Who is Alan Greenspan and 
Why is he threatening 
my job?

An investigative report by Matt Bates, Staff writer, IAM Journal


We like to think this is a democratic society; that in the United States, citizens and their elected representatives debate and decide the really important questions.

But this is emphatically untrue when it comes to some of the biggest decisions of all. Will wages rise or fall? Will there be jobs or unemployment? Will ordinary people be able to afford a mortgage, a credit card, or a loan for a car or college?

These decisions are made for us, behind closed doors, by the un-elected heads of the Federal Reserve System, the most powerful and secretive institution in the country.

This issue of the IAM Journal peers behind the walls of the nation's central bank to ask: Who runs the Fed? How do its actions affect you and your family, and how can we press this banker-run agency for more "worker-friendly" economic policies?

With his hands on the controls of the U.S. economy, Alan Greenspan is arguably the most powerful person in the country - perhaps in the world. One remark from the Chairman of the Federal Reserve System can send billions of dollars ricocheting around the world, ruining whole regions and enriching others, virtually overnight.

Greenspan doesn't look like a modern-day political powerhouse. With his dangling jowls and oversized glasses, the 75-year-old Greenspan looks terrible on TV, and his rambling monotone speeches could put an amphetamine addict to sleep.

But there's a lesson here: Greenspan doesn't have to look nice or sound nice because he doesn't have to run for office.

Indeed, Greenspan barely has to answer to Congress or, even, the Presidents and that's the way our leaders seem to like it. Laws dating back to 1913 guarantee the Fed far more freedom from public scrutiny than the CIA, National Reconnaissance Office, National Security Agency or other federal agencies.

So let the conventional politicians keep the voters entertained with public spats over this proposal or that piece of legislation. Meanwhile, Greenspan and the other un-elected leaders of the Fed are free to stay in the background, shielded from public view, where they can settle the truly fundamental political questions about the U.S. economy.

Push Towards Recession
The Fed made some highly unusual moves in the past 18 months: moves that hit like a bombshell with heavy fallout, both economic and political.

In June 1999, the Fed quietly began raising the all-important Federal Funds rate -- a "bottom line" rate that affects other rates by setting the interest banks pay each other for short-term loans. 

By the time Election Day rolled around, they had raised the Federal Funds rate six times for a total 1.75 percent increase, pitching the country sharply towards recession. 

Only once during the past 11 presidential campaigns had the Fed taken such drastic measures in the months leading up to an election, according to the Financial Markets Center. That was in 1979-80, when Jimmy Carter was blown out by Ronald Reagan, and inflation was galloping along at more than 13 percent a-year.

But the Fed's recent clampdown came when inflation was a mere 2 percent a-year -- its lowest rate in 40 years. The effects were dramatic and painful. In the year 2000:

  • The rate of economic growth was cut by more than half.
  • 194,000 manufacturing jobs were wiped out.
  • Manufacturing activity plunged to its lowest rate since April 1991.
  • Higher rates boosted U.S. export prices, causing trade deficits to swell some 40 percent.
  • Residential construction suffered its sharpest drop since 1995.
  • Personal savings rates fell into negative territory, as consumers dipped into savings to pay their bills.
The worst is yet to come. Since it takes about one year for rate hikes to work through the economy, we are only feeling the effects of the Fed's earliest moves.

The chokehold was so effective that soon after Election Day corporate leaders started howling for relief, and the Fed made another dramatic and unusual move.

On January 4 (barely three weeks after the Supreme Court ruling that assured George Bush the presidency), the Fed's Open Market Committee held a surprise, extraordinary session and rolled back the Federal Funds rate 0.5 percentage points. The FOMC had not held an unscheduled meeting to cut rates since the last recession in 1992.

What Is Greenspan Up To?
So why did Greenspan move so aggressively to tank a growing economy with the lowest inflation and unemployment rates in decades? 

Greenspan admits that "inflation has remained largely contained." But, he adds, it's not current inflation that worries him. He's on the warpath against possible future inflation. 

This odd bit of logic explains why Greenspan grinds his teeth over the very things workers most welcome: low unemployment and rising wages.

Greenspan's worst nightmare is the so-called "wage/price spiral," and it goes something like this: Low unemployment forces employers to compete for workers, and that allows workers to bargain better wages. 

When wages rise, people have more money to spend and they compete to buy things, bidding up prices for goods and services. To keep pace with rising prices, workers demand higher pay. And there you have it: the dreaded "inflationary wage/price spiral."

