Reviewed by Sebastian Mallaby
Sunday, September 23, 2007
THE AGE OF TURBULENCE
Adventures in a New World
By Alan Greenspan
Penguin Press. 531 pp. $35
Politicians are supposed to be the masters of persuasion, flattery and spin; technocrats just the opposite. But on Monday, the day Alan Greenspan's memoir was released and shot straight to number one on Amazon, the main papers all had Greenspan stories, even though he had already led the news over the weekend. Each newspaper had been granted an audience with the former Fed chairman, and each had found a little piece of what it craved. The New York Times led with Greenspan's efforts to distance himself from President Bush. The Wall Street Journal's front page announced that "Greenspan Hits Democrats, Too." The Washington Post's Bob Woodward mined Greenspan for additional nuggets on the run-up to the Iraq war.
None of this captures the meat of Greenspan's book. But it does shed light on one of its central, albeit unintended themes: Throughout his long career, Greenspan succeeded as much through charm as through his skills as an economist. In terms of policy-making courage, he could not match his predecessor, Paul Volcker, who slayed the beast of double-digit inflation even at the cost of double-digit unemployment. In terms of intellectual virtuosity, he is overshadowed by his successor, Ben S. Bernanke, an academic star on monetary policy. But Greenspan stands out for his people skills. He could sit down with politicians or executives and make them feel good about themselves. His intelligence is as much emotional as mathematical.
The early part of Greenspan's memoir, covering the years before his appointment to the Fed chairmanship in 1987, is light on the monetary dramas of the period. By the start of the 1970s, Greenspan had already advised the Nixon campaign and was an economic policy player; yet his narrative skips over the collapse of the gold standard, the unraveling of interest-rate regulation and the birth of derivatives trading -- events that shattered the stabilizing anchors of the post-war monetary system and set the stage for the challenges that Greenspan later would face. Instead, the reader is treated to conventional character sketches of Nixon (he was smart but paranoid) and Ford (a monument to decency). There is an account of Greenspan's efforts to broker a Reagan-Ford ticket in 1980, which may have been exciting at the time but is now merely a curiosity.
Greenspan got to know Dick Cheney and Donald Rumsfeld during the Ford years, a connection that colors his relationship with George W. Bush in more ways than recent news accounts have noted. Greenspan has hit the front pages by criticizing the Bush team's budget-busting tax cuts, even though he himself endorsed them at the time; his mistake was to believe that he could give his old friends a green light without fear that they would overdo the tax cuts irresponsibly. But he should not have been surprised by what ensued. In 1972, Rumsfeld and Cheney were in charge of administering Nixon's price controls, a program that Greenspan rightly describes as a populist abomination. Why Greenspan assumed that Cheney had lost his populist streak three decades on is something of a mystery.
The fact that Greenspan befriended Cheney and Rumsfeld despite their association with a crazy policy speaks volumes about his priorities. It's hard to imagine the nerdy young Bernanke befriending political officials, let alone economically misguided ones. But Greenspan's willingness to put relationships ahead of policy details was to serve him well. In 1980, when Reagan's campaign advisers were desperate to educate their candidate on the economy, they called in Greenspan to brief him, knowing of his magic way with Big People. Greenspan spent the five-hour session laughing appreciatively at Reagan's jokes. He never insisted that the conversation get serious, and the two got along famously.
If Greenspan's networking skills helped to land him the Fed job, they also colored the way that he performed in it. Volcker had made a point of keeping his distance from the executive branch, fearing that friendliness would cause the markets to doubt his toughness on inflation. Greenspan's approach was the opposite. Whereas Volcker refused to visit Reagan at the White House, and refused to have Reagan visit the Federal Reserve, Greenspan loved access. He flew down to Little Rock to meet Bill Clinton during the transition. He spent hours talking to incoming Vice President Cheney in the Cheney family kitchen. Even after that relationship had soured, Greenspan visited the Bush White House weekly.
Greenspan's role as the enabler of the Bush tax cuts has damaged his legacy. Yet it's remarkable how little this and other political entanglements compromised the Fed's independence in setting interest rates. Back in the 1980s, Volcker's admirers might have predicted that Greenspan's penchant for schmoozing senior officials and taking a position on every economic issue of the day would undermine the technocratic character of the Fed. But Greenspan was perfectly capable of socializing with Nick Brady, the Treasury secretary in the first Bush administration, while brushing off Brady's bullying demands for lower interest rates. If anything, Greenspan's status as an insider-guru on all economic questions served to enhance the Fed's prestige, upending the standard assumptions about central banks that prevailed before he tore up the rule book.
The enduring criticism of Greenspan's monetary record has turned out to be a different one. As the economy boomed during the 1990s, Greenspan was early in seeing the productivity revolution in U.S. firms that would allow the economy to zoom ahead without inflation. In September 1996, he took the risk of keeping interest rates low, rightly predicting that prices would remain stable. But while easy money cleared the way for the long boom of the 1990s, it had a darker consequence: It fueled the growth of a stock-market bubble that led the economy astray, misallocating billions of dollars of savings to worthless dot-com fantasies. In predicting that inflation would stay dormant, Greenspan correctly anticipated that the price of eggs would stay stable. But nest eggs were going through the roof. The real inflation was in stock prices.
Hence the anti-Greenspan rap: He was complacent about market bubbles. It is a complaint that seems especially damning now, as the second Greenspan bubble -- this time in real estate -- is popping up all around us. But on this issue, unlike on the Bush tax cut, Greenspan sketches a reasonable defense of his record.
The defense is unfortunately obscured by unpersuasive clutter. Greenspan raises a question as to whether pricking bubbles might exceed the Fed's mandate; but bursting bubbles can destabilize economies and force central-bank action, so this is a digression. He suggests that the Fed can't know for certain when markets are unsustainably high, but all central bank decisions involve uncertain forecasts. Greenspan's stronger claim is that, if central banks attempt to deflate bubbles, they will probably fail -- and failure will encourage speculators to think the boom cannot be stopped, adding to the bubble frenzy. The author cites 1997, when the Fed tried briefly to deflate the stock market, causing only a temporary pause in its upward trajectory. And then there is the case of 1994, when a prolonged series of interest-rate hikes kept stock prices stable. The moment that the tightening stopped, frenzy took over.
Greenspan's political memoir, which occupies the first half of the book, is readable, lucid and sometimes a bit thin on the dilemmas of monetary policy. In the book's second half, Greenspan the charmer makes way for Greenspan the technician, and the result is a 250-page essay on globalization. His overviews of Russia, India and China say little that is not familiar to attentive readers of the news. But the last chapter makes a powerful and remarkably self-deprecating point. Readers who persevere will feel rewarded.
For the past dozen years or so, Greenspan explains, central bankers have had it easy. Economic forces have acted to hold prices down, so the Fed has not had to raise interest rates aggressively to choke off inflation. But at some point this circumstance will change. The incorporation of information technology into business will have run its course, so cost-savings will be exhausted; the integration of China into the global economy will near completion, ending the second source of downward pressure on world prices. When those two things happen, central bankers will have to act tougher if they are going to rein in inflation. And if they get tough, they will also get unpopular.
Alan Greenspan presided over a golden moment in economic history. He was good at his job. But he was also lucky. *
Sebastian Mallaby directs the Center for Geoeconomic Studies at the Council on Foreign Relations. He can be reached at firstname.lastname@example.org.