Man on the Margin: Alan Greenspan
Jude Wanniski
November 4, 1992

Until President-elect Bill Clinton tells us whom he will name as his Treasury Secretary -- the most important decision he has to make in the next several weeks -- the most important economic actor in the country could be Federal Reserve Chairman Alan Greenspan. There are a host of economic difficulties pushing their way to the front burners in Washington. How they are handled will help shape the contours of the early Clinton Administration. As the Bush economic team is in lame duck status, courtesy of the wisdom of the national electorate in yesterday's voting, the central policy anchor should be Greenspan. Whether he is, or not, is up to him. He could keep his head down on a narrow job description, fiddling with the fed funds rate. Or, he could fill the power vacuum in a way that earns him the gratitude of the President-elect, making him a considerable influence on economic policy on a range of important issues, foreign and domestic.

We have, first of all, the potential of a messy trade war with Europe, the result of the breakdown in talks between our Agriculture Department and the European Community over our soybeans and their oilseeds. The U.S. has twice won rulings by the GATT that our soybean farmers have been unjustly damaged by European oilseed subsidies. If the GATTs Uruguay Round of trade liberalization had been ratified, these rulings would have been binding. Unfortunately, the Uruguay Round coincided with a contracting U.S. and world economy, which can be traced to our inept U.S. Treasury Department the most influential finance ministry on the planet. As we have argued again and again, it is extremely difficult to get international bureaucrats to agree to trade liberalization when their national pies are shrinking. Nationalism prevails. Because of the oilseed fracas, we may very soon see President Bush impose prohibitively high tariffs on $300 million of wine, cheese and other farm goods, produced mainly in France. The EC has said it will immediately retaliate against U.S. goods. If any of this were to transpire, Bill Clinton would step into a poisonous international atmosphere next January. My suspicion is that the talks with the EC broke down precisely because the Europeans are playing lame-duck politics with us. If I were Clinton, constrained because we only have one President at a time, I'd appreciate it if Greenspan publicly suggested putting the issue on hold until next spring, when chances would be extremely high that the EC negotiators would relent in order to give the new President an early victory. The larger aim should be to expand the U.S. economy, trigger a worldwide economic expansion, and have the Uruguay Round signed in an atmosphere of good feeling and international well-being.

Second, we have the December 19th mini-timebomb in the banking industry. On that date, new capital requirements take effect, which as many as 100 smaller banks with total assets of $30 billion may not be able to meet. The regulators will be required to "shoot these banks one at a time," as one industry lobbyist puts it, during the following 90 days. As the banking industry overall is steadily regaining its health, and as the amount of money involved is not great, this is not something to keep us awake at night. It is not something the new President will relish, as he would have these summary executions going off right into his first 100 days. It would not be good for consumer psychology. The solution would be to postpone the deadline for one year, to December 19, 1993, to allow the strengthening economy to pull up all or most of these banks. In the debates, Governor Clinton at one point mentioned the December 19 deadline, indicating that he has been well briefed on its implications. If I were he, I'd appreciate having Chairman Greenspan publicly recommend the year's delay, which would take pressure off the chairmen of the Senate and House Banking Committees who might otherwise be forced to hew to the regulatory deadlines.

A great many people are going to do everything they can in the weeks ahead to persuade the President-elect that he should have his own man at the Fed. The Fed spokesman is already taking calls to deny that Greenspan will submit his resignation soon, to permit Clinton to have a co-terminous chairman. The chorus will be led by older Keynesian and monetarist academics, who know full well that Greenspan has been quietly moving the United States back to a gold standard. As always, the theoreticians who sing of easy money and currency devaluation are backed to the hilt by the industrialists who control the corporatist wings of both parties, and who owned Nick Brady. In 1981, Greenspan was thought to have been safe, having told the Federal Gold Commission that he was attracted to gold convertibility, but could not see how to get from here to there. He has since figured it out, folks. Milton Friedman's attack on the Fed in The Wall Street Journal October 23, Too Tight For A Strong Recovery," was nothing less than a shot at Greenspan and gold.

If I were Greenspan, I'd take some pains to explain Price Level Targeting to the President-elect, and also discuss the beneficial effects a gold index standard would have on long-term interest rates. In today's WSJ, SEC Chairman Richard Breeden declaims against the March 1989 Basel Rules of bank capitalization, which heavily favor bank "investment" in U.S. and foreign governments bonds over bank credits to small business. Governments are thought to be "riskless," although if banks had to mark to market their government bonds in the Carter years the heyday of the Keynesians and monetarists -- the landscape would have been covered with buzzards. If short-term interest rates pop up, Breeden warns, today's record bank profits will disappear along with the interest margin between banks' long-term bond assets and their cost of funds. With a gold price target, there is no reason for short rates to rise, even with rapid economic growth. Alan Greenspan is now in a position to explain to the President-elect how a gold-based monetary system can keep the buzzards away from the Clinton Administration. What we have going for us in this situation is that Clinton did not study economics in college, he has been governor of a small backward state which Nobel Prizewinners have shunned and where monetary theory has never been discussed, and he is a young policy wonk who learns fast.

Greenspan has to feel confident of his ground in his initial meeting with the President-elect. His core beliefs on money and taxes are his sword and his shield, which can protect the Fed and his fellow citizens from another round of managed money which more than anything else destroyed Richard Nixon and made Jimmy Carter a one-term President. We know there are people close to the President-elect who believe this. In August, I wrote that "It would not surprise me to see Clinton soon defend Greenspan's Fed against the continued onslaughts of Nick Brady, who this week joined Democratic inflationists in Congress in attacking the independence of the Fed." ("Three Days in Washington," August 7, 1992.) In fact, Clinton did exactly that in his first debate, which astonished those who expected he might simply pile on Greenspan. In advance of this first unscheduled meeting with the President-elect, we expect Greenspan would do his best to get the price of gold back to $350, to demonstrate how happy the bond market becomes when gold is where it should be. Clinton, who has read plenty of stories about how bad he is going to be for bonds, should appreciate a big bond rally as a fanfare to his inaugural. It would make him think nice things about Greenspan.

Nobody is going to be able to talk Clinton out of national industrial planning schemes, "investments" in this, that and the other "technologies of the future." A few good deeds, though, will offset a multitude of sins. This is where Greenspan can make a difference. As I mentioned Monday in "A Vote for Bush, Barely," he is prepared to tell the President-elect that it would be terrific if, right off the bat, President Clinton could persuade Congress to index capital gains taxes historically. Clinton is philosophically attuned to this position. He has told business audiences that he is opposed to taxing inflation gains. Academic economists will oppose the idea on the grounds that it won't do diddley and will be expensive. If Clinton were to do it, perhaps trading off capgains at death, he would have a wondrous fanfare in the stock market to accompany the fanfare in bonds. These market advances would presage an expanding U.S. economy, triggering an expansion abroad, and a happy conclusion to the Uruguay Round. How delightful.

The President-elect should have this meeting with Greenspan sooner, not later. Once he has named a Treasury Secretary, Clinton's powers become diffuse, especially if his choice is a strong-willed, dominant personality. Will it be Chairman of Senate Finance, Lloyd Bentsen, the latest name in the hopper? The word is he wants it. Hmmm. Of the names bandied about, Paul Volcker would best be able to work with Greenspan on rebuilding the international monetary system. Even Volcker, though, has little experience with the dynamics of entrepreneurial capitalism. He's never met a payroll. He's a government guy all the way. Greenspan is just the fellow to get things off on the right foot for Clinton. He knows the ropes. He's seen it all. In this first exciting day of America's Adventure with Clintonomics, Greenspan is the man on the margin.