In this week’s Big Interview with the WSJ Alan Greenspan lashed out at his critics.  Dr. Greenspan also gave his latest economic prognosis saying the economy is improving, the wealth effect is positively contributing to the economy and that inflation will become a risk down the line.

Unfortunately, not 3 minutes into the interview, the former Fed Chief proves that he still has no idea how our monetary system actually works.  When asked if inflation is a problem he responds by saying:

“Down the road most certainly.  Unless we reign in the extraordinary amount of excess reserves in the monetary system which is what the Fed will be doing when it has to do that”

These are extraordinary comments from someone who ran the US central bank for 18 years.  The most important myth that has been busted in the last 24 months is the myth of the money multiplier.  Despite a dramatic expansion of reserves via the Fed’s operations over the course of the last few years we have seen no pick-up in lending.  Greenspan has long worked under a false premise so it’s not surprising that the US economy has the structural flaws that it currently has.  He believes an expansion of the monetary base should lead directly to an expansion of the money supply.  This is the same theory that most hyperinflationists have been working under for the last few years and it explains why their forecasts have been so far off the mark.  Greenspan is clearly still working under this flawed model.

As the Fed itself recently explained, the money multiplier is a myth.  Not only do banks not lend their reserves, but they only lend when there is demand for loans.  Loans create deposits.  Bank must have willing and creditworthy borrowers walk into their offices before any increase in the money supply can take place.  It takes two to borrow.  Dr. Greenspan clearly believes these excess reserves create some huge inflation risk down the line as the banks will just fire them out of their doors to the endless line of borrowers (which doesn’t currently exist).  Nothing could be farther from the truth.

Greenspan thinks these excess reserves now pose some risk to the banking system.  Despite acknowledging that the Fed is paying interest on excess reserves he still says the Fed has to remove these reserves.  These comments are extraordinarily wrong.  The fact that the Fed is now paying IOER means that they do not have to remove the reserves. Janet Yellen explained this just yesterday:

“In contrast, I disagree with the notion that the large quantity of reserves resulting from our asset purchases poses some special barrier to removing policy stimulus when the right time comes. The FOMC will be able to increase short-term rates by raising the interest rate that we pay on excess reserves–currently 1/4 percent. That ability will allow us to manage short-term interest rates effectively and thus to tighten policy when needed, even if bank reserves remain high.”

So you can see that Yellen could provide the old Fed Chief with a tip or two on how things actually work.

Much of the rest of the interview is spent fear mongering about a bubble in the bond market and its inevitable collapse:

“I think that the type of budget agreement that was put together by Alan Simpson and Erskine Bowles is the type of budget that will be passed by Congress…The only question is, will it be before or after the bond-market crisis.”

Of course, this isn’t the first time in the last few years that Dr. Greenspan has expressed his fears over the bond vigilantes.  Dr. Greenspan has long been concerned that the high US government debt levels are going to cause a Greek-like implosion in the USA.  This is another glaring example of his lack of understanding when it comes to the monetary system, but I’ve just recently covered this hysteria so there is no reason to rehash the discussion (see here if interested).

Dr. Greenspan says his legacy should not be viewed negatively and that his critics have not proven him wrong.  No sir Dr. Greenspan.  No one has to prove you wrong.  Your legacies of deregulation, a financialized US economy and the Greenspan put have spoken for themselves by helping to cause the world’s largest and most productive economy to suffer more than a decade of malaise, 10’s of millions unemployed and a near collapse of the entire system.

Source: WSJ


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • bart

    you can tell good things, bad things about the guy and his tenure as a fed head but his insight to the economics is unique. If he tells you the equity market is still undervaluated you better listen to him. If not you will end up as a lose who neither in 2009 or 2010 could not beat S&P500 ‘cos ‘he new better that big drop is coming’. Me I have great respect to Allan’s intellect, however I think he creashed a plane as a pilot

  • FDO15

    Hasn’t he admitted that is model was flawed in the past? Why is he even relevant? He helped cause the tech bubble and the housing bubble and now he’s advocating another “wealth effect” in stocks? What is wrong with this country?

