The Man Who Knew: The Life and Times of Alan Greenspan
By Sebastian Mallaby, Penguin Press, 800 pages, $40
In 1959, at the annual meeting of the American Statistical Association, a 33-year-old economist named Alan Greenspan argued that central banks should beware of letting financial markets get too comfortable. The Federal Reserve’s success in smoothing economic fluctuations in the 1920s, he said, had led to the dangerous belief that “the business cycle is dead”. The crash and depression that followed were “inevitable” consequences of that cavalier attitude towards risk.
Sound familiar? As Fed chairman from 1987 to 2006, that same Alan Greenspan presided over what was called “the Great Moderation”, a period when business-cycle downturns were muted and investors became convinced that the Fed had their backs. Greenspan hadn’t forgotten his earlier worries: a few months before he stepped down, he cautioned that “history has not dealt kindly with the aftermath of protracted periods of low-risk premiums”. Sure enough, it didn’t.
The risk that financial excess would lead to trouble was a central theme in Greenspan’s economic work, as Sebastian Mallaby reminds readers again and again in his excellent biography “The Man Who Knew”. So why did this Man Who Knew fail to act upon his knowledge?
Well, for one thing, there’s the question of what exactly he should have done. Mallaby, whose previous book was a sympathetic (and engrossing) history of hedge funds, doesn’t buy the argument that the deregulation of financial markets that began in the 1970s and accelerated in the 1990s was all a mistake — or that Greenspan could have stopped it if he wanted to. You may disagree.
What Mallaby cannot forgive was Greenspan’s tendency in his later years at the Federal Reserve to bend over backward to avoid upsetting financial markets. In 1994, Greenspan’s Fed brought on a bond-market crash to stop a feared resurgence of inflation. But in late 1998 and early 1999, and again in 2004 and 2005, Greenspan steered the Fed away from actions that might have tamped down financial exuberance.
Why? The answer at the time was that there was little threat of inflation, and the Fed’s main job is keeping consumer prices stable. But Greenspan understood how asset bubbles could harm the economy. A more convincing answer is that while Greenspan was (and is) a more capable economist than he gets credit for these days, he was an even better politician. And committing the institution he ran to a battle that it might not win and that he wasn’t absolutely certain needed fighting was not the kind of thing a smart politician did.
This view of Greenspan as a political animal is central to Mallaby’s account. It is also, along with the often amusing depictions of Greenspan’s personal life, what makes it so much fun to read. In his autobiography, published in 2007, Greenspan depicted his rise to power as a series of lucky coincidences. Mallaby describes in detail how Greenspan climbed to the top, and it’s a much more interesting story.
It is not heroic like the biographies of 19th-century business titans that Greenspan read when he was young. It is instead an archetypical second-half-of-the-20th-century tale of a young man of modest means rising to lofty status in business and in government by dint of intelligence, diligence, quirky charm and a Machiavellian streak. Greenspan comes across in these pages (and in person; I’ve met him twice) as a decent, thoughtful, likeable guy. Just not as an innocent, and also not as a hero.
You may be familiar with two landmarks of Greenspan’s early years: he was a professional jazz musician and a disciple of the extreme-libertarian novelist/philosopher Ayn Rand. Greenspan’s stint as a clarinet and saxophone player in a second-tier swing band started when he was 18; his Rand infatuation began in his late 20s.
In between, he had excelled as an economics student at New York University, taken a job at the business group now known as the Conference Board and on the side started studying for a PhD in economics at Columbia University with the famous empiricist Arthur Burns. Then the veteran economic consultant William Townsend, impressed by Greenspan’s Conference Board writings, asked the 26-year-old to become his partner. Greenspan agreed, dropping his graduate studies, and the firm of Townsend-Greenspan remained his professional home until he went to the Fed 34 years later.
After Townsend’s death in 1958 it was his firm, and it provided a uniquely congenial platform. There was no corporate ladder to climb, no tenure committee to answer to, just clients — an ever-growing roster of investment firms and corporations — to impress with his reams of data and his insights into the truths they revealed.
It was Greenspan’s libertarianism that propelled him into politics, but his other attributes that made him successful at it. At Rand’s urging, he delivered a series of lectures in 1963 and 1964 on the “Economics of a Free Society”, inveighing against, among other things, “one of the historic disasters in American history, the creation of the Federal Reserve System.”
A few years later, a Rand fan who had attended one of the lectures brought Greenspan into Richard Nixon’s orbit. He signed on as a policy adviser to Nixon’s 1968 campaign, and learnt quickly — when he drafted a position paper condemning farm subsidies — that a libertarian purist wouldn’t get far in a presidential campaign. So he adapted, and found other ways to make himself useful, such as putting the IBM 1130 computer at Townsend-Greenspan to work collating and evaluating poll results, NateSilver-style.
Greenspan did not join the Nixon administration — he wasn’t going to be more than a deputy something or other, and that had little appeal. But he did stay involved, serving on the famous presidential commission that recommended the end of the military draft and a less-famous one that called vainly for deregulation of interest rates. He also played a role in the notorious effort to get Arthur Burns, whom Nixon had appointed as Federal Reserve chairman, to stop raising interest rates and bad-mouthing the economy in the run-up to the 1972 election.
Nixon’s aides had been planting negative (and false) stories in the news media to pressure Burns, to no effect. So they asked the Fed chairman’s former student to talk some sense into him. Greenspan insisted to Mallaby that he refused, but Mallaby offers ample evidence that Nixon and Co believed that Greenspan had not only talked to Burns but had also done a bang-up job of it. In any case, Burns soon started saying positive things about Nixon’s economic policies, the Fed stopped raising rates and the Great Inflation of the 1970s was unleashed.
This is probably the biggest scoop in the book (Mallaby gives a research assistant, Jon Hill, most of the credit for it), but there are many other juicy stories about Greenspan’s subsequent rise from chairman of the Council of Economic Advisers in the Ford administration to informal minister without portfolio in the early Reagan years to boss of the Fed. These stories generally don’t make Greenspan look bad, just politically astute to a fault.
With the election of Bill Clinton, who proved endearingly willing to let Greenspan do his thing, the need for such manoeuvring waned. By the time George W. Bush took office, Greenspan’s reputation was such that he was pretty much untouchable. He had gained for himself and the Fed a remarkable amount of freedom. He just chose not to use it.
–New York Times News Service
Justin Fox is a columnist for Bloomberg View and the author of “The Myth of the Rational Market”.
