Tuesday, January 17, 2012

What makes Angela Merkel tick? (2 of 6): Merkel and Greenspan

In the first post in this series, we saw Angie in 2004 expressing her great admiration for Ayn Rand discipline and then-chairman of the US Federal Reserve. She classified him among the "leading thinkers" of the US.

Alan Greenspan, the Maestro of neoliberalism/deregulation/the Washington Consensus

Uncle Alan was regarded as something like a demigod by the Very Serious People in the US. And obviously by Angie, as well. Bob Woodward wrote a book on him titled Maestro. Even after the tech bubble burst in 2000 and shook confidence in the awesomeness of the stock market, the idolization of Uncle Alan continued. The one time I heard popular financial adviser Susie Orman speak live and in person, she advised her listeners that Uncle Alan as head of the Fed determined what would happen with inflation.

This adulation is partially because of a well-established habit of largely magical thinking about the arcane powers of the Federal Reserve. The late John Kenneth Galbraith was sharply critical of this attitude toward the Fed and its director. In his last book published during his lifetime, The Economics of Innocent Fraud (2004) he explained, "The false and favorable reputation of the Federal Reserve has a strong foundation: There is the power and prestige of banks and bankers and the magic accorded to money. These stand behind and support the Federal Reserve and its member - that is, belonging - banks." Galbraith regarded this high opinion of the Fed and its chairman of any given moment as "our most implausible and most cherished escape from reality" in economics.

Angie has shown a sometimes ruthless pragmatism in her political career in making allies and dumping them, even sticking in the metaphorical shiv when she thought it was to her advantage. I doubt she would express such admiration for Uncle Alan now that events and lack of the Fed Chairman's title have reduced his image to something a little close to that of the dogmatic hack he always was.

But her actions in the euro crisis, and the European banking crisis that always was and still is the core problem behind the euro crisis, show that she maintains her faith in the arcane magic of which Uncle Alan was the High Priest in the United States in 2004.

Greenspan's irresponsible service to the one-percenters, more specifically to financial institutions hawking mortgages, had real consequences for real people:

Galbraith the Younger, Jamie Galbraith, wrote in The Predator State (2008):

Lenders knew, as borrowers did not, that in the wake of 9/11 [2001], short-term rates were unprecedentedly low, and these conditions would not endure. They therefore deliberately substituted adjustable-rate mortgages for fixed-rate mortgages - with the endorsement of then Federal Reserve chairman Alan Greenspan, to reassure the naive public that the exercise was sound. Interest rates then rose, the mortgages started to reset, and hundred of thousands of homeowners found themselves unable to meet the required payments. Moreover, they had no prospect of rapidly increasing their incomes in order to meet their rapidly rising bills. By the late summer of 2007, new foreclosure mortgages were approaching the total number of persons permanently displaced from New Orleans by Hurricane Katrina every month. [my emphasis]
William Black takes a look at the destructive legacy of Uncle Alan in The continuing saga of bank self-regulation and other fairy tales featuring Alan Greenspan Credit Writedowns 01/12/2012. He reminds us of some of the highlights of the Maestro's financial statesmanship:

He supported the repeal of the Glass-Steagall Act despite the conflict of interest inherent in combining commercial and investment banking. He supported the passage of the Commodities Futures Modernization Act of 2000 despite agency conflicts between managers and owners of firms purchasing and selling credit default swaps (CDS).

He opposed using the Fed’s unique statutory authority under HOEPA (1994) to regulate ban fraudulent liar’s loans by entities not regulated by the Federal government. He opposed efforts to clean up outside auditors’ conflict of interest in serving as auditor and consultant to clients. He opposed efforts to clean up the acute agency conflicts of interest caused by modern executive compensation. He opposed taking an effective response to the large banks acting on their perverse conflicts of interest to aid and abet Enron’s SPV frauds.
Black also unpacks a example of the typical pretzel logic of Ayn Rand enthusiasts. Though Uncle Alan formulated it in a less accessible fashion than more credulous disciples, in his argument about how unregulated cutthroat competition produces honesty among business executives. Black boils Uncle Alan's argument down to its ridiculous essentials: "Markets force CEOs to act as if they were honest because a good reputation is essential to the CEO."

He also reminds us of this biographical detail from the glorious Reagan years: "Greenspan was Charles Keating’s principal economic expert and had seen him loot Lincoln Savings in the late 1980s."

The most fatuous part of Angie's 2004 praise for Uncle Alan is her admiration at how he had learned from the tech bubble of the 90s and would therefore prevent such a thing from happening again. Uncle Alan believed that the need for a CEO to have a good reputation was vital to his company's ability to borrow money in the bond market, and therefore the need to borrow would act as an antidote to the temptation to commit accounting fraud. As Black explains:

In any analogous context we would consider Greenspan’s “antidote” claim to be facially insane. If the head of the public health service announced proudly that the service had triumphed because, while one million Americans had died of an epidemic of cholera, the death rate had been so severe and rapid that the epidemic had burned out, we would consider him to be delusional and heartless. The death of the pathogen’s host (us) does not constitute a triumph over cholera. It also does not leave the survivors who were not exposed to the pathogen with additional antibodies that will prevent future epidemics.
Angie may not be running around citing her admiration of Uncle Alan these days. But she's following his example in pursuing a clearly disastrous course.

If we look at the real consequences for the 99% in countries currently suffering from Angie's EU-imposed austerity policies in Ireland, Greece, Portugal and Spain, we can see that Angie is a worthy disciple of that Leading Thinker and Very Serious Person Alan Greenspan, the maestro, the financial demigod.

In practice, it matters little whether Angie really believes the vapid ideology and magical thinking behind her "ordoliberal" economics or whether it's cynical service to the one-percenters. I would guess that there's actually a lot of the first at work, though it's also clear that she knows her policies are directed at comforting the most comfortable. Her words in 2004 on economic policy are consistent with her later policies, up to and including her current EU austerity drive.

Sources on Angie's life and career:
  • Gerd Langguth, Angela Merkel.Aufstieg zur Macht - Biographie(DTV; München) 2007 edition
  • Michael Lümann, Der Osten im Westen - oder: Wie viel DDR steckt in Angela Merkel, Matthias Platzeck und Wolfgang Thierse? Versuch einer Kollektivbiographie (ibidem-Verlag; Stuttgart) 2010
  • Angela Merkel, Mein Weg.Angela Merkel im Gespräch mit Hug Müller-Vogg (Hoffmann und Campe; Hamburg) 2004
  • Volker Resing, Angela Merkel.Die Protestantin - Ein Portrait (St. Benno-Verlag; Leipzig) 2009

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