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. To take the full measure of Greenspan’s culpability, we need to look beyond the disgraced public persona and see him within the broader sweep of his life and times. In Panderer to Power, author Frederick J. Sheehan delivers the first in-depth, critical biography of the man who, for nearly two decades, served as the world’s most powerful banker. Beginning with Greenspan’s formative years as a Depression-era kid from New York City, Sheehan traces his subject’s progress from his days touring America as a reed man with the Henry Jerome Orchestra in the 1940s through his emergence as one of America’s first celebrity economists to his ascent through the ranks of power in D.C. What emerges is a searing portrait of a shameless media hound who ferociously promoted his image as a straight-laced numbers cruncher, a Machiavelli whose political skills far surpassed his skills as an economist. Drawing upon a vast array of original sources, the author leaves little room for doubt: either the “economic genius of our time” was oblivious to the hazards of his irresponsible policy decisions or he knew full well what he was doing, but chose, as he had throughout his career, to put self-interest above the public good.

2. PANDERER
TO
POWER

3. This page intentionally left blank

4. PANDERER
TO
POWER
THE UNTOLD STORY OF HOW
ALAN GREENSPAN
ENRICHED WALL STREET AND
LEFT A LEGACY OF RECESSION
FREDERICK J. SHEEHAN
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London Madrid Mexico City Milan New Delhi
San Juan Seoul Singapore Sydney Toronto

5. Copyright © 2010 by Frederick J. Sheehan, Jr. All rights reserved. Except as permitted under the United
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6. To my father, who helped and encouraged me to write this book,
even when it seemed futile. My confidence and stamina
often flagged; his never did.

7. This page intentionally left blank

8. Contents
Author’s Note ix
Introduction to Part 1—Prelude to Power, 1926–1987 1
1 Early Years: The Education of Alan Greenspan, 1926–1958 9
2 The Dark Side of Prosperity, 1958–1967 19
3 Advising Nixon: “I Could Have a Real Effect,” 1967–1973 31
4 President Ford’s Council of Economic Advisers, 1973–1976 47
5 The 1980 Presidential Election: Boosting Carter,
Reagan, and Kennedy, 1976–1980 59
6 Parties, Publicity, Promotion—and Lobbying for the
Federal Reserve Chairmanship, 1980–1987 71
7 Lincoln Savings and Loan Association, 1984–1985 85
8 “The New Mr. Dollar”: Chairman of the Federal Reserve, 1987 95
Introduction to Part 2—The Pinnacle of
Power, 1987–2006 103
9 The Stock Market Crash and the Recession That
Greenspan Missed, 1987–1990 109
10 Restoring the Economy: Greenspan Underwrites the
Carry Trade, 1990–1994 121
11 Cutting Rates and Running for Another Term as
Chairman, 1995–1996 133
vii

9. viii Contents
12 The Productivity Mirage That Greenspan Doubted,
1995–1997 145
13 “Irrational Exuberance” and Other Disclosures, 1995–1998 157
14 In a Bubble of His Own, 1998 169
15 Long-Term Capital Management: A Lesson Ignored, 1998 181
16 Greenspan Launches His Doctrine,
November 1998–May 1999 191
17 “This is Insane!!” June–December 1999 203
18 Greenspan’s Postbubble Solution: Tighten Money,
January-May 2000 215
19 The Maestro’s Open-Mouth Policy, June–December 2000 227
20 Stocks Collapse and America Asks: “What Happens
When King Alan Goes?” 2001 237
21 The Fed’s Prescription for Economic Depletion, 1994–2002 251
22 The Mortgage Machine, 1989–2007 265
23 Greenspan’s Victory Lap: His Last Years at the Fed,
2002–2006 283
Introduction to Part 3—The Consequences of
Power, 2006–2009 301
24 The Great Distortion, 2006 307
25 Fast Money on the Crack-Up, 2006 315
26 Cheap Talk: Greenspan and the Bernanke Fed, 2007 327
27 “I Plead Not Guilty!” 2007–2008 337
28 Greenspan’s Hometown, 2008 349
29 Life after Greenspan, 2009– 361
Appendix: The Federal Reserve System 367
Acknowledgements 369
Index 371