  • wit777

    last two years showed that money multiplier did not work when there was no enough demand for loans from credible borrowers….but if economy expands credibility will rise… too high level of excess reserves can become a major problem?

  • csodak

    An Ann Rand disciple is deprogrammed? Previous testimony and this interview prove that he is still programmed.

    Bart, as your listened to this interview did you apply any critical thought?

    Excerpts from his congressional testimony where he effectively stated that his entire professional career he suffered from cognitive dissonance.

    “That’s precisely the reason I was shocked because I’d been going for 40 years or so with considerable evidence that it was working exceptionally well.”
    “Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.””
    “Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.””

    He suggested his trust in the responsibility of banks had been misplaced: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief.”

    “Harry Waxman asked “You found that your view of the world, your ideology, was not right, it was not working?” Greenspan agreed: “That’s precisely the reason I was shocked because I’d been going for 40 years or so with considerable evidence that it was working exceptionally well.”

    Relating to this interview:

    Greensapn points out that monthly economic statistics are ‘noise’ yet points to the last two weeks in December that railroad carloads of industrial goods jumped dramatically and states this is confirmation of his estimate that the economy is on a role.

    He states that everyone is wrong and he is right!

    He states that corporate profits were derived from productivity gains due to capital investment, not one mention of layoffs unless other than referencing increases in labor productivity.

    He states only one mandate for the Fed and that is to keep inflation low…no mention of full employment.

    He believes that you can inflate bank stocks which will, logically, inflate the banks assets and this will fix real estate valuations and all will be well with consumers.

    He also believes that all the people who are looking at his tenure and judging his decisions as being in error are ALL WRONG. He wouldn’t do anything different.

    He still believes that if you just let the markets go they will be efficient.
    He states “The stock market overall is the only type of stimulus that you can get in the economy that does not have any debt associated with it.” HUH? What investment world does he live in.

    Bond market collapses and yields skyrocket but no effect on the discounted cash flow model for stocks?

    It is a grave misfortune that America allowed this individual to navigate our economy for 18 years.

  • Darrell

    “Bank must have willing and creditworthy borrowers walk into their offices before any increase in the money supply can take place.”

    Yeah, who ever heard of a bank lending to borrowers who aren’t credit worthy. I mean if they did that, we would end up with bad mortgage loans and we all know that doesn’t happen.

  • Cullen Roche

    Dr. Greenspan is working under the false premise that this isn’t occurring:

  • GYSC

    So if reserves are not doing anything why are they being pumped up? No demand for loans means those reserves are sitting there, but why then? What happens if they are deployed?

  • Cullen Roche

    They were pumped up under QE1 for the purpose of credit easing. That was effective. The purpose of QE2 has been to reduce interest rates. That has clearly failed.

  • casanova

    It seems no one understands monetary policy by Pragmatic Capitalist nowdays!

    The Chartalist view that PC advocates has been tried by Weimar Germany and fully discredited. All monetary experts of Weimar Germany were Chartalist, so there is nothing new about the monetary theory PC advocates.
    The idea that goverments can spend money without consequences is dumb.
    No Chartalist is able to tell how much money should goverment spend without having inflation run hamock. And once the inflation genie is out of the bottle, is is not easy to bring things under control.

    Greenspan is no fool and I prefer someone who accepts a flaw on his understanding of the world rather than the many self-righteous polticians we have.
    Where he is wrong on his interview is that he asking his critics to prove him wrong. This is so contrary to sientific logic and analasys.
    He who makes a claim has the burden of proof. So he should prove that his theories are right. Otherwise, I can claim that I can turn lead into gold and you have to prove that I cant – it does not make sense.

    I beleive however that he will be proven right with his bond prediction crisis in the not too very long future. Time will tell.

