Shock Therapy at
The New York Times
Jude Wanniski
September 21, 1993


As we contemplate the turmoil in Moscow and the financial markets today, I find myself thinking about "money illusion," about The New York Times, and about Steven Greenhouse, its financial correspondent in Washington. Greenhouse is not a bad fellow or an incompetent reporter, but he's turned into a menace. As a Paris correspondent in the late '80s, he produced exemplary dispatch, on both politics and business. He's been hopeless, though, since he arrived in Washington to cover economics and the Federal Reserve. I cringed last Thursday when I saw his piece on Page D-1 of the Times, "Fed Fears a Market Bubble If It Lowers Interest Rates," knowing it would mean trouble. The article tells us Fed Vice Chairman David Mullins and Gov. Lawrence Lindsey believe it would be unwise to lower interest rates at this time because "It could encourage a speculative bubble in stocks and bonds."

The story is absolutely preposterous, as neither Mullins nor Lindsey believe lowering interest rates would encourage a speculative bubble in the financial markets. Nowhere in the article are they quoted as saying so. What the Fed governors do think is that an unnecessary injection of reserves into the banking system would first push up the price of gold, then other commodities and real property, but that as this was happening, the stock and bond markets would decline! As far as I know, there is nobody at the Fed who believes the central bank has the power to produce a boom on Wall Street -- a "bubble" boom or a real one -- except insofar as sound money removes one element of risk to capital. It is precisely this wisdom at the Fed that has steadily brought long-term interest rates down, even as the government mismanages fiscal policy in ways that add risk to capital. It was this they had in mind when Greenhouse suggested a bubble in asset prices, but he translated this into a Wall Street bubble. In response to a query, we're told Mullins doesn't even recall the stock market being mentioned in the interview. The effect of the Greenhouse story, though, was to add monetary risk to capital, helping propel the long bond yield from 5.97% Thursday morning to 6.09% at the close yesterday.

Why? We find in yesterday's Times a follow-up from Greenhouse, "White House Aides Reject a Fed Rate View," in which the President's economic advisors, who until now have kept their hands off the Fed, are quoted as denouncing the Fed for these silly bubble ideas. Greenhouse even has the gall to report that "Traders said the central bankers' remarks helped push down the bond market late last week." Bonds fell again after the market contemplated this new tension between the White House and the Fed, which led to this morning's Times headline, "Bond Rally Appears to Near End," smothered by the hot air of the Greenhouse Effect. Unless Chairman Greenspan can stamp this out, we will expect to soon see an escalating attack by the White House on the Fed for choking off the economic growth that was, ahem, supposed to flow from the new tax increases.

Early this year, remember, we advised you to pay no attention to the February 20 front page Times story by Greenhouse which asserted that Fed Chairman Alan Greenspan, in testimony before the Senate Banking Committee the previous day, had endorsed the Clinton tax-and-spend budget and indicated he would offset its contractionary effects with easy money. ["Clintonomics Watch: Keep Calm," 2-22] Greenspan had specifically told the committee he hadn't even seen the plan beyond its outline, and, as I wrote, "more importantly, he did not give the committee Democrats the slightest indication that he would offset an economic contraction by flooding the banking system with reserves." Indeed, he patiently lectured the committee, with Greenhouse sitting at the press table, on why the bond market would collapse if bondholders got the slightest whiff that the the Fed would go that route. The several Fed governors I spoke to that week were appalled that Greenhouse would write "not what he heard, but what he wanted to hear," as one of them put it. I advised them to straighten out Greenhouse, as his error would otherwise be stamped into conventional wisdom. A Fed spokesman called Greenhouse and did exactly that, and I flew to Washington and took Greenhouse to lunch, figuring the young man simply needed a little help in this arcane area. There was, though, no amendment or correction in the days and weeks that followed, and to this day there are important people all over the world who still think Greenspan promised to inflate the U.S. economy back to health.

The issue back then was exactly the same as in the "bubble report." Greenspan, in effect, advised the Senators that after more than 20 years of monkeying around with the currency, money illusion is dead as a doornail. What is money illusion? It's the Keynesian notion that creditors can be fooled into accepting a cheaper currency for their debts. It doesn't apply merely to bondholders, but to all people who have contracted to give up something now in expectation of getting paid later -- including the work force. The editors of the Times probably don't realize it, but money illusion has been a staple of Times editorial policy for three decades, which is why it is not surprising that they don't want to hear what Greenspan, Mullins and Lindsay are telling them. A good deal of the human misery in the world, after all, has flowed from the concept of money illusion, which undergirds policy at the IMF, the World Bank, and even, to this day, the U.S. Treasury.

Observe now the government of Poland changing hands once again this week, with the voters reaching out to the old communists to come back and save them from the miseries of Keynesian capitalism. The same forces have spilled into Russia today, with Boris Yeltsin and the Russian Parliament dissolving each other in a way that will almost surely force the military to choose up sides. These are all the bitter fruits of Times editorial policy. I did err several weeks ago in reporting that it was Peter Passell of the Times who urged Poland to harken to Harvard's Jeffrey Sachs, the Dr. Frankenstein of "Shock Therapy." It was in fact Michael Weinstein, currently the chief economics editorial writer of the Times. Weinstein tells me it was he who boosted his friend Sachs, who then counseled successive governments in Warsaw into major doses of money illusion, via currency devaluation. The Times then promoted him with Yeltsin, and Sachs supported Yegor Gaidar as Russia's economic architect and chief shock therapist.

The events in Russia will soon drive a stake through the heart of the shock therapists in Moscow and Eastern Europe, I think, as I doubt the Russian army will back Yeltsin and Gaidar for another round. The Times is still in denial, celebrating Gaidar's return to power last week, which precipitated this latest crisis. It has been their version of money illusion that has been driving the people of Russia back into the arms of the "communists." The ruble had stabilized through the summer, but as I predicted in June, it began falling to pieces again as summer ended -- equilibrating with an oil price that Sachs has coaxed from R120 per metric ton to R38,000, and which he now tells Polyconomics, furiously, is still too low! Notice the IMF this week advised Moscow that unless it does what it's told, it will not get the $1.5 billion it has been promised over and over again, like a piece of cheese on a string. This, too, nudged Moscow toward civil chaos, as the "communists" in Parliament were not amused.

Lane Kirkland of the AFL-CIO told me two years ago that Sachs had become the most hated man in Poland, and he wished he and Solidarity had never heard of him. You can say what you will about Karl Marx, but he was death on devaluation, which is why the people of China opted for Mao Tse Tung in 1949, and why today they are fanatical in maintaining the value of their money. The Times is beside itself with outrage at the prospect that the 2000 Olympics might this week be voted to China, on the grounds that it is denying its people the human right to live in misery and fear, as people are in Poland, Russia, Eastern Europe and New York City, which, after all, is the chief recipient of economic advice from The New York Times.

What's happening in Moscow is certainly scary, given even the  small prospect that the military might divide, producing civil war. Our estimate is that the unified command will sort things out and a military government will get control long enough to get the economy out of the mess it is in and make a renewed effort at democratic capitalism. This episode might also be just the shock therapy the Times needs to get out of the mess it is in, to make a renewed effort at democratic capitalism.