10. Author’s Note
Following are some explanations of how words with broad general
meanings are used specifically.
Money is used in its broadest form. The distinctions between “money”
and “currency” (e.g., the dollar) are not addressed.
Bank refers to the large banks. There are about 8,300 federally char-
tered banks in the United States. Maybe 300 of these share responsibility
for the current financial debacle. If a different type of bank is discussed,
it is identified, such as a savings and loan. This also applies to hedge
funds and private-equity funds. Most of them stick to their knitting and
act honorably.
Banks, as they existed when they are first discussed (the 1950s), no
longer exist. For instance, at that time, the distinction between commer-
cial and investment banks was clear. Now, they cross each other’s lines of
business. The easiest description of these businesses is “financial institu-
tions.” It is comprehensive, but it is vague. Therefore, firms are described
according to the topic under discussion. For instance, Goldman Sachs
falls under a discussion of “brokerage firms,” even though it was (until
recently) an investment bank. Likewise, Goldman Sachs stands under
the “underwriters” umbrella when underwriters are discussed.
An economist—in this book—has received a graduate degree, prob-
ably a Ph.D., in economics.
Most of the economists discussed in this book are the public per-
formers from government–academia–Wall Street and appear on CNBC.
There are many economists who do very good work, but are not part of
ix

11. x Author’s Note
this book. The best are generally unknown to the public, since the only
means by which the public would learn of them would be through the
publicity they would receive if they joined the performers.
Acquisitions, takeovers, buyouts, and leveraged buyouts (LBOs). The
vocabulary can be confusing. This book only addresses the peak periods.
In the late 1980s, acquisitions (also called takeovers or buyouts) of
companies were often in the form of what were called leveraged buyouts.
The buyouts during this manic final phase were marked by much more
debt financing (bonds, bank loans) than equity financing (cash, stock).
The companies leading the buyouts were commonly (though impre-
cisely) called leveraged buyout or LBO firms. This period is discussed in
Chapter 6.
The largest of these “LBO firms” were actually private equity firms (for
example, Kohlberg Kravis Roberts & Co. (KKR). The “private” refers to
equity not traded on a public exchange. During the culmination of the
(circa) 2004-2007 buyout mania, some private equity firms were, once
again, using less equity financing and much more debt financing. For all
intents and purposes, these deals were LBOs. The media had a difficult
time deciding the correct vocabulary (since the amount of equity was
so small compared to the amount of debt) and firms such as KKR were
called private equity firms, or LBO firms, or sometimes buyout firms.
These terms are used interchangeably in Chapter 25.
This book stops at the peak. Sort of. Greenspan could not stop talking.
He continued his open-mouth policy into 2009. The more he reminded
the public of his existence, the more his reputation suffered. This belated
condemnation of Greenspan was inseparable from current events. Also,
Bernanke’s Federal Reserve is inseparable from the financial terrain that
Alan Greenspan bequeathed to him. I have not attempted to describe
this postbust period comprehensively, but only incidentally.
The book concentrates on the United States and mentions events
overseas only as they relate to the United States. The change in how
Americans thought and behaved over the past half-century has applica-
tions in other countries, but that is a very large topic.

12. INTRODUCTION TO PART 1
PRELUDE TO POWER
1926–1987
[O]peration in securities is not mainly a matter of reasoning at all.…
The stock market … is just a bunch of minds—there is no science, no
IBM machine, no anything of that sort, that can tame it.1
—Edward C. Johnson II, 1963, President, Fidelity Investments
Alan Greenspan’s success was partly due to good timing. He reached
maturity at mid-century. His strengths attracted an America in which the
process of thinking was changing. Substance was yielding to superfici-
ality. Matter surrendered to abstraction.
Money was becoming more abstract. In 1900, Americans, and citi-
zens of most western European countries, held a currency that was
convertible into gold. Americans who distrusted the dollar’s value had
the right to trade their paper for gold at a fixed, statutory rate. The value
of the dollar fluctuated within a narrow range, and the prices of goods
and services were more or less fixed.
Today, a dollar is worth whatever we wish it to be. It is a symbol, no
longer fixed to a disinterested, inert metal. Inflation is one result. The
successful careers of pandering politicians and clever opportunists are
another. An object that cost $1 in 1913 (when the Federal Reserve Act
was passed) costs $20 today. Inflation of money was integrated into the
1
First Annual Contrary Opinion Foliage Forum,” 1963, from Charles D. Ellis and James
R. Vertin (eds.), Classics: An Investor’s Anthology (Homewood, III.: Dow Jones-Irwin,
1988), p. 392.
1