  • Cullen Roche

    Comparing Weimar to the modern state of the USA is HIGHLY misleading. Rather than make broad (false) allegations please show some facts in your analysis as opposed to rhetoric that incites fear.

  • Bob

    I was just on the phone chatting with a friend, telling her how I believed that if Greenspan was still the FED chairman, he would have sent us into the abyss, BECAUSE he did not truly understand what was needed, and then I click on your site and see this article! Super confirmation! I was also commenting how for all the vilification of Benanke, he does get it.

  • making sense

    The past boom and bust cycles might well be the only way to delay the inevitable. The current boom and (and the bust that will follow) is no different, and might well be the last one…. before a dramatic change to happen.

  • http://none GLH

    Sorry, I try to be nice to people, but I have no respect for bubble Al. A man who has lived in wealth all his life and served power at the detriment to the majority of Americans. Here are a few of his successes:
    According to the Economist Paul Krugman “he didn’t raise interest rates to curb the market’s enthusiasm; he didn’t even seek to impose margin requirements on stock market investors. Instead, he waited until the bubble burst, as it did in 2000, then tried to clean up the mess afterward.”
    John Robbins has argued that “Greenspan may be more responsible than any other single human being for the disastrous developments in our nation’s economy,” and that “when it comes to wreaking financial havoc, Madoff was a piker compared to the man who was dubbed history’s greatest Federal Reserve chairman upon his retirement in 2006.
    John Robbins has argued that “Greenspan may be more responsible than any other single human being for the disastrous developments in our nation’s economy,” and that “when it comes to wreaking financial havoc, Madoff was a piker compared to the man who was dubbed history’s greatest Federal Reserve chairman upon his retirement in 2006.
    Prior to running the Federal Reserve, Greenspan headed the National Commission on Social Security Reform. In this capacity, according to Robbins, Greenspan’s “policies triggered a staggering transfer of wealth from the lower and middle classes into the hands of the richest members of society.”:
    “Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants.Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.” Alan Greenspan, 2005.
    “It is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.” Alan Greenspan, March 2008.
    An October 15, 2008 article in the Washington Post analyzing the origins of the economic crisis claims that Greenspan vehemently opposed any regulation of derivatives, and that Greenspan actively sought to undermine the office of the Commodity Futures Trading Commission when the Commission sought to initiate regulation of derivatives.
    According to Frederic Sheehan in his book: Panderer to Power; Alan Greenspan’s 18-year stint as head of the Federal Reserve Bank witnessed some of the most massive upward redistributions of wealth in our nation’s history. It’s now clear that his policies contributed greatly to the transformation of Wall Street from an engine that financed American business to a business-destroying machine—and that Greenspan abetted the hollowing out of the U.S. economy by giving Wall Street and Washington everything they could possibly want.

    Is there any surprise that Greenspan is so wrong about Fed operations? Of course his mistake would help support the people he is so subservient to!

  • first

    “the former Fed Chief proves that he still has no idea how our monetary system actually works.”

    So the men that was in charge of the Central Bank of the largest economy in the world for 18 years did not understand what he was doing ?

    That’s not very encouraging.

    Something simply does not add up.

  • Obsvr-1

    all the more reason to End the FED, fold into the UST and eliminate fractional reserve lending. Over and over the FED (and the banksters) have presided over the boom/bust/bailout cycles resulting in the transfer of $T’s of national wealth to a small group of money elite. The time is now to take the control away from these ‘maestro’ of the boom/bust/bailout cycle.

  • Cullen Roche

    Do the math on Yellen and AG’s comments. They can’t both be right. And Yellen is obviously right, which means AG was working under a false premise for the entirety of his career. The fact that he is promoting the Bernanke Put should be extremely alarming to anyone in this country….

  • quark

    Greenspan is delusional and why he still is considered competent to testify on the conditions of our economy is telling.

