Alan Greenspan ditches the cryptic comments and says exactly what he means
For years Alan Greenspan, the most famous central banker in the history of the job, spoke in a careful code. His chosen means of communication was the oracular observation, hedged around by qualifying subclauses, parenthetical asides and carefully balanced counterfactuals, that could be understood only by those with a detailed knowledge of monetary policy and financial markets.
He once told an audience, in all seriousness: “I guess I should warn you. If I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”
But with the publication of his memoir, The Age of Turbulence: Adventures in a New World, this week, it is as though the oracle has suddenly grabbed a microphone and started to gossip frantically about all the hopeless souls who had been consulting it all these years.
President Bush is portrayed as irresponsible and incurious (who knew?). The former Chairman of the US Federal Reserve says that Mr Bush presided over intolerable increases in government spending. “My biggest frustration remained the President’s unwillingness to wield his veto against out-of-control spending.”
He had hoped that his colleague from the Ford Administration, Dick Cheney, the Vice-President, would be a force for economic prudence and fiscal discipline. Instead, “I was soon to see my old friends veer off to unexpected directions”.
Republicans who controlled Congress for most of the past ten years “lost their way” and “swapped principle for power. They ended up with neither.”
By contrast, Mr Bush’s predecessor, Bill Clinton, was a “risk-taker”, who had shown a “preference for dealing in facts”, and something of a soulmate for the data-obsessed Mr Greenspan.
“Here was a fellow information hound . . . We both read books and were curious and thoughtful about the world . . . I never ceased to be surprised by his fascination with economic detail: the effect of Canadian lumber on housing prices and inflation . . . He had an eye for the big picture, too.”
When it emerged that he also had an eye for something else – an intern by the name of Monica Lewinsky – Mr Greenspan was left feeling “disappointed and sad”.
The first President Bush gets short shrift for trying to strong-arm the central bank into an easier monetary policy so that he could get reelected in 1992. (He failed.) President Reagan’s tendency to formulate policy and ideology from anecdotes represented an “odd form of intelligence”.
The Iraq war, Mr Greenspan says, was “largely about oil”. The excitement that that seems to have caused in some sections of the media might be tempered by his somewhat testy acknowledgement earlier in the book that he was left out of the inner circle of policy advisers around President Bush.
For all the chatty observations about politicians and events he encountered in 19 years at the Fed, for today’s turbulent financial markets it is his account of monetary policy in the past few years that is of most interest. To the growing number of Greenspan critics, the former Fed Chairman, who once enjoyed godlike status on Wall Street, is largely to blame for the sub-prime mortgage crisis that is behind today’s turmoil. They say he allowed a bubble to develop in the housing market between 2001 and 2006, his last five years at the Fed, when he cut interest rates too far and kept them low for too long. Mr Greenspan acknowledges that he did not see the scale of the problems in the sub-prime housing sector. “I didn’t really get it until very late in 2005 and 2006,” he said last night in an interview on CBS News timed to coincide with the book launch.
But he insists that the Fed was right to cut interest rates – to an historic low of 1 per cent by 2003 and to keep them there for a year – because of the very real risk of deflation.
“We wanted to shut down the possibility of corrosive deflation,” he argues. “We were willing to chance that by cutting rates we thought might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address . . . It was a decision done right.”
He says that the housing bubble was caused, in any case, by other factors – mainly the end of communism, which brought new countries into the global economy and pushed down wages, prices and long-term interest rates (to which most US mortgages are tied).
He also argues that it is always better and easier for a central bank to respond – aggressively, if necessary – to the damaging effects of economic or financial events by cutting interest rates. That, at least, ought to resonate with Ben Bernanke, Mr Greenspan’s successor at the Fed.
Mr Bernanke and his fellow US central bankers gather tomorrow for the most important meeting of his short tenure so far, where the debate seems to be not about whether, but by how much, to cut interest rates in response to the financial turmoil of the past two months.
From The Times UK