Fed Targets Wages
The trouble is, Greenspan's nightmare scenario is just that -- a dream, an illusion, according to Jeff Faux, president of the Washington, D.C.-based Economic Policy Institute. 

The scenario provides a handy excuse for the Fed to chip away at wages and jobs: "to intervene in the economy on the side of those who invest for a living against those who work for a living," argues Faux. 

For starters, wage-driven inflation in a peacetime economy has simply never happened, Faux bluntly declares.

EPI examined price records dating back to 1914, when the U.S. started keeping such statistics, and studied every major inflationary spiral, which they defined as an annual rise of 5 percent or more in the Consumer Price Index.

In every case, they found inflation was ignited by external shocks to the system such as extraordinary wartime spending and OPEC price hikes and in every case, prices, not wages, led the way.

So, what are Greenspan and the Fed up to? 

Tom Schlesinger, executive director of the Financial Markets Center, says Greenspan is genuinely (and correctly) concerned that the stock market is so over-valued it could burst, with potentially disastrous consequences.

At the same time, Greenspan believes high interest rates are necessary to continue attracting the billions of dollars in foreign investment the U.S. relies upon to finance its record-high mountains of business and consumer debt. 

But instead of moving directly against reckless investing and lending by the rich, Greenspan and the Fed have chosen to cool the economy by undercutting wages and jobs. (More than once, Greenspan has publicly credited workers' "job insecurity" with limiting wages and strikes.)

Worker-friendly Options
The Fed has other options to cool down Wall Street. For example, it has the legal power to tighten "margin requirements," making it harder for investors to play the market with borrowed funds. 

But Greenspan "has consistently refused to do that, claiming that tighter margin requirements would discriminate against non-wealthy investors," EPI's Faux points out, adding, "The vast majority of people who buy stocks on margin are wealthy to begin with, and the entire thrust of GreenspanÕs policies harm non-wealthy people even more."

The Fed should gradually lower interest rates and keep probing to see how low the unemployment rate can drop without triggering inflation, he continues. As they do that, they should gradually tighten margin requirements and more strictly police unsound mortgages and other loans. 

"Doing those two things, you would gradually substitute speculative value with real value," Faux said. Instead of a stream of paper profits, you would create wealth based on the production of real goods and services and the profits, wages, jobs and new investments that flow from that.
But clearly, that isn't Fed strategy. "Their real target isn't inflation," Faux insists: "It's the bargaining power of workers."

Caring for Their Own
Their choice of targets isn't surprising, since the Fed is run almost exclusively by "those who invest for a living" -- the bankers and financiers.

Legally, it's not supposed to be that way. Fully two-thirds of the Fed's 108 district directors are supposed to be appointed with at least some regard for labor, consumers and other non-financial interests. 

Yet, only 7 percent of the directors represent workers and consumers, according to the Financial Markets Center.

And the Fed's Governors? Multi-millionaires, every one. No Governor has a background with even remote ties to unions, consumer or community groups, and four of the five Governors (there are two vacancies on the Board) either advised or worked directly for the banking and investment industry.

The tilt towards capital is built into the very structure of the Fed.

The 12 Reserve Districts, serving various geographic regions, are based on 3,296 "Member Banks," including all commercial banks operating under federal charter (designated by the word "National" in their name) and many state banks, as well. Together, the Member Banks account for more than three-quarters of all U.S. banking industry assets. 

The "Member Banks" elect two-thirds of all Reserve District directors. Among other powers, the directors name the Reserve Bank Presidents (subject to veto by the Governors) and also appoint the 12-member Federal Advisory Committee, which meets in private session, four times a year, with the Chairman and Board of Governors. 

It's easy to overstate the influence of the Member Banks, cautions Schlesinger. "Very often, the Board of Governors simply ignores the FAC, or uses their recommendations to do what the Governors wanted to do anyway," he points out. 

Nonetheless, he adds, "The FAC is the most powerful of all the Fed advisory groups . . . The banks get to register their grievances, preferences and interests behind closed doors, face-to-face with their regulators, in ways that private interests in other industries can only dream about."

Democracy or Plutocracy?
"What kind of democracy places its fate in the hands of an un-elected elite?" asks IAM President Tom Buffenbarger. 

"Imagine what people would say if you suggested giving the Labor Department the power to raise or lower employment and wage levels for the entire U.S. economy," he continues.

"Imagine if you said the unions should elect the majority of the decision-makers at the Department and have the right to lobby them, in private, without any day-to-day oversight from the president, Congress, the news media or anyone else. 

"People would call you crazy for even suggesting such extraordinary powers for workers," Buffenbarger points out. "Yet that is precisely the system we have created for capital."