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Who’s Done More Damage, Bernard Madoff or Alan Greenspan?
January 7th, 2011

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Exactly two years ago today, I received a phone call from hell. My financial adviser and close friend, with whom I had invested all of my family’s life savings, called to tell me that overnight we had lost 95 percent of our net worth. It turned out that our life savings had been invested in a fund that had been handled by Bernard Madoff. Because we weren’t direct investors, there was no hope of our ever recovering a penny.

Tragically, what happened to my family overnight is happening to many, many people today, only more slowly. It is one of the darkest nightmares of our times that so many people are losing their homes, their pensions, their jobs, their savings, and any semblance of financial security. The official unemployment rate is 9.8 percent, but if you include the underemployed (those who have part-time work but can’t find a full-time job, though they need one), and add in also the huge numbers of unemployed people who have given up looking for work because they feel the search is hopeless, the figure rises to above 22 percent. There are already 19 million vacant homes in the country, with another 10 million foreclosures in the pipeline. The average household credit card debt is nearly $16,000. And the U.S. dollar, which has been the world’s reserve currency for almost 100 years, is losing value and appears increasingly unstable.

How did we ever get into such a mess?

Last year, a Newsweek poll found Bernard Madoff to be the most despised person in history. Having been a victim of his fraud, I understand. But some people think that when it comes to wreaking financial havoc, Madoff was a piker compared to the man who was dubbed history’s greatest Federal Reserve chairman upon his retirement in 2006 — Alan Greenspan.

Why? Because Greenspan may be more responsible than any other single human being for the disastrous developments in our nation’s economy. Author Matt Taibbi doesn’t mince words on the subject. In his new book about how bubbles and bailouts have decimated the U.S. economy, he none-too-subtly calls Greenspan “the biggest asshole in the universe.”

Madoff lived high and mighty as a billionaire as long as he kept his Ponzi scheme afloat. Greenspan was revered as long as he kept the party going for the ultra-rich, as long as he kept one bubble after another inflated. But with every party, there’s always the morning after. The collapse of Madoff’s Ponzi scheme bankrupted not just tens of thousands of families, but many charitable foundations, nonprofit organizations, and hospital and school endowments. The bursting of Greenspan’s bubbles, on the other hand, decimated the entire U.S. economy, bankrupting tens of millions of families.

In his biography of Greenspan, appropriately titled Greenspan’s Bubbles, MSN Money columnist William Fleckenstein recounts the devastating series of bubbles and crashes that directly ensued from Greenspan’s policies. The Savings and Loan scandal was the first tip-off. As a paid consultant for Lincoln Savings and Loan, Greenspan was an ardent advocate of Savings and Loan deregulation. When Lincoln’s parent corporation went bankrupt in 1989, more than 21,000 mostly elderly investors lost their life savings.

This was, however, peanuts compared to what was to follow. With Greenspan as the head of the Federal Reserve from 1987 to 2006, and with his policies running the show, the tech bubble was inflated only to burst in 2000, closely followed by the real estate bubble that began to burst in 2007, and the credit bubble that burst in 2008.

Greenspan’s policies contributed massively to each of these bubbles, and thus to their inevitable collapse. Like Madoff’s Ponzi scheme, they provided illusory returns, not based on any real goods, services or value provided, but rather on the attraction soaring returns have for new entrants into the game.

The costs of each of these market collapses are measured not in the billions but in the trillions of dollars, and they’ve come so quickly on the heels of one another that we may think of them as business as usual. That’s why it’s important to grasp that, prior to Greenspan’s arrival, the U.S. had been nearly bubble-free for more than 50 years. The only exception? A brief mania for gold and other precious metals in late 1979 and early 1980.

Prior to running the Federal Reserve, Greenspan headed the National Commission on Social Security Reform. The original intent behind Social Security was generous and benevolent. At the height of the Great Depression, our society resolved to create a safety net that would pay modest benefits to retirees, the disabled, and the survivors of deceased workers. It was the formalizing of the long-respected tradition of supporting elders and others who are less able to fend for themselves. The idea was to create less fear and more economic security.

But once Greenspan got involved, things immediately began to change. His policies triggered a staggering transfer of wealth from the lower and middle classes into the hands of the richest members of society. It is not an exaggeration to say that the resulting concentration of money and power in the hands of the few is undermining the economy, corrupting democracy, deepening the racial wealth divide, and tearing communities and families apart.

