It is peculiar to say the least that central bankers, who were once at the helm of the most powerful institutions the western world has seen, get some of their common sense back once they leave office. Of course Alan Greenspan is a good example of that. Nowadays he occasionally says something sensible. Before he became Fed Chairman he had a particularly clear view on monetary matters. The man was good friends with Ayn Rand and once wrote in her book “Capitalism, the Unknown Ideal” in 1967:
The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of society lose value in terms of goods.
When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds finance by bank credit expansion. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.
There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
Greenspan knew how the monetary system would evolve once the gold standard was abandoned. He knew that continuous deficit spending would eventually end badly. Greenspan in his younger ”rebellious” years used to be one of the most vocal and best heard critics of the central banking system and deficit spending by governments. This made him a menace to the existing power structure. He had to be silenced. He was silenced by becoming Fed Chairman.
Greenspan was, by the late sixties and early seventies, spending less and less time at his consulting firm and more time within the circle he used to criticize so much. He served Richard Nixon and became chairman of the Council of Economic Advisors for Gerald Ford. He helped set up the Trilateral Commission for David Rockefeller together with, amongst others, Paul Volcker. He was also a director of the Council on Foreign Relations in the eighties. Apparently he served the establishment and politicians well because he succeeded Paul Volcker in 1987.
He became chairman of the Federal Reserve fully well knowing how the system could only evolve and what consequences there would be after abandoning the gold standard in 1971. He wrote and talked extensively about it in his younger years. Now that he had become one of the people he used to criticize, his words and actions didn’t match with his former believes anymore. Greenspan knew the only way to keep an economy going, where money is just credit, was ever more credit (money) creation. He just couldn't say it anymore. New credit had to be created constantly or soon enough there would be a deflationary down cycle. So Greenspan did what he had to do to keep the fiat system going and during his term, the US national debt went up from $2,300 billion dollars to $8,000 billion dollars. National debt to GDP rose less sharply but nevertheless it went up from 45% to approximately 65%. Greenspan added in his 19 years as Fed president almost $6,000 billion dollars of national debt, while it took 211 years (since the American revolution in 1776) before him to get to the first 2,300 billion dollars of national debt. Next to this extreme statistic, consumer credit went through the roof during his tenure, as did business credit. That was the main reason why the national-debt-to-gdp-figure declined during the Clinton years. No wonder the economy was in a seemingly never ending upward spiral and experienced an incredible boom because of all this new credit. But credit needs additional credit to survive…
Greenspan knows it will all come to an end sometime. His early words speak for themselves. Greenspan still defends his monetary policies and says he couldn’t foresee the stock market or real estate bubble. That is a lie, of course he could. Of course he is (as is Bernanke, as is Yellen) aware that this whole house of cards is coming down crashing someday. If regular people like you and me can fairly easily reason that there is no other outcome, these people can too. Bernanke did his part to enhance the final outcome and Yellen will be the one who will probably see the implosion happen during her tenure. Question is, why they keep doing what they do while they know the inevitable outcome and blow an incredible smoke screen in the mean time. Are their decisions really just based on keeping up appearances in the short term? I am not at all convinced there is just incompetence at play here.
How I would have loved to ask Greenspan some questions about his policy actions and about his change of heart to become the person he used to criticize… Unfortunately for me that possibility was and still is… rather slim. Luckily for me during Greenspan's years in office we simultaneously had Nout Wellink in the Netherlands. Wellink was the Dutch central bank president from 1997-2011, he was a member of the board of directors of the ECB from 1999-2011. On top of that he was the chairman of the BIS from 2002-2006 and a member of the Trilateral Commission. He is not Greenspan, but definitely not your average local bank clerk either.
Wellink was responsible during his time for the credit expansion in the Netherlands and helped coordinate it for Europe through his positions at the BIS and ECB. Simultaneously the Fed and all other western central banks expanded credit at a rapid pace. This synchronism was not a coincidence. Wellink also oversaw the sale of the Dutch public gold. The Dutch used to have about 1,700 tonnes of gold in the early nineties of the twentieth century. Now there is approximately 650 tonnes left (if we are to believe the Fed in New York, where most of that gold is supposedly stored).
