action:

Hike Margin Requirements!, testimony before The House Subcommittee on Domestic 
and International Monetary Policy on March 21, 2000.

[15] Alan Greenspan as Fed chairman repeatedly asserted it was impossible to 
judge if a speculative bubble existed during the rise of such a bubble. In 
August 2002, after his clear strategy of Fed rate rises was obvious to market 
players, he reiterated this: ³We at the Federal Reserve considered a number of 
issues related to asset bubbles--that is, surges in prices of assets to 
unsustainable levels. As events evolved, we recognized that, despite our 
suspicions, it was very difficult to definitively identify a bubble until after 
the fact--that is, when its bursting confirmed its existence.---Alan Greenspan 
Remarks by Chairman Alan Greenspan Economic volatility At a symposium sponsored 
by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming August 30, 

[16] Faux, Jeff, The Politically Talented Mr. Greenspan, Dissent Magazine, 
Spring 2001.

newslog archives: 

Escaping the Matrix: http://escapingthematrix.org/
cyberjournal: http://cyberjournal.org

The Phoenix Project:

rkm blog: "How We the People can change the world":

The Post-Bush Regime: A Prognosis

Community Democracy Framework: 

Moderator: •••@••.•••  (comments welcome)