    Nothing personal toward the interviewer but after so much backsliding its time someone who was competent on the issue interviews Mr. Greenspan. He is to often allowed to make ludicrous statements without comparing his statements against empirical evidence.

  • first

    “AG was working under a false premise for the entirety of his career.”

    He is a strange person using strange language that few seem to understand until we realize that he may be the one that does not understand.

    In is book he talks about not having bees sure when he was young if he was to be a professional musician or take economist career. To bad he did not chose the music.

  • casanova

    I agree that Weimar germany is HIGHLY different from the US economy. But Weimar is the only case I know in economic history where Chartalism dominated all economic policy making.
    On the other hand, can you find two identical economical situations on the history of the world?
    The fact that USA is not Weimar does not prove that Chartalism is right.
    If you think so highly of Chartalism, how much more money should US goverment spend, 4 trillion, 40 or 400 trillion?

  • Moneta

    Maybe interest rates would be converging towards the PIGs rates if it weren’t for QEs.

  • casanova

    If we live in chartalist world why are we paying taxes, why is the goverment selling bonds and paying interest on them?
    You seem to imply that nobody but you, Randall Wray and Bill Mitchell know about monetary theory and Greenspan and Bernanke are ignorants. I dont find your analasys credible. Why dont you answer my question, according to your theory, how much more money should US goverment spend, 4 trillion, 40 or 400 trillion?

  • casanova

    you accuse me of being rehtorical, yet you respond by rehtoric.
    My questions were clear:
    1)If goverment is not revenue constrained as chartalism claims, why is the goverment selling bonds and paying interest on them?
    2)What is the optimum goverment deficit for the Chartalists, 4 trillion, 40 or 400 trillion oe more?

    I personally beleive that dollar is commodity money, despite having come off the gold std, the USD has since been de facto pegged to the oil.
    So in the end the FED is always constrained by the oil price. Last time oil went to 149 it crashed the economy. Nowdays that limit seems to be around 100. So printing more money is not the solution.
    I think this guy at:
    seem to be much closer to some plausible explanation of our current situation than all the chartalist gibberish. Read all his posts, you might get it!

  • Obsvr-1

    Nope, there are those that propose or predict that money should/will be based on hydrocarbon commodities, but today that is not the case. You can not take approx 90 USDs to the treasury to redeem for a barrel of crude.

  • Cullen Roche

    Since I’ve answered all of these questions THOROUGHLY before I’ll make the same generous offer to you. Before brushing something off as “gibberish” perhaps familiarize yourself with it:

  • roger erickson

    Warren Mosler has correctly pointed out that with the demise of the gold std in 1933, fiat $ isn’t backed by anything, even fractionally, so fractional reserve lending did, in fact, end in 1933. The FED isn’t the problem, they’re actually rather irrelevant. Fiat currency creation is directly tied to public purpose & public initiative alone, yet currency supplies can still be manipulated per narrow political interests.

    The distracting belief that the FED is still relevant has encouraged fiscal impotency, which is the chief problem in our current fiat monetary policy, and also encouraged failed regulations, which is always a disaster in any set of operations.

    Can you imagine trying to tune your car engine based upon the following beliefs?

    1) adjusting the cost of fuel distribution would solve all problems (int. rates)
    2) fuel injection doesn’t matter (yet “balanced” dash-bd fuel/mileage units do!)
    3) tuning can be achieved by ignoring many operational tolerance limits

  • Greg

    All you’ve shown Casanova is that there are real resource constraints on all economic activity………. not exactly earth shattering news buddy.

    Oil happens to be important to the world economy…….. again not news.

    Chartalism/MMT simply points to the fact that “money” is never what is lacking in an economy. There can truly be things lacking in an economy but money is never one of them.

    All this focus on financial ratios and budget balancing as if achieving those things can actually make real resources more available/manageable/affordable for the economy as a whole is THE myth.