13. 2 Prelude to Power
twentieth-century inflation of words, constant distractions, and media
promotion. Thus, there came the worship of celebrities simply because
they are celebrities and the success of one pandering politician and
clever opportunist: Alan Greenspan.
Alan Greenspan grew up in New York City, a metropolis that illumi-
nates the changing tendencies and aspirations of Americans. Greens-
pan spent his young adulthood near or on Wall Street. In 1945, New
York was the largest manufacturing city in the United States.2 It was a
city that made things. By 2008, it was no longer a working-class town.
Nor was it a middle-income town. In Manhattan, 51 percent of neighbor-
hoods were identified as being high-income and 40 percent as being low
income.3 Publicity and finance priced out the factories. The chairman of
Lever Brothers, a soap manufacturer, explained why, in the mid-1950s,
he moved his headquarters to Manhattan: “The platform from which to
sell goods to America is New York.”4
Lever Brothers sold an image; the image sold soap. Alan Greenspan
also sold an image—productivity—but it was debt that boomed until it
was too large to be paid back. From the time Greenspan was named
Federal Reserve chairman until he left office, the nation’s debt rose
from $10.8 trillion to $41.0 trillion.5 Greenspan usually referred to the
debt as “wealth.” This image matched what he was selling—first stocks,
then houses. He expanded money and credit; he oozed praise for
derivatives. The larger volume of credit shrunk the consequences of
immediate losses. It was easy to overlook the areas of the economy
that had shriveled and the instability of finance that had compounded
over the past half-century. In early 2007, this massive inflation of paper
claims, many of which were claims on abstractions rather than on mate-
rial assets, tottered, then collapsed. The first to go was the subprime
mortgage market.
Credit creation filled the void of falling production. In 1950, 59 percent
of U.S. corporate profits were from manufacturing; 9 percent were from
2
Robert A. M. Stern, Thomas Mellins, and David Fishman, New York 1960: Architec-
ture and Urbanism between the Second World War and the Bicentennial (New York:
Monacell: Press, 1995), p. 19.
3
Sam Roberts, “Study Shows Dwindling Middle Class,” New York Times, June 26, 2006.
4
Stern et al., New York 1960, p. 61.
5
Figures from end of years he entered and left office. “Beginning of office” is
December 31, 1987, from Federal Reserve Flow of Funds Account; “end of office” is
December 31, 2005.

14. Prelude to Power 3
financial activities. During the past decade (2000–2008), 18 percent of
profits were from manufacturing and 34 percent were from finance.6
After graduating from New York University in 1948, Greenspan took a
job at the Conference Board. He received a master’s degree from NYU
in 1950; then studied economics under Arthur Burns at Columbia Univer-
sity. The two became lifelong friends. Arthur Burns served as chairman of
the Council of Economic Advisers under President Dwight Eisenhower.
He would become Federal Reserve chairman under President Richard
Nixon. Greenspan headed President Gerald Ford’s Council of Economic
Advisers (CEA) when Arthur Burns was Federal Reserve chairman.
In 1953, investment advisor William Townsend recruited Greenspan;
the pair formed an economic consulting firm, Townsend-Greenspan
& Co. When William Townsend died in 1958, Greenspan became the
sole owner.
Greenspan is sometimes described as a disciple of Ayn Rand’s
Objectivist philosophy or as a libertarian. However, he may not even
have understood what Rand was talking about. Nathaniel Branden, who
was closest to Greenspan’s mind during this period, reflected decades
later: “I wondered to what extent he was aware of Ayn’s opinions.”7
Alan Greenspan’s contributions to group discussions were meager.
Alan Greenspan was not philosophical; he was practical and, either by
nature or by design, vague, remote, and impenetrable.
Greenspan used his Randian acquaintances to climb the political lad-
der. He joined Martin Anderson’s policy research group during Richard
Nixon’s 1968 campaign for the presidency. Anderson, who traveled in
Objectivist circles, later introduced Greenspan to Ronald Reagan.
Greenspan was riding the wave of the growing influence of accred-
ited economists. By the late 1950s, Greenspan’s stock market predic-
tions and economic forecasts were quoted in Fortune and the New York
Times. His forecasts were usually wrong, as are those of most econo-
mists. Accuracy was less important than publicity.8
6
Bureau of Economic Analysis (BEA) National Income and Product Accounts (NIPA)
Table 6.16B,C,D. Income by industry has been so erratic over the past decade that the
totals for 2000–2008 are averaged as a comparison to 1950.
7
Nathaniel Branden, My Years with Ayn Rand, (San Franciscio: Jossey-Bass, 1999) p. 160.
8
The pervasiveness of publicity was to smother American life, but it was not new; the old
may have been even bolder than today. From the pitch to sell the movie Alimony in 1924:
“Brilliant men, beautiful jazz babies, champagne baths, midnight revels, petting parties in
the purple dawn, all ending in one terrific smashing climax that makes you gasp.”