It was primarily due to Greenspan’s proposals that the Social Security tax rate went from 9.35 percent in 1981 to 15.3 percent in 1990. Social Security taxes are borne primarily by the lower and middle economic classes. They only apply to wage income, not to investment income, so people who work for a living pay through the nose while those who invest for a living pay not at all. Fair, right?

Social Security taxes are currently capped at about $106,000. This means that a married couple who earns $106,000 a year will pay more than $16,000 in Social Security taxes. They will pay the same amount that Oracle CEO Larry Ellison and his wife will pay, even though Ellison’s income over the past 10 years wasnearly $2 billion.

A couple near the bottom of the economic ladder, earning $30,000 a year between them, obviously has nothing to spare, yet they pay $4,590 in Social Security taxes. Billionaire investors and hedge-fund managers, meanwhile, may pay nothing, because they can usually structure their income so that none of it is subject to Social Security or Medicare taxes.

The policies that were implemented following the recommendations of Greenspan’s commission have produced, in the last 20 years, $1.7 trillion in new taxes borne almost entirely by the lower and middle class. There might have been some justification for this if the amount of benefits you would eventually receive was directly related to the amount of money you paid into the pool, and if the money was set aside for future Social Security recipients. Prior to Greenspan’s reforms, that’s essentially how things were done. But thanks to his innovations, this is no longer the case. The money is no longer held separate from the rest of the budget, and has been used instead for other government spending.

It was George W. Bush’s first Treasury secretary Paul O’Neill who publicly announced the bad news. “I come to you as managing director of Social Security,” he said. “Today we have no assets in the trust fund. We have the good faith and credit of the United States government that benefits will flow.”

It’s hard to avoid noticing that Social Security is increasingly taking on some of the characteristics of a legally-mandated Ponzi scheme.

Bernard Madoff was a liar and psychopath who recklessly stole tens of billions of dollars. He will spend the rest of his pathetic life in prison. Alan Greenspan, on the other hand, is still widely admired. Not that long ago, he was almost considered a candidate for Mt. Rushmore. He was certainly the most influential proponent of financial deregulation in the last century.

But a generation from now, who will history judge with more scorn?

These comments are moderated to support respectful, non-commercial, and open-minded dialogue.

15 Responses to “Who’s Done More Damage, Bernard Madoff or Alan Greenspan?”

  1. jim golding says:

    way too focused on Greenspan. The most important component of the real estae meltdown was the government, mostly at the hands of liberals starting with FDR, then Carter et al, deciding that everyone should be able to enjoy the American Dream, home ownership. it got to the point of people qualifying for a loan using welfare checks. low interest rates encouraged buyers to only care about monthly payments rather than the actual cost of the home – fueling higher prices, then the fraud on wall street and the selling of sub-prime loans misrepresented to banks was the last straw. it had many components, the most importatn of which is the liberal idea that everyone deserved to be able to own a home – it was unrealistic and ultimately backfired bigtime. like your health advice but politically you sound like a lock step liberal.

  2. Robert says:

    Ayn Rand acolytes should search for “Angry Aussie Ayn Rand Acolytes” and watch the video.

  3. Milha Mann says:

    Thanks John for calling it as it is and as it was! Alas nothing changed. The infantiles and troglodytes disciples of the Ayn Rand philosophy, (I enjoyed Ayn Rand when I was 13,it was another good feel Western romance…but a philosophy??? in face of all we now know about cooperation and organic evolution…Give us a break..!) are now wholly represented by a political party. A party that does not believe in government (Our collective brain, the evolving brain of Gaia) and is hellbent on destroying it. Incessantly so when they are outside of power and subversively and insidiously so when they gain power.

    Again, thanks for your articles and your contributions to society!

