Greenspan’s remarks are part of the ongoing campaign by Democratic and Republican politicians to “reform” Social Security, that is, to further undermine its character as an entitlement that working people expect to receive as a right for all. The first major assault on the Social Security system was the dismantling of welfare by the Clinton administration in 1996.

Since then, politicians from both big-business parties have sought to gain acceptance for further attacks. Their main argument is that soon there will not be enough money to pay Social Security to all retirees, implying that younger workers will bear an undue burden caused by older generations. They insist that working people should be concerned about the federal government’s budget deficit and sacrifice in order to reduce it.

Feigning concern for workers whose benefits he proposes be slashed, Greenspan urged Congress to act rapidly to give future retirees “enough advanced warning to plan their finances accordingly,” the Washington Post reported February 26.

Seeking to downplay the impact that cuts would have, the big-business daily reported U.S. government estimates that about 20 percent of the elderly rely on Social Security for their entire retirement income. Many working people seek additional sources of income, however, because they have a hard time living on meager Social Security benefits, particularly with skyrocketing medical bills.

The U.S. government’s central banker said he was worried about the impact of the costs of Social Security on the long-term government budget deficit, which would “slow the growth of living standards.” This year’s budget deficit is projected to reach $521 billion and the long-term deficit, according to a January 5 report by the liberal Brookings Institute, is expected to reach as high as $5 trillion over the next decade.

To reduce the risk of a sharp reaction from working people, Greenspan and President George Bush have said they oppose any cuts for those currently receiving benefits. Instead, Greenspan proposed that Congress consider reductions for future retirees, a higher eligibility age for Social Security and Medicare, and tying cost-of-living increases in the program to a measure of inflation other than the consumer price index. The latter measure was floated by a Congressional committee under President William Clinton but received little support within ruling-class circles at that time.

Commenting on the budget committee hearing, Bush told the Post he had not read Greenspan’s remarks but took the occasion to reiterate his proposed solution for Social Security: to create “personal savings accounts” for younger workers—a scheme to push workers to gamble with their social security benefits, whether on the stock market or elsewhere.

Democrats have also insisted on the urgency of Social Security “reform” and reducing the federal budget deficit. Democratic presidential candidates, however, have been carefully vague about their proposals. Instead, they have attacked Bush “for worsening the deficit and endangering Social Security,” the Washington Post reported.

During the discussion following Greenspan’s testimomy not one member of the committee, Democrat or Republican, said that cutting Social Security was not an option to be considered. The differences centerd on how much and how fast.

Greenspan chaired a commission on Social Security under President Ronald Reagan but that administration, which like previous ones operated on the basis of deficit spending, decided that attempts to “reform” social security at that time would have run the risk of unleashing a social explosion. Greenspan has continued to serve as central banker under subsequent Democratic and Republican administrations.

The current round of assaults on Social Security has its roots in the Clinton administration. In August 1996 Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act, which abolished Aid to Families with Dependent Children (AFDC), or welfare, the main federally funded cash relief program. AFDC was part of the Social Security Act of 1935, which also encompasses Social Security, Supplemental Security Insurance, and unemployment insurance.

In 1997 a panel appointed by Health and Human Services Secretary Donna Shalala to study ways to cut Social Security issued a report that proposed some measures similar to those advocated by the Bush administration, including investing in the stock market. Sensing the powder keg involved in going after an entitlement that so many view as their basic right, the Clinton administration was cautious in backing the panel’s recommendations.

Greenspan’s February 25 remarks to the House Budget Committee came within months of bipartisan legislation passed by Congress and signed by Bush that shifts much of the costs of Medicare onto the backs of working people.

The new law requires Medicare to compete with private health insurance companies, gives billions in subsidies and tax breaks to those companies, and includes incentives for recipients to join private health-care plans. It also introduces for the first time a “means test” for eligibility, and increases the amount Medicare recipients pay in deductibles and out-of-pocket expenses.

In 1934 three major strikes—in Toledo, Minneapolis, and San Francisco—and numerous smaller ones set the stage for workers to force concessions from the bosses and their political servants in Washington. These working-class struggles transformed the labor movement, opening the process that forged the industrial unions that formed the backbone of the Congress of Industrial Organizations.

Under the pressure of the strikes and mobilizations of the unemployed, President Franklin D. Roosevelt signed the Social Security Act in August 1935, in an attempt to placate the growing social movement.

