The man who thought he knew
THE MAN WHO KNEW: THE LIFE AND TIMES OF ALAN GREENSPAN
Penguin Press, $40, 781 pages
This is an important book by probably the best chronicler of modern financial affairs on the job today. It is a thoroughly researched and elegant narrative about the life of a major player in this current era of instability and peril in our global financial markets.
More, author Sebastian Mallaby intentionally provides us with proof that the failings of his subject, former Federal Reserve Chairman Alan Greenspan, offer a compelling guideline for future financial regulators on how not to repeat the gross errors of the past.
Happily, Mr. Mallaby avoids the pitfall that snares many biographers, the temptation to resort to hagiography to stress his main character’s importance.
He likes Mr. Greenspan well enough personally and was given extraordinary access to the man and his papers. But he went further and spent years studying other archives and interviewing other sources.
The Greenspan who emerges is intensely human, talented, charming — and flawed. In his youth he was a prodigy in the certainties of mathematics and later was seduced by the stern doctrines of Ayn Rand. Their lifelong friendship and his devotion to other strict libertarians led him to a deep faith in such nostrums as the gold standard, the abolition of the Federal Reserve, and — most fatally — the conviction in the corrective powers of unfettered free financial markets.
As he began his career in public service, the boy from the immigrant neighborhood of Washington Heights in New York City was more Austrian than Friederich Hayek. Had he stayed true to that faith it is unlikely we would ever have heard of him.
Yet throughout his four-decade career as a government adviser and central banker, Mr. Greenspan cut his ideological cloth to fit the fashions of his political patrons. Starting as an adviser on Richard Nixon’s 1967 Southern Strategy through to the presidency of Bill Clinton, he outlasted that other peerless apparatchik of influence, Henry Kissinger. At all costs he kept his presence inside the high councils of whoever was in the Oval Office.
In the process he too often aided and abetted the instincts if politicians and their Wall Street contributors to shake free of the restraints of regulation and permit the Ponzification of finance that allowed financial markets to balloon into derivative products no one understood. As long as inflation stayed low, this also gave presidents and the Congress the leeway to spend more money than their tax revenues could accumulate.
Mr. Mallaby elegantly sums up this important man’s important life, not to praise him so much as to warn us not to duplicate his mistakes.
He says, “Greenspan and his contemporaries blundered: they were insufficiently wary of the distorted incentives within large financial institutions; they were too complacent about bubbles and leverage. But while one task for the historian is to judge past generations, a second is to show future generations how and why men will grapple with the same limitations that Greenspan confronted. They will be expected to forecast crises but will lack the tools to do so. They will be called upon to eliminate financial risks when such risks are inescapable features of the human condition. The delusion that statesmen can perform the impossible — that they really can qualify for the title of “maestro” — breeds complacency among citizens and hubris among leaders. The story of Alan Greenspan may perhaps serve as an antidote.”
My quibble with that last sentence is that Mr. Greenspan’s rise and fall from being financial wizard to talk-show punch line is only half the lesson we have to learn. The irony in all this is that Mr. Mallaby currently holds a chair at the Council on Foreign Relations think tank named in honor of no less than Mr. Greenspan’s predecessor at the Federal Reserve, Paul A. Volcker.
Where Mr. Greenspan evaded getting fired for this view, Mr. Volcker’s equally distinguished career as a financial counselor saw him repeatedly sacked and passed over by presidents from Jimmy Carter to, most recently, Barack Obama.
It was as Fed chairman in 1980 that Mr. Volcker attacked the 14.8 percent inflation rate that gripped the nation, and by jacking up the central bank’s borrowing rates for banks, crushed inflation to below 3 percent by 1983. It was strong and painful medicine. Builders, farmers, bankers, almost everyone, protested violently. Mr. Carter and his aides whined piteously, but it worked.
Most recently, President Obama and the current Fed board at first welcomed Mr. Volcker’s stern strictures in his Volcker Rule plans to reign in the lunacies of Wall Street’s banks and hedge funds. That was in 2010 but, as Mr. Mallaby might point out, repentance was inevitable. Just last week the Fed, prodded by the White House, gave Goldman Sachs and other banks a five-year breather on the Volcker Rule demand that they unload and write off the hard-to-sell stakes they have in hedge funds and other dodgy products.
So the second volume Mr. Mallaby ought to write — about the life and times of Paul Volcker — may have to wait; for that part of the story has yet to unfold.