Is Alan Greenspan the demon author of the GFC, or a true immortal of central banking? A monumental new biography persuasively argues he was neither – but that his latter-day critics have got him wrong, writes Duncan Greive.
There are two Alan Greenspans in popular mythology, each in direct contradiction to the other. The first is encompassed by his nickname, The Maestro – the man who steered the US economy, and by extension the world’s, through a period of unprecedented stability and growth, two extraordinary decades which began in Reagan’s waning days and ended with Obama just over the horizon.
The second vision of Greenspan focusses on what preceded that period and what came after. His early years featured a near-erotic fixation on his friend, the novelist and libertarian icon Ayn Rand, along with a close association with Nixon; two years after his retirement came the chaos of the GFC, the consequences of which now look bedded in for the foreseeable future.
Which Greenspan you hew toward will probably be a reliable indicator of your politics, but the brilliance of The Man Who Knew, Sebastian Mallaby’s new biography of the former Federal Reserve chief, is that it convincingly shows that neither characterisation is particularly useful in illuminating the nuances of the man.
His place at the centre of the Western world seemed unlikely for much of his life. He was born in 1926 in New York to a Jewish Romanian mother, Rose Goldsmith, who had a profound influence on him, and an indifferent father who left early and essentially ignored his son. Greenspan conceived of himself throughout his life as a “sideman”, a peripheral character to whatever stage he was on, likely related to his first work as a jobbing jazz clarinetist through the ‘40s. This self-conception is given some weight by Mallaby, who perceives of its function as two-fold: both as a self-effacing modesty which could obscure his true role in events, but also as a character trait which lent him a certain passivity at critical junctures – his instinct at the Fed was to facilitate business and finance, rather than seek to restrain it, even when warning sirens began to shriek.
His move from jazz to economics and to the outskirts of public life came gradually, and he was not tagged for greatness from the first by any means, graduating from NYU and dropping out of Columbia. He spent his formative years at a small economic consultancy, notable for the beginnings of his intuitive conception of the economy’s motion. With theories assuming the logical and orderly behaviour of markets very much in vogue, Greenspan was a kind of strange hermit on the outskirts of the discipline.
This manifested itself in some agreeably oddball behaviour. He devoured a phone book-sized text on the complexities of steel manufacturing which few in the industry had ever opened, so as to better understand the forces acting on that specific sector. By contemporary standards this was deeply weird – steel production was simply a big number to feed into a formula which would then tell you what was happening in your economy. Greenspan’s assumption was that studying it on a deeper, granular level would help him understand the way different commodities interacted with one another, and therefore which signals to weigh more heavily than others when attempting to predict the vagaries of supply and demand.
It is not particularly surprising to learn that such interests didn’t help elevate him socially. After a short, loveless marriage in his 20s, Greenspan became a long-term bachelor, consumed by his work, and only began developing a social life when he came into Ayn Rand’s orbit. The flamboyant Russian was in between her two massively influential novels, living a fairly Bohemian lifestyle in keeping with New York City of the ‘50s. She surrounded herself with radical young men, all in thrall to her intellect and vision of the world, and would send her husband away for the night when she wanted to sleep with someone else.
Greenspan was not in that category. Initially he sat on the periphery of her circle, a strange, awkward nerd incapable of joining in the pacy conversation at her Saturday night parties. This only seemed to make him keener to join in, and he began to write increasingly strident papers and speeches as a kind of economics peacocking. These would both endear him to the Rand set and, decades later, serve as ammunition for those who would characterise Greenspan as a hopeless idealogue. Yet while he certainly was a perfectly dogmatic libertarian at the time, hero-worshipping the rugged tycoons of 19th century American industry, Mallaby suggests that his Reserve Bank era was characterised by a pragmatism the young Greenspan would likely have abhorred.
The speeches he made and the insights he created for businesses in the ‘50s and ‘60s saw him develop the beginning of the cult following which would grow consistently throughout his career. He began his transition to politics by working as an aide to Nixon, then as chair of the Council of Economic Advisors under Ford – his first major role, during which time he began a longrunning though somewhat intermittent relationship with American news legend Barbara Walters.
(His love life is a fun subplot throughout – he comes off as somewhat dour and studious yet dated a number of very prominent women, finally settling down at 70 and wedding news anchor Andrea Mitchell in a ceremony officiated by Supreme Court Justice Ruth Ginsberg).
Following Jimmy Carter’s election in ‘77, Greenspan commenced a decade in the private sector. He served on the boards of giant corporations like Alcoa, Mobil and JP Morgan, while continuing to build close relations with the Republican Party. Carter appointed Paul Volcker, a towering figure literally and figuratively, who represented the first truly independent Fed chair, and was acclaimed for taming the runaway inflation of the ’70s which echoed into the following decade (and still lingers today as a kind of psychic scar on those of a particular age).
By this point we’re 350 pages in and have still to commence the period for which Greenspan is most widely known, yet Mallaby’s prose is never less than riveting. This is due in part to it functioning as a financial history of the ‘60s through the ‘80s, and reminder of what a turbulent era it was. Because we forever soak in the roiling culture and politics of the era – psychedelia and punk, assassinations and cold war – it’s easy to gloss the fact that the global economy was hardly an oasis of calm. While the era from WWII through the ‘80s is rightly remembered as a very good one for many American workers, it was also characterised by double digit inflation, oil shocks, the saving and loans crisis and the first of what would become habitual bailouts, with the financial sector evolving into the staggering complex and problematic monstrosity it would become.
