Everything Wrong at Once Jude Wanniski March 31, 1997

If all our political leaders decided all at once to drive down the stock market and the bond market, is there anyone who doubts they know how to do it? Why they would want to do it is as mystifying as why 39 men and women would want to commit suicide last week in a San Diego suburb. People do strange things when they are under strange pressures, and it is practically hopeless to try to psychoanalyze them for clues to their behavior. In the space of a few days last week, Fed Chairman Alan Greenspan and House Speaker Newt Gingrich, two extremely intelligent men I have known since the 1970s, did things that were destructive to the financial markets, the economy, and to their own standing in history. Suicidal, metaphorically speaking. Greenspan’s real reason for raising interest rates at a time when nobody can see the rhyme or reason for it may have to wait for his memoirs. Gingrich’s decision to come out of hiding with a suicidal announcement that austerity must precede tax cuts, which is the sequence that sent him into hiding during the 104th Congress, is as much a mystery to me. It can only be explained by understanding that each man has been under great pressures, with personal variables and calculations that we can only guess at. It may help to examine the political structures within which they made their puzzling decisions. Both men, after all, have only one vote in their respective institutions. In a real sense, they must lead by following, although ultimately they must choose between sets of risky alternatives in building coalition and consensus, at the Fed or in the House of Representatives.

Greenspan’s problem lies in the structure of the Federal Reserve System, as it has evolved since enactment of its enabling legislation in 1913. It essentially came into being because of the long monetary deflation that followed the Greenback era of the Civil War. The populist movement that felt crushed by the gold standard legislation of 1873 had wanted a return to the gold/silver system that had preceded the war -- which would have enabled debtors to pay their loans and taxes in cheaper silver. Instead, in 1913 all they got was an elastic gold standard, which the new central banking system would administer. To assure that political pressures on Congress would prevent the elasticity of the dollar to snap into easy money inflations, the government created a Fed that could make policy decisions independently of the executive and legislative branches. In each of the twelve Fed districts, the local business establishment has the ability to select presidents who are not subject to a confirmation process. The seven Fed governors who are appointed by the President and confirmed by the Senate have 14-year terms, also to insulate them from transient political pressures. To be honest, the Fed is a private corporation established by Congress, a corporation with a contract to manage the nation’s money.

As long as the Fed was required to use a fixed weight of gold as its unit of account, its power was circumscribed and narrow. It could create a bit more money here and there, but it would then have to reel it back in, or the dollar/gold link would require the Treasury to pay out some of its gold reserves to reel in the surplus dollar liquidity. The problem the populists did not expect in 1913 was a break in the gold link. Without gold or silver maintaining the dollar as “honest money,” the power to control the money shifted away from the Congress elected by the people to the private corporation controlled by the elites. In Thursday’s New York Times, University of Texas economics professor Jamie Galbraith, son of John Kenneth, argued that the only reason Greenspan raised interest rates last week was to line the pockets of the bankers the Fed represents. This is not quite correct. It is the business community that the banks serve that has the control of the twelve Federal Reserve banks. The influence, of course, tilts away from the worker to the owners, who complain when the unemployment pool dries up and they must compete for labor with offers of higher wages. They do not keep this a secret, but make open complaints. Last year, it was Minneapolis Fed President Gary Stern who urged an increase in interest rates to cool down the economy [“Fed Watch: The Minneapolis Hawk,” August 27, 1996]. The people to whom Stern responds are those he dines and golfs with, the captains of industry who become alarmed when their best workers quit to start their own companies or go to work for an upstart entrepreneur. This is the pressure Greenspan came under from a majority of the Fed Presidents last year, fending them off during the election campaign with implicit promises that the cooling would come this year. How much? We will have to see. But we should also be quite clear that the process really is antithetical to our constitutional democracy. In the present circumstance, it is also destructive to the economy and financial markets. This is why, in his heart, Greenspan would rather we were on a gold standard.

Why, though, does Newt mix the same poisonous brew for the Republicans of the 105th Congress as he did for the 104th, putting budget balance ahead of economic growth? Worse, he did so without consulting the wiser heads in the party, including Senate Majority Leader Trent Lott or House Majority Leader Dick Armey, or the nominal party leader, Jack Kemp. The answer lies in the rather obvious fact that he was psychologically crippled in the legislative wars of the last Congress and continues to be a deadweight on the party he serves. As a revolutionary at the barricades, Newt was all one could ask. It is out of such revolutionaries that Presidents are made. As a legislative leader, Newt has been a disaster from day one, moving onto a strange chessboard with no strategic planning. He allowed himself to be lured again and again into destructive ad hoc political choices in late 1994 and 1995, encouraged by the intellectual poseurs and court flatterers who crowd the Beltway, the same Beltway Boys who are now screaming for his head (as in the current Beltway Standard).

The first law of an individual or institution is the law of survival, and Newt now has clearly put his survival ahead of his party’s. He may not even realize it, but people often do things they believe are perfectly reasonable, but are in fact merely suicidal. Gingrich now is roaming around China, trying to figure out how he can keep his troops happy at the same time he keeps The Washington Post happy. He practically is wondering aloud how he can win back the favor of Beltway Bill Kristol while at the same time huddling for warmth against President Clinton, whose favorable ratings are double his own. Rep. Peter King [R-NY] is the point man in the drive to get rid of Newt before he makes even worse mistakes. We can only hope, for the sake of the nation and of the world, that Newt’s friends persuade him to turn over his gavel, his pet dinosaur, his ice bucket, and any sharp instruments he has in his possession. He has lost the confidence of his party and should lose a vote of no confidence if one is called. The ideal solution would be to have Rep. Henry Hyde [R-IL] come in as caretaker Speaker for the balance of this Congress. Outside the leadership, Newt could then work on his $300,000 ethical problem. If he succeeds, he could stand for re-election as Speaker in the 106th Congress. If he doesn’t, he will still have left a career on the net plus side.

There will likely be a challenge to Newt in the House GOP caucus after the Easter recess. Perhaps the House membership will keep Newt in a position of great power because he helped many of them raise money or solve some personal or political problem. That’s more or less why the folks from Heaven’s Gate in San Diego went along with the crowd. It’s not, however, what the American people expect of the men and women they sent to represent them in the House of Representatives. Newt’s friends do him no favors by propping him up. Even if he reverses on one issue or another, there is no telling what he will do next as he scrambles to save himself, auctioning off pieces of himself to one interest group or another.

The good news is that not everyone in Washington has gone batty. There are a few people who have kept their heads. President Clinton is among them, but he doesn’t seem to be interested in filling the leadership vacuum in the Republican Party. Until someone shows up who will, there is not much encouragement we can offer on the financial markets. When everything goes wrong at once in the political universe, Wall Street can’t be far behind.