  • Postkey


    “Stephen Zarlenga dealt with this in his massive work of monetary history, The Lost Science of Money (pp579-580). He said:
    “The great German hyper-inflation of 1922-23 is one of the most widely cited examples by those who insist that private bankers, not governments, should control the money system. What is practically unknown about that sordid affair is that it occurred under the auspices of a privately owned and controlled central bank.
    Up to then the Reichsbank had a form of private ownership but with substantial public control; the President and Directors were officials of the German government, appointed by the Emperor for life. There was a sharing of the revenue of the central bank between the private shareholders and the government. But shareholders had no power to determine policy.
    The Allies’ plan for the reconstruction of Germany after WW1 came to be known as the Dawes Plan, named after General Charles Gates Dawes, a Chicago banker. The foreign experts delegated by the League of Nations to guide the economic recovery of Germany wanted a more free market orientation for the German central bank.
    Schacht relates how the Allies had insisted that the Reichsbank be made more independent from the government:
    ‘On May 26, 1922, the law establishing the independence of the Reichsbank and withdrawing from the Chancellor of the Reich any influence on the conduct of the Bank’s business was promulgated.’
    This granting of total private control over the German currency became a key factor in the worst inflation of modern times.”
    Therefore, as Zarlenga goes on to elaborate, German hyper-inflation did not occur as a result of the German government creating money, but rather it was a result of the complete privatisation of the German central bank, the Reichsbank, as part of the Allies’ post-WWI free-market plans for the German economy.
    The worst inflation of modern times occurred as a result of the privately-controlled central bank manipulating the German economy for its own private profit.”

  • okl

    on the contrary, i actually think he’s talking like that for political reasons; after all, if the people know that the govt is not revenue constrained, they think of 2 things immediately;

    1) spend on me (justify with something politically correct)
    2) unlimited govt power

    these 2 combined creates such a huge political problem that it would be better for politicians to say “we’ll reduce the deficit”, for at least it garners some support from the 2nd party.

    in other words, he said what he said because it is politically unacceptable to say the other thing!

    then again, his track record does suggest a fair bit of ignorance… oh dear me.

  • Martin

    Bart you make me laugh:

    On January 7, 1973, the New-York times featured an interview with Alan Greenspan, the future Federal Chairman urged investors to buy stocks without hesitation: “It’s very rare that you can be as unqualifiedly bullish as you can now”. 1973 and 1974 turned out to be some of the worst years for economic growth and the stock market since the Great Depression. From 1973 to 1974, US stocks lost 37%.

    Greenspan should just keep is mouth shut, he would make himself a big favor. He has already done enough damage already and is responsible for a lot of the mess we are in.

  • Moneta

    It does not prove anything. People lie all the time. How can we prove what he really believes?

    Everyone assumes our leaders are stupid but what do we know? Do you really expect them to come out and say: “Run for the hills!”?

    Government NEEDS inflation. It will do whatever it needs to do to get it and it surely won’t come out and tell us so… why would they want to refinance their debt at higher rates?

    So whatever we get, inflation or deflation, it does not matter because the end result will be a lower standsrd of living.

  • Anonymous

    Or empty rhetoric that inspires laughter, in some circles.

  • first

    Yes, and it really lasted until 1981 when the market hit new lows. Even Ross Perot could not make it on Wall Street with the firm he had purchased.

  • first

    “Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004″ I guess they are selling them to BB the bider of last resort.

  • Cullen Roche

    I think maybe only in this circle :-)

  • wh10

    TPC, to address Darrell’s point in another way, would you say it was low rates, as opposed to excess reserves, that partially contributed to the subprime boom?
    Therefore, going forward, these excess reserves only pose a threat if rates remain low? In other words, the interest rate is what is causal, not the quantity of reserves. The quantity is just an enabler (given low rates).

  • http://deleted Don Levit

    How is the interest paid on these excess reserves?
    Is it paid in cash, directly impacting the budget, or is it paid in Treasury securities, which I assume adds to the debt held by the public?
    If someone can provide a governmental excerpt and link supporting their answer, I would appreciate it.
    Don Levit

  • Anonymous


    I think you’ve hit upon an important point that I have missed up to now.

