A Fresh Look at the Greenspan Era

A Review of Sebastian Mallaby’s “The Man Who Knew:  The Life and Times of Alan Greenspan”

As memories of the 2008-2009 financial crisis fade in the distance of a long path of rising stock and real estate values, investors become increasingly susceptible to ignoring risk and thus acting imprudently.  One way to help combat such complacency is to read economic history.  And luckily an engaging new book by Sebastian Mallaby helps investors do just that.

Mallaby’s “The Man Who Knew:  The Life and Times of Alan Greenspan” traces the rise of the former Federal Reserve chairman from a highly intelligent but insecure child, to economic consultant and devotee of the libertarian firebrand Ayn Rand, to pragmatic policy adviser to several U.S. Presidents, to the most powerful figure in global finance, and, finally, to an overly-villainized scapegoat of the financial crisis.  The author’s meticulous research allows him to dispel many myths regarding Dr. Greenspan’s tenure; for example, his rejections of various regulatory proposals were for practical and not purely ideological reasons.  However, the author does not give Greenspan a full pass on his regulatory indifference. Greenspan, the author notes, could have more forcefully fought for proposals to increase bank capital (proposed by Tim Geithner) and regulate over-the-counter derivatives (proposed by Brooksley Born).

The most noted and contentious point in the book, however, is the role of monetary policy on asset prices.  Dr. Greenspan, in his post-crisis attempt at salvaging his reputation as a central banker, vehemently denied that the Federal Reserve could have thwarted the trajectory of housing prices before they reached dangerous proportions.  On this point, his successors, Ben Bernanke and Janet Yellen, agree.

This belief in the impotence of monetary policy on asset prices was and is far from universally accepted.  In late 1993, then Fed board member Lawrence Lindsey recognized that price stability, arguably the most important mandate of a central bank, would no longer be a reliable signal for monetary policy.  As Lindsey saw things, technology-driven productivity gains, increased global trade, and an expanding post-cold war labor force were forcing down consumer prices even as the Fed was lowering short-term interest rates.  If Lindsey was correct, easy money policies from the Federal Reserve would not necessarily lead to rising consumer prices but could lead to destabilizing asset prices.  Lindsey felt that financial stability should be a stated goal of the Federal Reserve, at least as important as the institution’s “dual mandate” of price stability and full employment.  Greenspan, however, would largely ignore Lindsey’s warnings.

To Mallaby, Greenspan’s dismissal presents an interesting paradox.  Mallaby cites a paper which Greenspan authored in 1959.  In this paper, Greenspan looked at the impact that monetary policy had on asset prices and particularly the role that stock prices had on business investment.  Greenspan also had many other instances in his career where he clearly understood the impact that the Federal Reserve has on asset prices.  To the author, Greenspan’s unwillingness to act on the several asset price bubbles which persisted under the tenure remains a subject of speculation.

The author’s exhaustive research and literary talent provides an engaging backdrop for the former Chairman’s career.  Readers should, however, understand the limitations of the book within the genre of economic history.  Given the need to provide a focus on Greenspan’s Fed chairmanship, the author provides adequate coverage of certain historical events while briefly mentioning others.  For example, Richard Nixon’s deep politicization of the Fed is well covered, the tax movement of the late 1970’s / early 1980’s is not.  Furthermore, readers unfamiliar with such terms as “Keynesian economics”, “Supply-Side fiscal policy” and “Neoclassical economics” may want to keep a good economic dictionary on hand; the author presupposes a familiarity with economics which some readers may be lacking.

Mallaby’s “The Man Who Knew” will likely be seen as an important contribution to monetary and pollical history, and perhaps the standard work on the Federal Reserve under Alan Greenspan.  As the author himself notes, “The story of Alan Greenspan is also the story of the making of modern finance.”  All serious investors should give this book a thoughtful reading.  They will be well rewarded for doing so.

 

 

 

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