The Great Enabler

The Age of Turbulence: Adventures in a New World by Alan Greenspan (The Penguin Press, 531 pages, $35)

In one of the stories that he made up while writing for The New Republic, the young fabulist Stephen Glass spun a narrative about an Alan Greenspan cult in the financial world. The members supposedly held reverential celebrations of the Fed chairman's birthday as well as quasi-religious observances at several brokerage houses. "He's been good to us, and it's a way to honor him," a fictitious bond trader supposedly said. Interestingly, this was not one of the articles that brought down the mendacious Glass, for the idea of a Greenspan cult hardly strained credulity.

In his 18 years at the Federal Reserve, Greenspan had the reputation of an economic wizard—the rare Fed chairman who did not take away the punch bowl during booms but somehow avoided getting the economy drunk on inflation nonetheless. Unlike most senior Fed officials, Greenspan came to prominence as a business researcher who studied actual economic conditions in all their institutional complexity. As the junior partner in the economic research firm Townsend-Greenspan, he became celebrated for his genius in forecasting trends based on his detailed reading of such statistical indicators as freight-car loadings and shipments of raw cotton. Along the way, he became an acolyte of Ayn Rand, whom he recalls fondly.

Greenspan first entered public life as a volunteer economic adviser to Richard Nixon's 1968 campaign. Though he served as an informal adviser to Nixon after the election, it wasn't until late in the Watergate scandal that the White House chief of staff, Al Haig, asked Greenspan to become the president's top economic adviser. Appalled by Nixon's dalliance with wage and price controls and personally uncomfortable around the man, Greenspan demurred until his old mentor, Fed Chairman Arthur Burns, urged him to accept for the good of the country. His Senate confirmation hearing was Aug. 8, 1974. That evening, Nixon resigned.

Gerald Ford, however, retained Greenspan, who then began what would be a 30-year, bipartisan process of deregulating the U.S. economy. Many Americans think deregulation began under Jimmy Carter or Ronald Reagan, but Greenspan is determined to set the record straight. "Deregulation was the Ford administration's great unsung achievement," he crows, meaning, of course, his own. "It's difficult to imagine how straitjacketed American business was then," Greenspan continues, insisting with Randian hyperbole that government was monitoring business operations "down to the tiniest detail."

If Greenspan managed to make over his public image from a competent technical economist cum Ayn Rand fanatic to wise manager of the economy, his personal obsession with getting government out of the way stayed with him. He wrote his memoir virtually on the eve of the meltdown in sub-prime mortgages—a direct result of Greenspan's own refusal to use the Fed's authority to regulate loan-underwriting standards. But, oblivious to the dangers, he declares, "Awareness of the detrimental effects of excessive regulation and the need for economic adaptability has advanced substantially in recent years. We dare not go back."

***

Appointed by ronald reagan to chair the Fed in 1987, Greenspan personally knew six presidents as either chief economic adviser or head of the central bank. When The Age of Turbulence appeared, the early reviews pounced on the tantalizing, indiscreet tidbits that Greenspan dropped in: "[Nixon] wasn't exclusively anti-Semitic … He hated everybody." Bill Clinton and Nixon were the smartest presidents Greenspan served under. Gerald Ford was "as close to normal as you get in a president." George W. Bush disappointed Greenspan as a big spender. And the blockbuster that every lefty had been waiting for: "I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."

While some reviewers emphasized these naughty asides, others found it touching that the dour Greenspan, noted for Delphic and opaque pronouncements to congressional committees, reveals himself to be a warm, witty fellow with a romantic side and a remarkable capacity to write graceful narrative. "Not only can Greenspan discourse lucidly on economic matters," an impressed Michael Kinsley wrote in The New York Times Book Review, "but he has also written the most unexpectedly charming Washington insider memoir since Katharine Graham's a decade ago."

Well, not exactly. Read deep into the acknowledgements (which are printed in what looks like six-point type), and you will find this characteristically oblique confession: "Peter Petre has been my collaborator in the writing." Petre, a senior editor at Fortune, has become one of America's best (and best-compensated) ghostwriters. In the autobiographies that Petre ghosted for IBM's Thomas Watson Jr. and Gen. Norman Schwarzkopf, Watson had the decency to give Petre a co-author credit line (in much smaller type), while the title page of Schwarzkopf's book says "written with" Petre. But in the case of the vain Greenspan, you need to read down to the middle of page 507 to find any mention of Petre at all.

Nor is this really an insider memoir, in the sense of a book that tells all. Much of what Greenspan recounts was told (in more detail) six years ago in Bob Woodward's worshipful book, Maestro, written with Greenspan's full cooperation. Greenspan's own acknowledgements page even thanks Woodward for sharing his transcripts of the extensive interviews that Greenspan gave him while the chairman was still in office. While Greenspan offers a few more titillating asides, the book is far more valuable for what it reveals about the interests that the Federal Reserve upholds and the prevailing delusions and inconsistencies in the reigning conservative view of how to operate the economy.

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In his long career at the Fed, Alan Greenspan was the great enabler in three distinct senses. First, thanks to his voracious statistical appetite and close reading of business conditions, he often had deeper insights than his own senior staff and a better feel for the economy than most academic economists. In the mid-1990s, the majority of economists still believed in a static trade-off between inflation and unemployment that supposedly required the Fed to hit the brakes whenever unemployment fell below something like 5 percent. Greenspan's study of the actual economy, however, persuaded him that structural changes allowed the Fed to be more expansive.

With higher rates of productivity thanks to the diffusion of computer technology, the economy could run closer to full employment without triggering inflation. As Greenspan writes, quoting himself at a key meeting of the Federal Open Market Committee in December 1995:

My idea was that as the world absorbed information technology and learned to put it to work, we had entered what would prove to be a protracted period of lower inflation, lower interest rates, increased productivity, and full employment. "I've been looking at business cycles since the late 1940s," I said. "There has been nothing like this." The depth and persistence of such technological changes, I noted, "appear only once every fifty or one hundred years."