    While MMT is a bit hard to understand (much less explain), it is the way that our money system operates.

    So, why isn’t it more widely understood?

    “if the people know that the govt is not revenue constrained, they think of 2 things immediately;

    1) spend on me (justify with something politically correct)
    2) unlimited govt power”

    The wealth of our nation, and of the world, depends on the productivity of it’s people. That productivity generally comes from a belief system, and not many places on earth have been as productive as the USA, due in part to the belief system in place here.

    MMT seems to stand in contrast to the belief system inthe USA (work hard, be frugal).

    Cullen, your thoughts?

  • Cullen Roche

    I think the subprime boom was primarily caused by lax lending requirements. Low interest rates were not the true enabler.

    Remember, banks don’t lend their reserves.

  • first

    “those who insist that private bankers, not governments, should control the money system.”

    Sorry but German inflation in the 1920s was not simply caused buy private banks as you mention, “it was caused by a conscious political decision on the part of the German government to a particular economic strategy to deal with World War I debts and reparations”. As a result of inflation, German debts by 1922 were reduced down to where they had been in 1914. Yes “hyper-inflation of the early 1920s was a result of the political and economic instability of the Weimar Republic”

    “Germany had significant problems caused by the need to pay World War I debts combined with the demands of voters for more social services”

    From 1924 onward German officials were “virtually flooded with loan offers by foreigners.” When these debts suddenly came due it was as if years of reparations payments were compressed into a few short weeks”.

    Germany also took in “27 billion marks in loans from the United States, which Germany defaulted on in 1932″.

    Inflation has always been the tool of Kings and Government for paying wars.

  • troll

    ….and now, from left field:
    What if Greenspan fears that that the vast majority of Americans would pay attention to “hyper-inflation” ravings because they CAN grasp that relatively concrete concept – rather than try to make them grasp the reality of a monetary system that is based on virtually NOTHING conrete, and risk total loss of their faith in the “good faith” of the government backing of an abstract monetary system?
    Feed the people lies and the monetary system lives on – or tell the people the truth (which they will not understand) and risk total collapse? What a choice!
    Any comments?

  • wh10

    I agree with that. But if interest rates were much higher, instead of 1%, could you not argue that even with lax lending standards banks wouldn’t have been able to make those loans (or at least nearly as many)?

    In any case, putting that aside, I am more interested in policy going forward. What is Yellen implying then when she says that the Fed can simply raise interest rates to tighten policy without worrying about the excess reserves? It’s not that, when the economy delevers and recovers, high rates will prevent a surge of loans (partially) enabled by the excess reserves? I mean do those reserves not pose *ANY* potential for loan creation, given low enough rates? I understand banks make loans based upon the availability of good loans, but can’t any loan look good enough when you have nearly free money sitting around?

    I admit I am stuck in a money multiplier textbook state of mind. I will read up on the multiplier myth literature here. I just don’t yet see why a bank, at its full reserve requirement, that suddenly gets an influx of reserves, won’t lend those reserves out if rates are low enough such that the economy has an appetite for more loans.

  • Adam

    Excess lending can always lead an economy into trouble. The key is that reserves are not needed to cause excess lending. Loans generate their own reserves by generating deposits.

  • wh10

    Scratch the last sentence in the second paragraph.

  • Matt Franko

    Don Hi,

    I posted this over at ND2.0 in response to your question here, it must have gotten buried in the comments:

    “Look at page 7 of 63 of the following pdf, it has the income statement for the Fed Reserve bank of New York, the branch of the FRS that runs the System Open Market Account:


    It has interest income from Treasury Securities at $8.775B in 2009 (units in $), holdings of Treasury Securities are listed separately in the balance sheet as Assets as they should be, you could see any YoY change in those assets there.