Wellink made it possible that mortgages were a lot easier to obtain and that a family could borrow much more money, even without a down payment. Also the mortgage debt costs were and still are, to a slightly lesser extent, tax deductible. This resulted in the fact that the Dutch have the highest mortgage debt per household in the world. The total mortgage debt in the Netherlands is about $900 billion dollars and that is about 110% of GDP. Astonishingly also Wellink, like Greenspan, seemed to regain some of his common sense after he left office and started warning about excessive credit creation. Amongst evasive and apologetic statements, he also made some sensible comments, that he should have given more attention while being in office. He talked publicly about the maximum capital ratio banks could have. Even though during his presidency some banks would end up having a ratio of 70:1, he now started pleading for maximum capital ratios of 10:1. To reach this level he said that either a contraction of outstanding loans would be necessary or a large amount of fresh capital needed to be inserted into the banks. Both options are of course extremely difficult to implement because a reduction of outstanding loans would lead to a deflationary collapse and an insertion of capital would require newly created money. The excessive creation of money/credit caused the problems in the first place.
Nout Wellink clears his conscience and manages to compare the financial innovations, like the securitization of financial products, with the first flight of the Wright Brothers. Nout Wellink, in his biography Wellink Aan Het Woord, 2011, p. 132:
Take for example the Wright Brothers who went in to the air with a plane. If a regulator would have thought: "what am I going to do about this? Two crazy people want to go in the air. After Icarus, who crashed with burned wings, nobody ever pulled it off. Leonardo da Vinci made a beautiful drawing as if man can fly, but no, we should forbid this from happening". If the Wright Brothers needed a flying permit before they started, nothing would have happened. And the aviation industry would not have existed today. The problem with innovation is that you can't forbid it and you can not demand a permit beforehand. Because you don't know what will happen.
With all this in my mind I learned that Wellink started doing lectures after he left office in 2011. During these lectures he tried to wash his hands in innocence and in the mean time promoted his new biography called – Wellink Aan Het Woord – which means something like “Wellink Is Talking”. I also found out that most of these lectures were publicly accessible. Knowing this I got excited and started thinking about all the questions I could ask him. It was late 2011 and QE II was decided upon just a couple of months earlier by Bernanke. After a few lectures, where it was difficult to ask some questions, I went to another lecture of him at 't Spui in Amsterdam.
When I walked in to the room where the lecture was given, I saw that the setting was perfect. There were only about 100 people in a rather small room so it should be possible to make him say something worthwhile. I knew I wouldn’t have much time so my first question had to be the right one. I thought about this relatively new phenomenon called Quantitative Easing. QE cannot stop without dire consequences so why not ask him if QE was permanent. At a certain moment, I had my hand in the air for a long time, I was chosen and I asked him this question. Is QE permanent? He responded with that market conditions had to be normalized again so that these measures would not be necessary anymore. I wanted to follow up on his answer and explain him that it cannot stop, but he said to me why don’t you come to me after the lecture and talk. You can imagine I agreed.
After his open lecture I walked up to the front and had a chance to talk to him for about five to ten minutes. I asked him if he knew the Austrian School of Economics, he said he did. He also said that the theory doesn’t necessarily have to be true. I confronted him with the phrase by Ludwig von Mises in which Von Mises said:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Wellink didn’t seem uneasy when I asked him these questions, he just kept repeating that the theory of Austian Economics isn’t proven to be a reality yet. I tried to persuade him to stand on my side by telling him what a truly great roadmap it had been so far, before and during the crisis but Wellink kept insisting that banks needed to be recapitalized in order to stave off such a disaster as mentioned by Von Mises. He acknowledged that recapitalizing banks was a very difficult task. But the financial world would eventually stabilize again, these draconian measures were only temporary, he informed me. Needless to say I wasn't convinced.
I asked Wellink about gold. He said a goldstandard is not fair because some countries have accumulated a lot more gold than others and some countries have much more gold in the ground than others. But when I asked him what he would do if QE proved to be irreversible, in fear of a deflationary collapse, and QE III, IV, etc. would become apparent, he said that he would put his wealth in to physical gold because that would be the most prudent thing to do. I thought that was a remarkable revelation from the man who in early 2011 forced a Dutch pension fund via a court order to sell most of its gold because it was "not in the interest of the people that were depending on the fund". Gold was branded by him as too risky back then. Nevertheless an ex-central banker admitting that physical gold would be the best option to retain wealth if QE would go on, is something worth mentioning. It comes from the horses mouth. I wonder what Wellink is doing with his own money now, or was he long before my talk already invested in physical gold?
Like Greenspan, these men know what is going on. They are somewhat apologetic but that doesn’t clear them from the blame for their role in the destruction of the monetary system, no matter how much they downplay their part. They were not incompetent when they implemented all the rules necessary for the credit creation. They knew they were creating short term gain but long term pain. They were given status and were paid a handsome some of money, to take our system another step further to the edge of destruction. Question is to what degree they were operating as front men for the financial elite behind the curtain. The elite that doesn’t need to give lectures or write a book to earn some extra retirement money. To what degree is this coming catastrophe premeditated by them?