Tuesday, September 18, 2007


The Banker Looks Back

The Banker Looks Back

September 18, 2007

At one point during his long interview on "60 Minutes" Sunday evening, Alan Greenspan could be seen autographing dollar bills for his smiling fans. Meanwhile, off camera, unautographed greenbacks continue to depreciate against a variety of metals and foreign currencies. A century ago the pound sterling anticipated the dollar's role today as the pre-eminent global monetary brand. But the pound was exchangeable into gold at the bearer's demand. Not since 1971 has the dollar been collateralized by gold or exchangeable at the U.S. Treasury into anything except nickels, dimes and quarters.

Sooner or later, the dollar will lose its luster and finally its value, as paper currencies always do. Striving to understand why people trusted it in the first place, historians will naturally reach for the memoirs of the foremost central banker of his day. But Mr. Greenspan's "The Age of Turbulence" will leave them just as confused as they ever were.

[Alan Greenspan]

The first reports of the book's contents trumpeted Mr. Greenspan's criticism of the current administration's spending habits and his (approving) sense that the Iraq war had something to do with crude oil. But the real news in "The Age of Turbulence" is what it reveals about the greenbacks to which Mr. Greenspan affixed his celebrity signature and the ways in which the currency has been managed and, especially, mismanaged.

A more self-knowing memoirist might have titled this book "The Age of Credulity." The great public drama of Mr. Greenspan's life is, of course, the work he performed as chairman of the Federal Reserve from 1987 to 2006. That work, in all but name, was price fixing. It consisted (and, under his successor, Ben S. Bernanke, still consists) of setting an interest rate and shoving it down the throat of the world's largest economy. It is a mighty strange work for a "libertarian Republican," as the Maestro styles himself here, let alone a former worshipful member of the inner circle of the radical individualist Ayn Rand. "It did not go without notice," the author writes of his swearing-in as chairman of the President's Council of Economic Advisers in 1974, "that Ayn Rand stood beside me as I took the oath of office in the presence of President Ford in the Oval Office."

The fantastic irony of Mr. Greenspan's career path -- from gold-standard libertarian to federal interest-rate fixer -- seems hardly to have registered on Mr. Greenspan himself. The closest he comes to acknowledging it is his description of how the Fed looked to him from the outside. It was, he writes, a "black box." Having watched his mentor, Arthur Burns, struggle with the chairmanship, Mr. Greenspan notes, "it did not seem like a job I felt equipped to do; setting interest rates for an entire economy seemed to involve so much more than I knew." A deeper kind of libertarian might have added: "Maybe nobody can know enough to set interest rates for an entire economy."

So Mr. Greenspan, a consulting economist of no special attainments (on the eve of the 1974 stock-market collapse, he was quoted in the New York Times saying "it is rare that you can be as unqualifiedly bullish as you can now"), agreed to perform the impossible. Succeeding Paul A. Volcker, he became America's monetary central-planner-in-all-but-name. Mr. Greenspan ruled the roost in 74 fiscal quarters, of which recession darkened only five.

By Alan Greenspan
(The Penguin Press, 531 pages, $35)

Under his direction, the Fed became a kind of first responder to the scene of financial and economic distress. It soothed taut nerves following the 1987 stock-market break, nourished a crisis-ridden banking system with cheap money in 1990-92, helped to lead the Clinton administration's rescue of the Mexican economy in 1994-95 and engineered the so-called soft landing of the U.S. economy, also in 1995. It famously trimmed its interest rate three times during the Long-Term Capital Management crisis of 1998, succeeding so well in one artfully timed intervention that the stock market, in the final hour of a single session, leapt by 7%. And the market kept right on leaping, all the way to the Nasdaq's own Mount Everest in March 2000. One of those rare recessions followed, after which came the campaign to scotch what Mr. Greenspan was pleased to call "deflation." To fend off the peril of low and lower everyday prices, the Fed pressed its interest rate all the way down to 1% in 2003 and kept it there until mid-2004. Now it was house prices that went into orbit. They were just beginning to return to Earth when Mr. Greenspan retired from public life.

Readers who got one of the fancy new teaser-rate mortgages in 2003 or 2004, and who have lived to rue the day, are unlikely to find much nourishment in Mr. Greenspan's discussion of the theory of financial bubbles or in his self-exculpating account of the Fed's role in financing them with artificially low interest rates. Nobody can identify a bubble as it is inflating, Mr. Greenspan has long insisted -- though, as you will not read in these pages, Mr. Greenspan was so certain that he detected a stock-market bubble in 1994 that he tried to prick it by pushing interest rates up. Strangely, the author's bubble-sensor failed him later in the decade. He did, in 1997, utter the innocuous phrase "irrational exuberance," but that was as far as he went in attacking sky-high equity valuations.

Mr. Greenspan now writes that the enlightened central banker will let speculation take its course. Following the inevitable blow-up, he will clean up the mess with low interest rates and lots of freshly printed dollar bills -- thereby gassing up a new bubble.

Only one of the troubles with this prescription is that it requires an enlightened central banker to carry it out. Nowhere in this book does Mr. Greenspan own up to his role of underestimating the severity of the credit troubles of 1990, or of cheering on the tech-stock frenzy in 1998-2000, or of dangling the most beguiling teaser rate of all during the mortgage frolics of 2004 -- i.e., that 1% federal-funds rate. In February 2004, only months before the Fed started to raise its rate, in a speech titled "Understanding Household Debt Obligations," Mr. Greenspan demonstrated next to no understanding. His advice to American homeowners was not that they lock in a fixed-rate mortgage while the locking was good, but rather that they consider an adjustable-rate model. He who set the rates got it backward.

An only child of divorced parents growing up in New York City in the 1930s, Mr. Greenspan had seemed destined for better things than a career in interest-rate manipulation. He was an exceptional clarinetist, a Morse code enthusiast and the developer of a personal system for scoring baseball games. The boy who would date Barbara Walters, marry NBC's Andrea Mitchell and be knighted by the queen of England was, above all things, lucky. In 1944, a dark spot on the X-ray of his lung made him undraftable. He spent the late war years in the reed section of the Henry Jerome orchestra. Luck still with him, he gravitated to economics, thence to Ayn Rand and thence -- what could Rand have thought? -- to the security of the federal payroll.

Admirers or detractors of Mr. Greenspan's central banking record will turn the pages of the first half of this book -- the story of his life, his loves and his economics -- without once having to stifle a yawn. But few will remain alert while toiling through the public-policy ruminations that pad out the final 200 pages. As Fed chairman, Mr. Greenspan had a habit of inflicting on captive audiences his not always original views on such topics as rural electrification, education in a global economy and the bright promise of technology. Such ponderations are no more scintillating now that he is out of office.

"As Fed chairman," Mr. Greenspan writes, "I was queried by fellow central bankers with large holdings of U.S. dollars about whether dollars were safe investments." The monetary bureaucrats will find no reassurance in these all-too-many pages.

Mr. Grant is the editor of Grant's Interest Rate Observer.

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