  • http://deleted Don Levit

    Very well stated.
    I believe the full faith and credit of the U.S. Government is based on peoiple’s perceptions, the average American, not those who underdstand MMT.
    People look at government the only way they can, as their household or business, with a lot of slack due to our “economic power” as the sovereign.
    I presented a very compelling case to a Unitarian Universalist discussion group about a month ago on the Social Security and Medicare Trust Funds.
    The agreement from my collection of governmental links and excerpts seemed to be that the trust funds make it no easier to pay beneficiaries than if the trust fund didn’t exist.
    Their payment would be made good only as good as the US dollar can maintain its “full faith and credit.”
    When I asked for a show of hands “Who do you have more faith in, the full credit of the U.S. Government or God, the highly atheist/agnostic crowd voted, and it was a tie!
    Don Levit

  • Adam

    Here’s a thought for you… If the US government hadn’t fought Vietnam (or had at least properly taxed for in from 1968-1972) adn OPEC & Iran had never embargoed the west would Reagan ever have been elected. From the New Deal until Reagan the US government actively tried to maintain full employment. When Reagan said, “Government is not a solution to our problem, government is the problem.” he wasn’t really talking to the average American. He was talking to the richest of Americans who had seen their share of the economic pie decline from the New Deal until the Reagan Revolution. Since then it’s grown massively.

  • Cullen Roche

    If we are living in a system that is built on faith and the government is building belief that is built on lies then there is destined to be a collapse in the system. They would be better off coming clean – even if people don’t fully grasp it.

    Your wife might not understand why you cheated on her, but lying about it gets you nowhere…..

  • Adam


    How can lying to people increase the “full faith and credit” of the government? The lying is what got the government the credibility it has!

    Anyhow, not applying MMT and trying to operate on a gold standard only leads to bad decisions which will not increase the credibility of the government.

    And additionally, the US government gets it full faith and credit from the US people and the economic output those people generate. If you don’t believe that then I assume you would prefer to continue with the plutocracy we have which prefers the average American to see their government as the enemy instead of fully capable of fiscally affording what they need or what to spend their economic output on.

  • john

    Kelly you are killer

  • Matt Franko

    Or Don,

    Maybe I misinterpreted, do you mean the interest that Treasury pays to the Fed on the Treasury securities the Fed holds? Or the interest the Fed pays to depository institutions (banks) on the excess reserves that are on the banks books?


  • Michael Muoio

    Greenspan was,is and always will be a minion for the fascist corporatist class.

  • quark

    Who controls the FED and the private banks in this country? I have not witness over the past 30 years the FED, the private banks or investment houses in this country being run as if they feared default by any institution until it’s time for the taxpayer to bail their asses out.

    Anyone who believes that privatizing banks is a cure for excess should send their resume to Alan Greenspan.

  • anonymoose

    the usual partisan view from adam.

  • Jonnyblaze

    I actually think this is quite plausible and quite ingenious really (in a devious way). By continually saying “inflation’s not a concern yet, but it will be down the road…” such talking heads can continue to keep John Q Public in the dark about the operational realities of the system, while at the same time assuaging fears enough to stave off panic. The elites don’t want us finding out how things actually work because then they might be forced to render an account for their actions.

    But look, it’s not JUST about lining their own pockets. Our economy as a whole would not yet be ready to absorb the shocks of a complete overhaul of the current financial system. Just look at how much of our economy has already been financialized. Since we don’t really make anything tangible anymore, most of our “productive” capacity here in the private sector relies on the very same rules of the game that ultimately do need to be changed. There will be pain either way we go, it’s just that the power elites don’t have to experience any of it so long as they can maintain the status quo.

  • rhp


    basic question not directly related to this thread but i STILL can’t quite get it.

    Your quote: “They (bank reserves) were pumped up under QE1 for the purpose of credit easing. That was effective. The purpose of QE2 has been to reduce interest rates. That has clearly failed.”

    I understand how TARP could bolster the banking system by exchanging “good” paper for less valuable paper (MBS’s), and thus stabilize the system.