  4. pravin says:

    those who think alan g’span is a ayn rand head need to get their heads examined.he WAS one until he became a central banker.a central bank would not even exist in ayn rand’s world.the fed would not be able to print infinite money in a gold standard based world which ayn rand wanted.
    the only solution for you americans is to vote in ron paul -someone who understand what the fed reserve is about.
    those blaming greed etc have no understanding of human nature which has been be the same since centuries.what changed is the incentives provided by the idea that the govt and the us fed reserve will be able to centrally plan for the rest of us.ie socialism. yes ,g’span acted like a socialist while spouting free markets.in a free market banks that lend like there was no tomorow would be bankrupt.the left had more cheerleaders of the bailouts than true libertarians like ron paul

  5. Michael Jones says:

    John,
    Thank you for your insight and I am sorry to write that NOTHING has changed since those dark days of two years ago.
    The present policy of the Federal Reserve and the Obama White House is geared to continue to enrich the Financial Industry, which they have close ties.
    One book, in particular, is worth reading,
    “Crisis Economics; A Crash Course in the Future of Finance” by Nouriel Roubini and Stephen Mihm.
    Mr. Roubini is a renowned economist and is noted for his prediction of the recent bubbles and was named by Foreign Policy as one of the “Top 100 Public Intellectuals”.
    The reason way I am suggesting this book is he not only looks into the future and likely outcomes that will occur down the road because of the curent actions or lack of them.
    Remember fiat money is just that, only worth what we think its worth! Beware

  6. Rocky says:

    Social Security benefits replace a higher percentage of a low income person’s wages than a high income person’s wages. That has been the case since benefits were first paid around 1940. It is a subsidy from higher wage (and stock option) people to lower wage people, from single people who die at 60 and collect no benefits to married couples with non-working spouses who live into their 90′s. The system is riddle with rules that favor some and punish others. It also discriminates against the partners in gay relationships. If one partner dies, there are no survivor benefits for the survivor.

    Instead of blaming only Alan Greenspan, blame the American voters for the bad choices they made at the polls in the past dozen years. Once upon a time, we were actually on the path to eliminating the National Debt (when Clinton left office). Several rounds of tax cuts and three wars later, we have condemned the children of America to a heavy financial burden. So much for family values.

  7. Dale says:

    Part of what is crucial to learn from all this is that we need to be mindful and informed about exactly what we are investing in—so many times the tendency is to turn things over to an “expert” and say “get the highest return that you can for me on my money.” If we take charge of our own financial life and make decisions based on our deepest values, we may choose to invest in certificates of deposit offered at a local credit union. The return is not huge, but the money is insured and the credit union uses it to help people in our own community. We can also invest our money in the solar industry, and other kinds of enterprises that are helping us to live more sustainably and heal the planet. A lot of what happens in our own financial lives and in the national economy is a function of our personal choices. It has been said many times that we vote with our dollars, and this is no less true when we give our dollars to some investment plan than it is when we choose which foods or cars to buy or not buy.

  8. Ryan Eliason says:

    I so appreciate your take on these issues John! It’s amazing how people like Greenspan get into power and are still respected even after they screw things up so badly. The bottom line is that too many people don’t understand why the economy is hurting. Thank you for doing your part to educated people.

  9. Craig Bear says:

    Two items in your article that need clarifying.

    First, Madoff stole between $10 and $15 billion, the rest of the “tens of billions of dollars” was not real money, but phony interest, made up, never existed in the first place.

    Second, you make it sound like the Social Security Tax is regressive with the onus on the poor and middle class. In reality, if you don’t put the money in, such as investment income, then you can’t take the money out. Hence, you would have no tax. And how much you take out depends on how long you live, sort of like an insurance policy. Some people like Jack LaLanne – who lived to be 96 – may collect social security for over 30 years, while others such as Jim Fixx – who lived to be 42 – will not see one red cent. In effect, social security, along with medicare and medicare, help subsidize the elderly at the expense of the working families. Whether you are rich or poor isn’t directly related to this issue.

  10. Gerri says:

    THANK YOU John for pointing out the misinformation regarding the unemployment rate. It does not take into consideration those who were not eligible for unemployment benefits, who have perhaps not lost their savings to the likes of Greenspan and Madoff, but because they had to live off of their life savings with no hope of retirement and hopefully not losing their homes in the process.

  11. Rick says:

    Thank you John for this informative article. Though Madoff and Greenspan have done much damage and have hurt millions of people. they are not the cause of all of our worsening problems. WE ARE!

    The saying goes: “People get the leaders they deserve”

    That’s what we’ve had for most of the past 50 years; corrupt leaders which Americans have elected to office. What do Americans or anyone else really expect? Let’s be totally honest about the real state of our nation. Nothing is going to stop the march toward the coming short-lived biblically prophesied New World Order which will end in the final conflict between good (Jesus Christ and His angels) and evil (Satan and his human stooges).