The most class-conscious workers pushed for a broader political agenda that aimed at providing the widest protections for working people. In 1934 the National Unemployed League drafted a “workers security bill” that called for a 30-hour workweek and a public works program to provide “an up-to-date, fully equipped county hospital in every county; modern libraries and recreational centers in every city and county.” It also addressed other social needs, calling for “rural electrification” and that those employed by the “relief” program be paid the standing union wage. The Unemployed League demanded that unemployment and social insurance be “extended to workers and farmers without discrimination because of age, sex, race, or color, religious or political opinion or affiliations—for all time lost.”

Provisions of the Social Security Act were expanded in the 1960s, introducing Medicare and Medicaid, as a product of working-class struggle in the form of the advancing civil rights movement of the 1950s and 60s.

He proposed measures to curb their expansion that would effectively raise mortgage rates for working people seeking to buy homes.

The next day he told the House Budget Committee that he was worried about the impact of the costs of Social Security on the long-term government budget deficit, which he described as a “structural problem.” (See article on Social Security above.)

Fannie Mae was set up in 1938, ostensibly to provide low-interest home loans. Freddie Mac was established in 1970. Both are what are known as government-sponsored enterprises, or GSEs. They are chartered by Congress but are private companies. Together they buy up and repackage billions of dollars in mortgages from local lenders and resell them on financial securities markets around the world. They have grown to be among the largest financial institutions in the United States, standing behind more than $4 trillion in mortgages. That represents more than 75 percent of the single-family mortgages in the United States. Greenspan said that while he didn’t see any immediate danger with the companies, “concerns about systemic risk are appropriately focused on large, highly leveraged financial institutions…that play substantial roles in the functioning of financial markets.”
 
Perception of ‘full faith and credit’
Greenspan attributed the growth of the companies to the perception by investors around the world “that these securities are backed by the full faith and credit of the United States government” and that in case of a financial crisis Washington would have no choice but to prevent the two companies from defaulting. He added that this perception, also called an implicit subsidy, has been reinforced by the “scale itself” of the company’s holdings and the impact a default would have on financial markets.

It was under Greenspan’s watch as chairman of the Federal Reserve since 1987 that this massive debt balloon was inflated. Fannie Mae’s debt obligations from borrowing rose four-fold over the last decade, reported the February 25 Wall Street Journal—from $201 billion to nearly $962 billion. And Freddie Mac’s shot up 15 times, from $48 billion to $745 billion.

Financial departments of large corporations invest in GSEs such as Fannie Mae and Freddie Mac in a effort to protect the money value of their capital from erosion and unanticipated fluctuations. The result is more and more complex forms of paper securities designed to hedge bets, offset currency devaluations, and reap enormous windfall profits at the same time. The growth of their investments has opened the doors to financial speculation on a scale never before possible in history, while creating the potential for shifts that could not only bring down individuals capitalists but trigger a collapse of the entire world banking and monetary system.

Greenspan expressed further concern that, “unlike many well-capitalized” savings and loans and commercial banks, the two companies have chosen not to lessen that risk by holding greater capital reserves as protection. This practice heightens the degree to which they are leveraged and raises interest rate risk. “Without the expectation of government support in a crisis, such leverage would not be possible without significantly higher cost of debt,” Greenspan said.

In his summation Greenspan proposed that Congress establish a regulator over Fannie Mae, Freddie Mac, and other GSEs with the authority to set levels of capital they must hold, limit their levels of borrowing, and establish a “clear process for placing a GSE in receivership.” Greenspan argued that these steps would send a “clear warning” to the companies’ debt-holders, according to the Journal, that they could take a financial “haircut” in the event one of the companies was declared insolvent.

Senior executives at both companies reacted quickly to Greenspan’s remarks. A Fannie Mae official commented that the Federal Reserve Board chairman’s testimony “does not appreciate the role of our mortgage portfolio and the impact of his proposal” according to the February 25 New York Times.

A Freddie Mac executive told the Financial Times that Greenspan’s proposal would “raise mortgage costs for US homebuyers.”

Shares in both companies dropped following Greenspan’s testimony. Shares in Fannie Mae fell $2.65 to $76.25 and Freddie Mac slid $1.81 to $62.12.

Concern in ruling class circles about both companies has heightened over the past year due to a wide variety of admitted questionable accounting practices. Last November executives at Freddie Mac admitted to overstating the company’s earnings by $5 billion in order to “smooth out” its long-term earnings trend and to allay concerns by investors. And last October Fannie Mae was forced to correct what officials said were $1 billion in errors in its recent financial results.

In his testimony Greenspan also cited a study done by the Federal Reserve that he said shows that Fannie Mae and Freddie Mac actually have a negligible impact on lowering interest rate for home buyers as compared to the hefty dividends reaped by its stock holders.
 
 
Related article:
Defend Social Security  
 
 
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