15. 4 Prelude to Power
Greenspan observed Federal Reserve Chairman William McChesney
Martin Jr. lose the fight against inflation. In 1957, Martin warned the Sen-
ate that the current inflation problem that had persisted since World War
II had been fostered by “economic imbalances,”9 of which the heaviest
hit were those who could not protect the value of their income or their
savings10—the “little man”11. Martin predicted that those with “savings in
their old age would tend to be the slick and clever rather than the hard-
working and thrifty.”
This was a foresighted summary of the period from 1957 to the present.
Greenspan seemed to understand that permanent, underlying infla-
tion supported asset prices. In 1959, he told Fortune that an “artificial
liquidity in our financial system” could power “an explosive speculative
boom.” According to the Fortune reporter: “Once the Federal Reserve
was set up, Greenspan reasons, the money supply never really got
short. With one eye necessarily cocked towards politics, the Fed has
always maintained a more than adequate money supply even when
speculative booms threaten.”12
The stock market rose from 1950 to 1966. The rise was validated by
the booming economy, but around the time Greenspan spoke to Fortune,
fancy finance was playing an expanding role. The conglomerate craze,
technology stock bubbles, and the huge growth of institutional money
management (mutual funds and hedge funds) would end in tears, but for-
tunes were made. By 1969, Greenspan was a millionaire.13 Greenspan
described his specialty to Martin Mayer as “statistical espionage.”14 Mayer
would later discuss Greenspan’s technique at greater length: “the book on
him in that capacity was that you could order the opinion you needed.”15
Richard Nixon was introduced to Greenspan during the 1968 cam-
paign. The candidate’s evaluation: “That’s a very intelligent man.”16
9
William McChesney Martin, Statement, Before the Committee on Finance, U.S. Senate,
August 13, 1957, pp. 9–10.
10
Ibid., p. 15.
11
Ibid., p. 23.
12
Gilbert Burck, “A New Kind of Stock Market,” Fortune, March 1959, p. 201.
13
Justin Martin, Greenspan: The Man behind Money (Cambridge, Mass.:
Perseus, 2000), p. 65.
14
Martin Mayer, New Breed on Wall Street: The Young Men Who Make the Money Go
(New York: Macmillan, 1969), p. 82.
15
Martin Mayer, The Greatest-Ever Bank Robbery: The Collapse of the Savings and
Loan Industry (New York: Charles Scribner’s Sons, 1990), p. 140.
16
Martin, Greenspan, p. 69.

16. Prelude to Power 5
Greenspan was nominated by Nixon as Council of Economic Advisers
chairman in 1973. Gerald Ford was president when Greenspan passed
his confirmation hearing in 1974.
This was an ideal time for a publicity-minded economist to enter gov-
ernment. It was the same year that Time introduced People magazine.
Greenspan, who had cultivated the press for years, maneuvered his
portrait on to the front cover of Newsweek—the first economist to gar-
ner such attention.17 Greenspan set an example that flattery could get
one anywhere.
The United States had been buying more than it produced since the
1950s. The dollars piled up overseas, and creditor nations demanded
that the United States redeem dollars with its gold reserves. The U.S.
government abandoned its promise to buy dollars for gold in 1971,
when it dropped the gold standard. The dollar then traded at whatever
people believed it to be worth, which wasn’t much.
By the late 1970s, doubters prevailed. The period was plagued with
higher inflation and a bewildered society. Many kept up by trading jew-
elry or houses. In 1980, the New York Times spoke to the economist:
“Alan Greenspan, the economist, has asserted that the translation of
home-ownership equity into cash available for consumer spending is
perhaps the most significant reason why the economy in 1975–1978
was consistently stronger than expected.”18 When the Nasdaq crashed
in 2000, the Federal Reserve chairman remembered this lesson.
After Ford left office, in January 1977, Greenspan was a celebrity
back in New York. He ran Townsend-Greenspan, but he seemed to
exert his greatest efforts outside the office. He dated Barbara Walters, a
television personality. He was a regular in the Times’s “Evening Hours”
and “Notes on Fashion” columns.
Greenspan is classified as a Republican. In practice, however, his flat-
tery was nonpartisan. When Ted Kennedy ran for the Democratic nom-
ination in 1980, Greenspan hosted a breakfast for the Massachusetts
senator in New York with “key Wall Street figures.”19 At the 1980 Republi-
can convention, Greenspan almost corralled Ronald Reagan into offering
him the position of treasury secretary.
17
Ibid., p. 127.
18
John H. Allan, “Thrift Adrift: Why Nobody Saves,” New York Times, February 17, 1980.
19
Steven Rattner, “The Candidates’ Economists,” New York Times, November 18,
1979, p. F1.