The chairman had that exactly right. But Greenspan was also an enabler in a second, less savory sense. As a conservative Republican and disciple of Ayn Rand, Greenspan was a fanatic believer in free markets. Yet when speculative excesses permitted by deregulation caused trouble for big banks, hedge funds, the stock market, or the economy as a whole, Greenspan suddenly turned into a believer in big government. His Fed was prepared to do whatever it took to get the economy back on track. Usually, that meant a bout of very cheap money, which unfortunately fueled the next round of speculative excess.

Had Greenspan stepped in to insist on tighter regulation as the price of giving banks the serial bailouts, that would have been defensible policy. But despite his practice as the most interventionist Federal Reserve chairman ever, his faith in the theory of self-correcting markets was undiminished. Some might find this behavior inconsistent, even hypocritical. For had Greenspan let the supposedly self-regulating financial markets just suffer the consequences of their own folly, big banks would have gone broke, and we could have repeated 1929. As his memoir shows, Greenspan still doesn't get that core contradiction in his worldview.

And Greenspan was the great enabler in a third sense. At just the right political moment, he gave his blessing to George W. Bush's tax cuts, testifying that surpluses were vulnerable to being spent by politicians. As an anti-government libertarian, Greenspan loathed government spending far more than he feared deficits. With fiscal conservatives on Capitol Hill fairly begging Greenspan not to endorse a big tax cut, Greenspan gave Bush the political cover he needed. Greenspan's memoir is full of a lot of disingenuous backing-and-filling, contending that the press misunderstood his caveats.

When Sen. Kent Conrad, a leading Democratic budget hawk, warned Greenspan, "You're going to create a feeding frenzy … Why are you backing the Bush tax cut?" Greenspan lamely replied that he was merely endorsing a large tax cut, and not necessarily Bush's. Greenspan admits, however, that the White House was thrilled and that the press played his testimony as an endorsement. "I'd misjudged the emotions of the moment," he writes. But at the time, Greenspan did not take the trouble to correct the record. He goes on to confess surprise that the Bush tax cuts were part of a revenue shortfall that led to a new cycle of big deficits. His criticism of Bush as a fiscal wastrel is equally disingenuous. Bush's "big spending" was mostly on wars, and the rest of the deficit is mainly the result of the tax cuts for which Greenspan himself bears heavy responsibility.

***

Greenspan has really written four books: a witty autobiography, heavily reliant on Petre's deft hand; an apologia intended to preserve a legacy rapidly being tarnished by events in the financial markets; some gratuitous and fairly pedestrian chapters on far-flung issues—Russia, India, China, Latin America—on which Greenspan is not really expert; and several fascinating sections on core economic-policy questions regarding wages, deficits, regulation, globalization, and inflation. These latter chapters, reflecting Greenspan's own expertise and ideological prejudices, offer a revealing window on the far-right ideology of the people who run the country.

When Greenspan gets back to these various areas of technical analysis, the prose starts reading as if it came from the hand of the chairman personally, not from his ghostwriter. His chapter on the trade deficit and the foreign debt is classic Greenspan—on the one hand, this, on the other hand, that. The trade deficit, he writes, is a problem, but not a dire one because foreigners seem willing to keep funding our foreign debt. On the other hand: "Sudden reversals of foreign investor sentiment cannot be entirely ruled out, with the concomitant risk of rapid declines in the dollar's foreign exchange." Uh-oh. But, then on the third hand: "However, it is easy to exaggerate the likelihood of a dollar collapse." And so on. And when you get to sentences such as the following one, it's clear that this is pure Greenspan, not Petre: "Aggregate net claims against foreigners only (our current account) is an incomplete statistical picture of [our] potential economic stress." With the dollar swooning and America heavily dependent on Chinese lending, Greenspan expresses far more worry about less ominous problems, such as Social Security.

At one point, amid his celebration of the efficiencies of the deregulated economy, Greenspan improbably confesses grave concern about "the emergence of increasing concentrations of income, which is a threat to the comity and stability of democratic societies." Why this new inequality? In a breathtaking discussion that might have come from William Greider, Greenspan blames economic globalization and its downward pressure on U.S. wages. Assessing the "conundrum" of what killed inflation, he points out that 500 million new workers in low-wage countries have been producing for export since 1989. "This movement of workers into the marketplace reduced world wages," Greenspan writes. He adds:

Even though the aggregate payroll of the newly repositioned workforce was only a fraction of that of developed nations, the impact was pronounced. Not only did low-priced imports displace production and hence workers in developed countries, but the competitive effect of the displaced workers seeking new jobs suppressed the wages of workers not directly in the line of fire of low-priced imports.

Take that, globalizers. What's the remedy? As a conservative ideologue, Greenspan is categorically opposed to any of the policy instruments that might restore a more balanced income distribution. He abhors regulation, disdains trade unions, much less labor standards in trade agreements, and opposes social spending. And he is far more worried about a backlash of "populist" politicians exploiting economic discontents and sowing protectionism than about the substantive problems of insecurity and inequality. Instead, he makes an entirely unconvincing pitch for better education, despite his acknowledgement that no amount of education will equilibrate U.S. and Third World wages.

I found this analysis of globalization and inequality, which puts Greenspan at odds with most economists (who still argue that the effect of trade on wages is trivial), far more illuminating and vindicating than anything that Greenspan had to say about Nixon, Bush, or Iraq and oil. Let's hope the revelations of this book, intended and unintended, give inspiration and courage to America's liberals.

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