http://www.amconmag.com/2006/2006_02_13/feature.html ebruary 13, 2006 Issue Copyright Â© 2006 The American Conservative Eat, Drink, and Buy Merrily Celebrated Fed Chairman Alan Greenspanâs true legacy is one of debt and fiscal deceit. His successor aims to follow. by Bill Bonner Alan Greenspan, the most famous public servant since Pontius Pilate, leaves his post on Jan. 31. We stand back in awe and wonder. Is it not to him that we owe this long stretch of calm and prosperity, known to economists as the Great Moderation? Has he not ably served six administrations, tending the empireâs money? Did he not win a host of awards, including the prestigious Enron Prize for Distinguished Public Service? If nothing else, the American empire has been a more entertaining place since Greenspan took over at the Federal Reserve 18 years ago. Without sinking into the esoterica economica of it, the Fedâs role is to maintain financial discipline, to âtake away the punchbowlâ before things get out of control. Greenspanâs approach has been different. Like a naughty schoolboy, he adds more gin. As he leaves office, financiers are tap dancing on tables on Wall Street, after passing out $21 billion in bonuses. In California, realtors slap each other on the back after another year of double-digit house price gains. And over on the other side of the world, Chinese manufacturers canât remember ever having it so good. Americans gave him the Medal of Freedom. The British made him a knight. The French inducted him into the Legion of Honor. To his peers he is the âgreatest central banker who ever lived.â To the public, his powers are almost magical. So how did an appointed U.S. public official achieve such popularity? The answer is simple. He threw the biggest party the world has ever seen. Setting short-term lending rates first below market levels and then even below the rate of consumer price inflation, his easy-money policies stifled a much-needed recession in 2001, stirred a real-estate bubble on both coasts, coaxed a generation of Americans deeper into debt, juiced the price of oil up 500 percent, and helped re-elect two presidents and hundreds of members of Congress. From the time he entered the Fed on Aug. 11, 1987, to the time he leaves it, the tap has never stopped running. Since 1987, outstanding home-mortgage debt has jumped from $1.8 trillion to $8.2 trillion. Total consumer debt has gone from $2.7 trillion to $11 trillion. Household debt has quadrupled. In 2005, the party got so hot that the neighbors threatened to call the police. Real wages (adjusted for inflation) went down for the second year in a row, leaving people with little choice. If they wanted to continue living in the style to which they had become accustomed, they had to borrow. Spiders who tried to weave their webs in the doorways of Americaâs lending institutions got no rest in â05; the savings rate went negativeâfor the first time since the Great Depression. And government debt exploded too. The feds owed less than $2 trillion in the second Reagan administration, a figure that had been almost constant for the previous 40 years. But since Greenspan has been at the Fed, the red ink has gushedâto over $8 trillion. Greenspan must have had a special place in his heart for politicians of both parties; he was always ready to back them with as much fresh credit as they required. During the two terms of George W. Bush, the federal government has borrowed more money from foreign governments and banks than all other American administrations put together, from 1776 to 2000. And more debt will be added in the eight Bush years than in the previous 200. If you distributed the cost of the governmentâs programs, promises, and pledges to the voters, along with the nationâs private debt, the typical household, and the nation itself, would be broke. On Greenspanâs watch, the homeland also lost ground to its rivals. The trade deficit more than quadrupled from $150.7 billion to $661.8 and will reach $830 billion in 2006. When he came to power, the U.S. was still a creditor. Now it is a debtor, with more than $11 trillion worth of American assets in foreign hands, a more than 500 percent increase since 1987. Yet the maestroâs financial reign has entered the history books as the Great Moderation, though there is nothing in the slightest bit moderate about Americaâs binge borrowing. And still, it is widely believed that the drunken revelry, the sturm und drang, the boom and bust of the markets have all magically vanished. It is as though a marching band had switched to elevator music, with the parade that normally follows replacing its clowns and freaks in gaudy get-ups with accountants, economists, and investment quants with laptop computers. The thrill has gone out of the whole thing. But so, supposedly, has the risk. Now the only risk is making a bad calculation. That is said to be Greenspanâs real legacy; he has finally made central banking work. And his successor, Ben Bernanke, pledges not to mess it up. By targeting inflation, he says, he will be able to make the financial world even more stable and predictable. And if the party ever starts to wind down, he has told fellow economists that he will drop money out of helicopters, if necessary, to keep it going. Here is where the gods must start holding their sides and rolling on the ground. This is not the first time they have seen this movie, but they laugh hard every time. Since 1971, the world has had an âexperimentalâ financial system, with currencies backed by nothing more than the full faith and credit of government. Too bad, but history shows that government faith and credit always runs out, usually sooner than you expect. There are no counterexamples. Even the most successful empires in history have not been able to make full faith and credit stick. The Roman Empire followed a, shall we say, classical model of imperial finance: it was built on a foundation of forced tribute. As the empire matured, force gave way to fraud. A kind of habitual cheating that the Romans called consuetudo fraudium crept into every transaction. First, the imperial money lost its value. Then, eventually, the empire itself was lost. Nero had no helicopters, but he knew Bernankeâs trick. In AD 64, he decreed that the number of aureus coins minted from a pound of gold would increase from 41 to 45, making each coin about 10 percent less valuable. The silver denarius, meanwhile, lost 99.98 percent of its value in the five centuries before the sacking of Rome.