    If bank reserves are not linked to lending (creation of credit), then how does pumping up bank reserves ease credit?? This has been bugging me for a couple of months now.

    Thanks in advance.


  • Jonnyblaze

    But isn’t the point really that policy IS being formulated based on the operational realities, it’s just not being reported back to the public that way?

    Also, why must our only options be plutocracy or central planning? I don’t think our government is the enemy, but I certainly do think that they’ve been a piss-poor steward of the nation’s economic resources over the past several decades.

  • Cullen Roche


    The fed effectively created a market. In addition to reducing the general fears in the market (by removing some of the toxic waste) they basically did what the ECB is now doing in Europe – making a market in bonds that no one wants. Rates fall….Credit conditions ease.

  • Jonnyblaze

    Why not? What if the purpose of these policies all along has been to simply backdoor bail out the banks and provide a psychological backstop for equity markets (the Bernanke put)?

    I agree that the operational realities mean that QE won’t help heal the underlying issues. But I guess my supposition is that many policymakers don’t really care to. Much easier to try and keep the party going until they’re dead and gone…

  • Roger Ingalls

    But no telling her about it isn’t the same as lying about it. It buys time.

  • rhp

    thanks, will chew on your response for awhile………

  • Whiskey Tango Foxtrot

    Inflationistas inevitably pull out examples of Weimar and Zimbabwe but it seems to me that those utterly fail as comparisons to the US in many ways including the floating of debt.

    How many bonds did Weimar or Zimbabwe sell on their way to destroying their currency?

    The debt market is the LAW and is the ultimate judge on a currency’s integrity.

    And the first derivative of the debt market for a nation is the price of their Credit Default Swaps.

    Weimar and Zimbabwe never had any credit, so all they could do was print.

    US Long Term Interest rates indicate – no worries.

  • jeff

    Where can I find a dataset on CDS of debt by country?

  • Adam

    Partisan? Only if you consider the average “Joe” a partisan view. I once was a Reagan supporter, but not now. I’d like to see the average American run this country not some elite bunch that don’t have my interest at heart. That aside, what’s your explanation why most peoples real wages have fallen since the government abandoned full employment post the 1970’s?

  • Adam

    Piss poor standards!!! That’s only a relative view. If you’re part of the plutocracy (& I could be using the wrong word but I think you get the point) things are wonderful and getting better. The alternative view is not necessarily central planning, you need to deprogram your thinking. There are ways for the government to fiscally assist average Americans without actual doing it bureaucratically.

  • Scott Fullwiler

    Interest income on reserves is credited to bank reserve accounts at the Fed. Given its balance sheet construction, there is no other possible way for the Fed to spend “money” except via credits to reserve accounts of the recipients or the banks of the recipients (if the recipients are non-banks).

  • mike mohr

    This guy Greenspan should be in jail.

  • Craig

    In the sentence below;

    “He believes an expansion of the monetary base should lead directly to an expansion of the money supply.”

    What is the difference between “monetary base” and “money supply”?

    Is monetary base the money public banks have available to lend?

    Is money supply the money currently ciculating through the economy?

    Thanks for the help…

  • first

    Weimar never had any credit,??? “The Germans faced a $12 billion reparations bill, equivalent to about $2.4 trillion today”.

  • first
  • casanova

    No one is comparing US with Weimar, actually there are no two identical economic situations to be compared in the history of humanity, each economic situation is different.
    If you read my comments carefully, Weimar period was the only period in history dominated by Chartalism monetary policy making and chartalist policy makers, the same policy promoted in this blog nowdays.

  • Scott Fullwiler

    Wrong again.

  • okl

    anonymous, you are quite right that strangely, what we have has worked so far up till now because people dont really understand how it works.

    though i do think that if the govt spends on unproductive things, then it will all come unravelling through the political channel, which ultimately determines what works and what doesn’t in the mortal world.