Master of the Universe (retired)

By Alan Beattie
Financial Times, London
Saturday, September 22, 2007

http://www.ft.com/cms/s/0/7198d398-6659-11dc-9fbb-0000779fd2ac.html

"The Age of Turbulence: Adventures in a New World"
By Alan Greenspan
Allen Lane, L25, 531 pages
FT bookshop price: L20

Say what you like about Alan Greenspan, but his perfect timing has been unimpaired by retirement. The former Federal Reserve chairman, who departed office last year after nearly two decades as head of America's central bank, has managed to arrange a novel form of financial market crisis just as his memoirs are published.

The turbulence this summer is one of those periodic episodes which force the mysterious brotherhood of central bankers out of the shadows. The markets generally contrive to arrange one near the beginning of the tenure of each Fed chairman. Paul Volcker, Greenspan's predecessor, had to endure a collapse in the bond market two months after he took over in 1979; Greenspan himself had the 1987 stock market crash to deal with.

The famous saying (famous among central bankers, anyway) of the Cambridge economist John Maynard Keynes was his hope that economics would one day become as humble and routine as dentistry. The dentists can rest for the moment safe in the knowledge that the dispassionate dullness of their craft remains unchallenged.

Central bankers crave order: stable prices determined by interest rates set to control an economy that behaves in a known way. Occasionally, during Greenspan's tenure at the Fed from 1987 to 2006, and particularly during the long 1990s expansion, it looked like this nirvanic end of history had occurred in monetary policy as well as geopolitics. No such luck. Economies change speed; financial markets develop in peculiar new ways. This summer's turmoil has brought a new twist. Trouble has lunged out of an opaque corner of the capital markets and raised a whole new set of questions to which central banks have varied answers.

The appeal of Greenspan's memoirs should be relatively broad -- they are at least more lucid than his famously opaque prose while in office. But what emerges from the book is that even he, who knew so much more than most, knew far less than most supposed.

Central bankers are an odd breed, somewhere between an international trade union and a fraternal masonic order, intimidating outsiders through a carefully inculcated awe of their unfathomable power and, notwithstanding recent disagreements on dealing with market turbulence, a powerful internal solidarity. Jean-Claude Trichet, now president of the European Central Bank, was once asked for his view of a frankly eccentric plan by the Bank of Japan to start buying equities to boost the stagnant Japanese economy. "We form a mutual admiration society," he told a gaggle of bemused journalists, tongue imperviously lodged in Gallic cheek, "so whatever the Bank of Japan suggests is necessarily the best way of doing it."

They would regard themselves as something like the Jedi Council -– an ascetic elite who, through innate wisdom and arduous training, are entrusted with maintaining order in a galaxy permanently threatened by the dark, swirling chaos of price instability. In reality, as Greenspan makes clear, there is a good element of the Wizard of Oz. The darkest secret of central bankers is that they are generally working from the same data as everyone else.

This is less true of Greenspan himself than most. As anyone who has had regular conversations with him can testify, his most remarkable trait is not a high-level grasp of theoretical monetary economics but a truly phenomenal mental database of the nuts and bolts -- and, increasingly, the circuit boards and fibre-optic cables -- of the US economy. As we see in some intriguing personal vignettes in "The Age of Turbulence," he elevated a nerdish childhood obsession with baseball statistics and the intricacies of collecting and disseminating information into a career path, first in an economic consultancy and then in public service.

Only a boyhood Alan Greenspan could have come away from cowboy movies idolising the telegraph operators rather than the cowboys. And perhaps only Alan Greenspan would have invited Andrea Mitchell, the NBC correspondent who became his second wife, back to his apartment on their first date to read an essay he had written on the microeconomic theory of monopolies.

It was this mastery of the minutiae that enabled him to make one of the smartest moves of any central banker's career, and one for which he will be rightly revered: spotting the productivity surge of the 1990s in the US economy, and realising that a car whose cylinder size had just increased did not have to have the brakes slammed on as early to prevent the engine overheating.

Spotting where things were going, at which he was expert, is one thing: responding with policy is another. The cottage industry of Fed-watchers will pick two things in particular out of this book, one of which is not even really the province of central bankers. The first is Greenspan's account of dealing with the bubble of the 1990s stock market. The second is a mea culpa for supporting a giant tax cut by President George W. Bush that turned out to be the first misstep in a lurch away from the path of fiscal probity.

He comes away looking rather better from his writings on the bubble. Central bankers these days generally target the price of goods and services. Greenspan made a half-hearted and unsuccessful attempt to go after stock prices instead, trying to prick the equity market bubble with his tongue in the famous, or infamous, speech of 1996 musing whether "irrational exuberance" had taken hold. The markets roared upwards regardless, and he concluded that only massive increases in interest rates, which would also have hammered the real economy, would have done the trick, and that it was better to clear up after the mess by cushioning the blow to the economy when the bubble burst of its own accord. Whatever you think about this continuing debate, his account of the evolving response of policy is at least clear, frank and coherent. "In effect, investors were teaching the Fed a lesson," he writes. "You can't tell when a market is overvalued, and you can't fight market forces ... we never tried to rein in stock prices again."

