Greenspan on Out-of-Control Money and the Future of U.S. Capitalism
Burkett, Paul, Monthly Review
Federal Reserve pronouncements usually yield little insight into the real functions and limitations of monetary policy or into ruling-class thinking on the prospects for U.S. capitalism. During financial crises, the Fed may affirm its "readiness as a source of liquidity to support the economic and financial system," as Chairman Alan Greenspan put it following the October 1987 crash. But even such emergency bulletins are more designed to allay public fears and boost market confidence than to inform citizens about the inner workings of the system and Fed policy. They are somewhat akin to the assurances of "no danger to the public" routinely churned out by the authorities after nuclear-reactor accidents. In more normal times, Fed statements utilize the jargons of market analysts and neoclassical economists which have grown increasingly similar in the recent years of exploding finance and stagnating productive activity. This reinforces the aura of elite expertise and control separating Fed personnel and operations from the general public.
In this setting, it is not surprising that Greenspan's announcement last fall of a new long-run guideline for Fed policy, while duly noted by the business press and hardcore Fed-watchers in academia and economic consulting firms, caused little if any public stir. ["Statement to the Congress (July 20, 1993)," Federal Reserve Bulletin, September 1993, pp.849-855.] In one sense, this was as it should have been. Greenspan's statement did not follow on the heels of a major short-term financial crisis, and its practical implications for the Fed's day-to-day operations were minimal. Yet on a different level it revealed a great deal about the long-run socioeconomic crisis we are facing and the type of mainstream response likely to become more common in the near future as ruling-class spokespeople redefine the reality of crisis in line with the changing requirements of capitalist ideology.
The first theme that jumps out of Greenspan's statement is his admission that: (1) the Fed cannot control the quantity of money in the economy; (2) there is no stable or predictable relation between the quantity of money and the economic variables which are supposed to be the ultimate targets of Fed policy. According to Greenspan, the "monetary aggregates" have been showing "persistent and sizable deviations . . . from expectations," and the "historical relationships between money and income and between money and the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy." Greenspan's frank conclusion that money must be "downgraded as a reliable indicator of financial conditions" is notable because the Fed, supported by most mainstream economists, has long thought and taught that it influences economic conditions primarily by controlling the money supply.
If money is no longer a reliable indicator, what should replace it as a policy guide? This brings us to Greenspan's second main theme:
In these circumstances, it is especially prudent to focus on longer-term policy guides. One important guidepost is real interest rates. . . . In assessing real rates the central issue is their relationship to an equilibrium interest rate, specifically the real level that, if maintained, would keep the economy at its production potential over time. . . . Maintaining the real rate around its equilibrium level should have a stabilizing effect on the economy, directing production toward its long-term potential.
Even before delving further into the equilibrium interest rate, we can see that the significance of this new approach depends on how Greenspan relates the economy's long-term potential to current circumstances. Crudely stated, if the new interest rate guidepost is to keep production at its long-term potential, the Fed must pursue some combination of two options: (1) move current circumstances, i.e. the actual performance of the economy, closer to the system's potential (however defined); (2) redefine long-term potential to make it conform more closely to current circumstances. …