Currency Wars_ The Making of the Next Global Crisis - James Rickards [55]
This low rate policy was justified initially as a response to the challenges of the 2000 tech bubble collapse, the 2001 recession, the 9/11 attacks and Greenspan’s fears of deflation. Yet it was primarily fear of deflation that caused Greenspan to keep rates low for far longer than would ordinarily be justified by a mild recession. China was now exporting its deflation to the world, partly through a steady supply of cheap labor. Greenspan’s low rate policy, partly intended to offset the effects of Chinese deflation in the United States, sowed the seeds of the full-scale currency war that emerged later in the decade.
Greenspan’s low rates were not only a policy response to potential deflation; they were also a kind of intravenous drug to Wall Street. The Federal Open Market Committee, the body that sets the fed funds target rate, was now acting like a meth lab for hyperactive deal junkies on the Street. Lower rates meant that all types of dubious or risky deals could begin to look attractive, because marginal borrowers would ostensibly be able to afford the financing costs. Low rates also set off a search for yield by institutional investors who needed higher returns than were being offered in risk-free government securities or highly rated bonds. The subprime residential loan market and the commercial real estate market both exploded in terms of loan originations, deal flow, securitizations and underlying asset prices due to Greenspan’s low rate policies. The great real estate bubble of 2002 to 2007 was under way.
In September 2002, just as the low rate policy was taking off, Greenspan gained an ally, Ben Bernanke, appointed as a new member of the Fed Board of Governors. Bernanke’s deeply rooted fear of deflation was even greater than Greenspan’s. Bernanke would quickly establish his deflation-fighting credentials with a speech to the National Economists Club in Washington, D.C., just two months after being sworn in as a Fed governor. The speech, entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” was widely noted at the time for its reference to Milton Friedman’s idea of dropping freshly printed money from helicopters to prevent deflation if necessary, and earned Bernanke the sobriquet “Helicopter Ben.”
Bernanke’s 2002 speech was the blueprint for the 2008 bailouts and the 2009 policy of quantitative easing. Bernanke spoke plainly about how the Fed could print money to monetize government deficits, whether they arose from tax cuts or spending increases, saying:
A broad-based tax cut . . . accommodated by a program of open market purchases . . . would almost certainly be an effective stimulant to consumption.... A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money....
Of course . . . the government could . . . even acquire existing real or financial assets. If . . . the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open market operations in private assets.
Bernanke was explaining how the Treasury could issue debt to buy private stock and the Fed could finance that debt by printing money. This is essentially what happened when the Treasury took over AIG, GM and Citibank and bailed out Goldman Sachs, among others. It had all been spelled out by Bernanke years earlier.
With Bernanke on the board, Greenspan had the perfect soul mate, and in time the perfect successor, in his antideflationary crusade. The