The man who thought he knew


The Washington Times Daily - - EDITORIAL - By James Srodes Washington au­thor and jour­nal­ist James Srodes was Washington bureau chief for Forbes mag­a­zine.

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.

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