This serves to both set the backdrop to Greenspan’s tenure at the Fed, but also rebut some characterisations of the Chair which have become bedded in over the past few years. Today we’d kill for some inflation, but it bedevilled an era and was a Fed priority well before Greenspan took office. Bailing out institutions to avoid a contagious impact on the wider financial system had occurred when Volcker stepped in to save Continental Illinois. And the idea that unemployment was not the only, or even the primary, number to pay attention to was essentially passé by this point.
Two months after his appointment as Chair of the Federal Reserve in 1987, Black Monday came. Following a string of large losses, an enormous sell-off abruptly ended a long bull run, with the Dow Jones losing 22 per cent on a terrifying Monday in October, still by far the largest single day decline in the market’s history. Thus Greenspan had the makings of what might have become a great depression on his hands before he’d any real understanding of the nature of the role. His actions thereafter– loosening monetary policy, shepherding a crippled Chicago Mercantile Exchange to safety and projecting calm in the face of the chaos – came to be viewed as critical in preventing the crash from precipitating a major recession; indeed the decade’s robust growth continued essentially unchanged. This contrasts markedly with New Zealand’s experience: our market was frothier still and started a slide which saw it lose 75 per cent of its value and 200 companies in the years to come.
The wounds it inflicted here were absorbed by Don Brash, who makes an entertaining cameo at the Jackson Hole gathering of central bankers in 1994. Closing out the decade of radical reform which began with the fourth Labour government, then-Governor Brash had made our Reserve Bank the world’s first to introduce explicit inflation targeting.
“There is a growing body of evidence suggesting that inflation hinders growth,” Brash told the conference in a keynote address, during the period in which the “thin, bespectacled and mild of manner” banker was an (almost) swaggering banking celebrity in that tiny but unimaginably influential clique. Mallaby drily notes that Brash did not pause “to mention what that evidence might be”.
This sets up a debate which threads through Greenspan’s reign and persists still about the extent to which inflation is truly harmful in relatively small doses. It became an accepted dictum, with many central banks following Brash’s lead, including Greenspan in a de facto fashion. What’s fascinating about the section is seeing the extent to which it was based on hard data, which appears to be not at all. This seems the more pointed given that we in New Zealand have been stubbornly below our band for some time without any major uproar – Mallaby’s analysis suggests that both the band and the fanatical focus on inflation might be overdue a review.
In many ways evolving assumptions to fit different eras and business climates was a hallmark of Greenspan’s ‘feel’ driven tenure. In sharp contrast to both his early didactic libertarianism and his critics’ characterisations of him, Mallaby persuasively argues that the Greenspan era was characterised by his shifting areas of emphasis: from employment, to inflation, to stock and housing markets. His ability to pick a particular statistic that seemed to be moving out of correlation to the rest of the economy and divine its meaning became admired to the point of hero worship, even by many who were dubious or critical of him upon his appointment. It’s telling that he stared down and helped depose George Bush Sr while having his most celebrated years working alongside Clinton: of the four presidents he served under, the sole Democrat was the one with whom he enjoyed the most uncomplicated relationship.
As the ’90s wore on he continued to pilot the economy through trouble serenely – the Russian default, the Asian crisis, even the dot-com bubble and bust all passed without major upset. Greenspan was featured at the centre of a trio of economists on the cover of Time in 1998 alongside the headline ‘The committee to save the world’, which epitomised and cemented his omniscient reputation.
Around the same time, the meltdown of Long Term Capital Management, the hedge fund run by math geniuses and Nobel winners which had produced unholy returns for four years, flamed out in a spectacular style. The impossibly complex web of contracts and hedges revealed by its implosion pointed to bizarre behaviour at the edges of the banking industry. But while that crisis too was averted, few lessons appeared to be learned.
It’s this blaring signal, and his failure to act more firmly on the housing bubble and explosion in sub-prime lending, which form the basis of the case against Greenspan. Mallaby interviewed him extensively for this book, and was granted access to his archives, and while he does critique those decisions, it’s measured to a fault: at times it can verge on the apologetic.
Yet as he stresses throughout, conceptions of Greenspan which over-emphasise any one failure or success fail to acknowledge either the totality of his work, or the extent to which his approach just plain worked. His disinclination toward regulation had served the economy incredibly well to that point, and his belief that government regulators were just as prone to error as bank risk management teams was both commonplace and deeply felt at the time. So while it was clearly an error of historically vast proportions, it was one that almost any substitute would likely have made were they in his seat at that time.
Likewise, the problems we’ve lived through since, while certainly related to the grotesque excesses of peak finance, arguably owe as big a debt to technology and globalisation – the two forces which did so much good for prosperity and worldwide growth through the previous two decades. This is Mallaby’s contention anyway, and The Man Who Knew is an incredibly persuasive and rigourous attempt to rehabilitate the image of the once godlike figure.
This feels like a particularly poignant moment to look back in wonder at the Greenspan era: 1987-2006, probably the longest sustained period of relative peace and prosperity in human history. Now, a decade or so removed from his retirement, we’re watching as the world seems poised on the edge of dystopia, and neither nostalgia for the good times nor fury at what he missed adequately capture the breadth of what Greenspan accomplished.
The Man Who Knew does though. Meticulous, indefatigable and utterly comprehensive, it’s financial history, biography and analysis of the highest order – a fitting and admiring portrait of a fascinating 20th century life, one replete with vast power which one day found its limit.
The Man Who Knew: The Life and Times of Alan Greenspan (Bloomsbury, $32.99) by Sebastian Mallaby is available at Unity Books.