Less impressive is his half-apology on the subject of tax cuts. Greenspan’s gold-standard reputation meant he was frequently invited by congressional committees to pontificate on subjects at best tangentially related to monetary policy, even given the Fed's wider remit than the more narrowly circumscribed roles handed to central banks such as the Bank of England and the ECB.

Several of these subjects, indeed, form part of the rather disappointing second half of the book, which might easily have been shortened without losing too much. He trundles through a variety of issues on which, thanks to his congressional testimony and other musings, his thoughts are both already generally available and infrequently startling to anyone familiar with his predilection for free markets. For example: private property rights are a good thing, as was Adam Smith; the Chinese need to liberalise their exchange rate and press on with creating a market economy; liquefied natural gas would be a useful supplement to oil for America's and the world's energy needs, though the refining and delivery facilities do not exist on a big enough scale; the French are less enamoured of free markets than are the Americans, etc., etc.

If the Senate banking committee had asked the chairman about the pitching rotation for the New York Yankees, the lifelong baseball fan would no doubt have had an empirically grounded and exhaustively researched view on that as well. In the case of tax policy, one of the two or three most explosive issues in American politics and one that is the proper province of Capitol Hill, Greenspan's addiction to having his say caused real harm. Having supported the grinding effort of reducing the structural federal budget deficit during the Clinton administration, Greenspan gave fatal support for the huge tax cut proposed by Bush as soon as the new president came into office in 2001.

Greenspan's defence of this -- that he also supported "triggers" that would have reduced the tax cut had the fiscal surplus begun to shrink, as it duly did -- is naivety bordering on disingenuousness. He should surely have seen the ideological rigidity of the George W. Bush administration. As Democratic fiscal conservatives warned him in advance, his testimony was seized on by an administration bent on exploiting to the full an electoral mandate it had barely, if at all, earned. It also helped to set off a destructive spiral of ever higher federal spending and ever more tax cuts, undermining another of Greenspan's Republican beliefs -- that tax cuts are less damaging than spending increases because they have a finite limit. Spending can always be raised but taxes cannot be cut below zero. With the Bush Republicans in charge of the White House -- and, as Greenspan himself points out, refusing to use the spending veto -- you don't get either/or, you get both/and.

Predictably, the Bush administration triumphantly paraded Greenspan's main message around Washington and buried the qualifications. Greenspan now admits to misjudging the political mood of the capital but adds the following explanation of his thinking: "I was an analyst, not a politician; the job would be no fun if I had to worry about the political implications of everything I said.' Actually, no: he was Fed chairman, at a minimum the second most powerful man in the world, not an analyst. Either having fun was higher up his to-do list than it needed to be or, as a sleeve-tugging suspicion persists, such a politically astute man was trying to ingratiate himself with an incoming administration that prized loyalty above more ascetic virtues.

Indeed, the tax cut debacle is one of the reasons that we may never see another Fed chairman with quite the same range of influence. That is a good thing. The episode is a powerful argument for monetary policy-makers to confine their activities to setting monetary policy and their comments on anything else to how it will affect that narrowly defined task.

One of the wisest things ever said to me about chairman Greenspan came from Barney Frank, one of his familiar sparring partners and a man with whom he disagreed profoundly on any number of issues but for whom he had a genuine and obvious respect. Frank, a very liberal Democratic congressman, now chairs the House financial services committee which holds Greenspan’s successor accountable. The degree of adulation in which the Fed chairman was held was damaging for both country and individual, Frank said. "The aura of invincibility is very bad for democracy. Marx said he was not a Marxist; Greenspan was never a Greenspan worshipper."

As Greenspan himself says of the 1990s stock market boom: "People would stop me on the street and thank me for their 401(k) [pension saving scheme]; I'd be cordial in response, though I admit I occasionally felt tempted to say, 'Madam, I had nothing to do with your 401(k).' It's a very uncomfortable feeling to be complimented for something you didn't do."

What has prevented central banking from becoming like dentistry is not just the uncertainty of judgment within an agreed paradigm -- about where the economy is heading and where interest rates ought to go. It's about the very way in which central bankers ought to think, judge, and act, an uncertainty that they feel as acutely as anyone, whatever the mask of omniscience might suggest. As for Alan Greenspan's legacy? More data are needed. It is, as yet, too early to tell.

----

The author is the Financial Times' world trade editor. Between 2002-2004 he covered the Federal Reserve for the FT in Washington. Before joining the newspaper in 1998, he was an economist at the Bank of England.

* * *

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.