17. 6 Prelude to Power
Greenspan remained in the public eye during the early Reagan
years. He was called a “superstar” (New York Times) on the speak-
ing circuit, making 80 speeches a year for up to $40,000 a speech.20
He joined corporate boards. He spent most of his time in Washington.
Martin Anderson, who both worked in the Reagan White House and
had introduced Greenspan to politics back in the 1960s, remembered:
“I don’t think I was in the White House once where I didn’t see him sit-
ting in the lobby or working the offices. I was astounded by his omni-
presence.… He was always huddling in the corner with someone.”21
His record as an economic forecaster was unimpressive. Senator
William Proxmire castigated the nominee at Greenspan’s Federal
Reserve confirmation hearing in 1987. Proxmire recited Greenspan’s
economic predictions as CEA chairman. His Treasury bill and inflation
forecasts were the worst of any CEA director.22
There was little left of Townsend-Greenspan when he became Fed-
eral Reserve chairman.23
Proxmire had another concern with Greenspan’s nomination. The
senator thought that the growing concentration of financial power and
solvency of the financial system was heading down a dark road, toward
“increased concentration of banking.” 24 Proxmire’s fears proved cor-
rect. Two decades later, the highly concentrated financial system is
semi-insolvent.
Nobody contributed more to the concentration of finance than Alan
Greenspan. As Federal Reserve chairman, Greenspan, who had
recently resigned as a director of J. P. Morgan to take the post, permit-
ted Morgan to underwrite debt, then equity—the first time either had
been permitted by a commercial bank since 1933.
Luckily for Greenspan, his nomination preceded the public denoue-
ment of Lincoln Savings and Loan and of Charles Keating. Greenspan
had been hired by Keating to persuade the Federal Home Loan Bank of
San Francisco that Lincoln was in good shape. Greenspan succeeded
20
Martin, Greenspan, pp. 139, 276.
21
Jerome Tuccille, Alan Shrugged: The Life and Times of Alan Greenspan, the World’s
Most Powerful Banker (Hoboken, N.J.: Wiley, 2002, pp. 157–158.
22
Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 41.
23
Tuccille, Alan Shrugged, p. 154.
24
Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, p. 60.

18. Prelude to Power 7
even though Lincoln was one of Michael Milken’s top three junk-bond
customers among savings and loans (S&Ls).25
The rise of Milken—and of Greenspan—was attuned to the hec-
tic financialization of America in the 1980s. “Maximizing shareholder
value” turned out to be a veil for loading corporate balance sheets with
debt, a much cheaper and faster route to growth than from retained
profits. The market would not have accommodated such indiscretions
30 years earlier.
The capital foundations were growing unstable. Greenspan could
(and would) salute the economy’s flexibility. The economy was, in fact,
vulnerable to collapse and needed constant infusions of money and
credit to sustain it. Hands trembled at the word “recession,” and right-
fully so: balance sheets—government, corporate, and personal—were
no longer constructed to weather a storm. This was capitalism with little
respect for capital.
An error-prone but malleable Federal Reserve chairman was a pre-
dictable choice for the most influential financial position in the world.
25
Barrie A. Wigmore, Securities Markets in the 1980s, Vol. 1 (New York: Oxford University
Press, 1997), p. 286.

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