His latest book, oddly named “The Map and the Territory,” is meant to be an account of his intellectual journey to discover why, as the nation’s top bank regulator and its most famous economic prognosticator, he failed to see it all coming. Why had the markets, which for centuries had been so adept at self-correction, failed this time? Why had bank executives, with every incentive to protect their fortunes and reputations, knowingly gambled it all away?
What we find, however, is that Greenspan’s journey of discovery brings him right back to where he began — to an unshakable faith in free markets, an antipathy toward market regulation, and a conviction that progressive taxes and social spending are to blame for slow growth, stagnant wages and exploding deficits.
Those who have followed his career know that it was Greenspan who gave the green light to bank consolidation, Greenspan who pushed financial deregulation, Greenspan who advocated new global rules that would have reduced bank capital reserves and Greenspan who blocked efforts to crack down on abusive subprime lending. But if you are looking for him to accept any responsibility for the crisis that ensued, you will be sorely disappointed.
Instead, he shifts the blame to subsequent policymakers for bailing out the financial system and imposing “massive” new regulation that, he asserts without proof, has cast “a pall of uncertainty” over the economy and ushered in an era of “crony capitalism.”
“Unless we reverse the inexorable increase in the role of government,” he warns ominously, in language he could have lifted from the Romney-Ryan campaign site, “we will surely lose our pre-eminence as the undisputed global leader.”
To take him at his word, Greenspan began to have doubts about his understanding of how the economy works after the financial collapse, which he characterized as an “existential crisis” for economic forecasters such as himself. He set out to “understand how we got it so wrong and what we can learn from the fact that we did.”
His journey begins with a reconsideration of the great British economist John Maynard Keynes, who famously rejected the neoclassical model of an economy based solely on rational self-interest in favor of one driven by “animal spirits” that often lead to irrational herd behavior.
Greenspan also comes to a new appreciation of the danger posed by extended periods of economic stability, which lull people to take undue risks and sow the seeds of the next crisis. That hypothesis was advanced decades ago by the left-wing economist Hyman Minsky, whom Greenspan curiously fails to mention.
Noting the failure of the bond market to distinguish the risk between lending to the productive German savers and the spendthrift Greek slackers, Greenspan comes to understand the importance of “culture” long after it became central to development economics.