    We as a people have rejected God and His laws. We tell God to keep His nose out of our business and out of our life. We curse, blaspheme and deny Him continually in everything we think and do from morning till night. We make jokes about Him. We can’t pray or study the Bible in school or anywhere else much without getting into trouble. We are depraved, totally immoral and have murdered more than 50 million unborn children. We even make Sodom & Gomorrah blush! We are the greediest generation in the history of the world. We practice a form of religion based almost totally on paganism. And then we continually expect God to bless America, take care of her and restore her to greatness? TOTALLY outrageous!

    We have forgotten and betrayed God! As a result, God has already judged America, partly through the removal of our wealth, pride in our power and status in the world. As such, we as a nation with a mountain of sins are doomed and heading for destruction very soon, a time that will be filled with tremendous misery, suffering, starvation, disease and death.

    The ONLY solution? REPENTANCE and getting back to the true God of the Bible, in whom is our ONLY hope for the future. Unfortunately, it appears, for the most part, that it is probably too late for many in that our peoples and nations are so calloused and arrogant that most of them will not repent at this time and come out of this, Satan’s world.

    Otherwise, keep up the good humanitarian work you and your family are doing! Best wishes.

  12. LaBoheme42 says:

    I agree with you on some level regarding Alan Greenspan. But I must point out that blaming Alan Greenspan is like blaming the police for not having stricter laws to stop the criminals. Why not blame the “greedy” and “clever” who had no moral compass and took millions for themselves..and ultimately took their brokerage houses with them. As I understand it, Mr. Greenspan comes from an era where it is unimaginable to run your business into the ground for the sake of more money. His premise of deregulation was based on a business striving for healthy growth. If he is at fault, it is for failing to notice the change in moral climate in the US.

  13. Edpeak says:

    And I heard you on the radio today, and I feel terrible about what happened to you personally. Despite warning to lovingly say “but please, never, ever, ever put 95% of your savings in one single place!” it’s a very sad sense of compassion for you that trumps that.

    Though as you said, many Americans who don’t have the incredible network of support which I’m very glad you have, are in the same or worse economic shape..

    Best wishes to you.

  14. Edpeak says:

    I have nothing nice to say about AynRand-head Greenspan, but the blame-Greenspan line which the mainstream-media loves to repeat (that alone should be a red light!) doesn’t mesh with the facts.

    “Greenspan was an ardent advocate of Savings and Loan deregulation.”

    Key word: “advocate of” So were many many other rightwing nuts, including equally powerful ones. And “advocate of” does not equal “passed laws for de-regulation” You’ll have to thank right-wingers including many Republicans and more than a few neoliberal Democrats

    They are the ones who DID regulation, no matter how much Greenspan “advocated” for it (along with many many economists who were cited by congress as much if not more than Greenspan for their ‘theory’ of why deregulation works)

    Same with the other recommendations including social security; along with right-wing economists from America’s TOP universities, the Heritage Foundation and countless other right-wing think-tanks, “advocated” the same. Why single out Greenspan? Because it’s always convenient to put one single person’s “face” on the problem, even when reality is much more complex than one person.

    The biggest misrepresentation in the mainstream media is that somehow “Greenspan kept rates low” was a big contributor to the present crash. This article doesn’t say that but feeds into that same very misleading line. Massive fraud, massive deliberately-complex and deliberately misleading and opaque financial instruments, and no oversight and ratings agencies going along for the ride and stamping their approval, etc, led to this mess..it would have been 100% the same even with a different chairman (who by the way is not the only one who votes at the Fed, as you well know) and 100% the same if there was one less voice “advocating” the deregulation. Clinton’s (now some of them, Obama’s) economic team was happy to go with the repeal of regulations galore.

    Better article and title would have been:

    “Who’s Done More Damage, Bernard Madoff or the ‘regulation is always bad’ market fundamentalists?”

    The flat-earth market-fundies did it, people, economists, leaders, congresspersons, economists, Think Tanks and more, and more than 99% of those were not associated with the Fed, much less were named Greenspan.

    The bad news is those folks are still around.

    The good news about my dissent here to your article and title: we can still act to oppose them. And act we must.

  15. Gene Nagle says:

    THANK YOU John for making these points that very much need to be made and for helping put the blame for many of the economic issues of recent years where they belong! And thanks to Ryan Eliason for pointing out your Web site during his interview of you.

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