The Age of Turbulence
By Alan Greenspan
Penguin Press
From the early reviews, you would think “The Age of Turbulence” was a clumsy attempt by former Fed chairman Alan Greenspan to excuse himself for the problems he allegedly caused, from the ballooning of the tech and housing bubbles to the growth in the nation’s national debt to the decline of the dollar.
Greenspan’s book isn’t like that. First, it’s just a good story: Greenspan tells us how a hyper-analytic, baseball-obsessed “lower- middle-class” kid from Washington Heights grew up to be Fed chairman. Greenspan spent much of his private-sector career working for himself, not for a huge bank or corporation. In partnership with an older economist, he prepared analyses of various sectors of the economy for high-end clients in American industry. Through this experience, he clearly learned that a hard-working person with highly-sought skills can make it on his own.
Through research for his clients, Greenspan learned first-hand how quickly things change in competitive markets. He analyzed, for example, how the American steel industry suffered mid-century when a domestic strike forced big consumers like the auto industry to look abroad for sources and when aluminum makers started to compete with steel for the lucrative canned-goods market.
These empirical encounters with economic self-sufficiency and creative destruction likely helped Greenspan refrain from worrying too much from his government perch during the heady years of the 1990s, when entrepreneurs were forcing innovation across the American economy.
Second, the book is an intricately detailed journey into the mind of a preeminent central banker, making it an invaluable resource for anyone interested in economics, banking and finance, whether the reader agrees with the man’s on-the-job decisions or not.
Here, Greenspan’s book has come under withering criticism. Most harshly, fellow economist and New York Times columnist Paul Krugman has accused the former chairman of “moral collapse” in his alleged support for the 2001 Bush tax cuts.
Hits in hindsight
But the facts don’t bear this out.
In January 2001, Greenspan, testifying about competing tax-cut plans before Congress, said that, “short of a major and prolonged economic contraction,” the nation’s annual budget surpluses, now more than three years running, likely would pay off much of the national debt by the end of the decade.
He added that, as long as the nation continued to pay back its debt, tax cuts were better than spending increases but that the probability of “dropping back into deficit” was real. Thus, he suggested that Congress put triggers on the tax cuts to “limit surplus-reducing actions” if the budget did fall back into the red. Two years later, Greenspan said it would “probably be unwise” to end the tax cut, now enacted, because investors, still regaining their footing in a vastly different environment, had grown used to it.
It seems silly now that Greenspan believed Washington’s press clippings about surpluses as far as the eye could see. But remember the context: Back then, the nonpartisan Congressional Budget Office had estimated that these annual $300-billion-plus surpluses would mean that the national debt would be a fraction of itself by 2006.
Greenspan gave truthful, reasonable answers, backed by evidence, for that time.
Greenspan doesn’t shy from criticizing the Bush administration. Both the president and the Republican Congress were fiscally irresponsible in enacting the huge Medicare drug plan without reforming the rest of the expensive program; they were also craven in pushing pork-barrel spending to hang onto power, he writes. The critics say that Greenspan’s words come too late: he should have spoken up when it counted.
But the serving Fed chairman is not a politician or a think-tank critic. He’s not supposed to run around Washington telling the solons they’re spending too much. Armed with nuanced facts and analysis, which Greenspan was always happy to give, elected officials should be able to make responsible decisions without a Fed baby sitter publicly castigating them.
The sitting Fed chairman has one day-to-day job: trying to keep the prices of goods and services stable. The chairman does this by determining, along with a board of people, whether it’s a good idea to raise short-term interest rates, cut them or leave them alone at any given time.
Greenspan did this job, keeping inflation largely in check over nearly two decades. As he notes, market forces made his job easier. After the collapse of communism showed the fallacy of central planning, workers all over the world joined competitive market economies, exporting cheap goods and services to Western consumers and helping keep inflation in check. And they were saving more money than ever before, pushing demand for our Treasury-bond and mortgage debt up and interest rates down.
But lots of people think Greenspan should have done some other stuff, too.
First, despite his infamous “irrational exuberance” comment in 1996, critics think he should have done more to deflate the tech-stock bubble before 2000.
Greenspan’s account of his reasoning on the issue shows the limits of the Fed’s power. The Fed did raise rates, but the market was too strong for the gradual steps the Fed was willing to take. “If [higher interest rates] could not knock stock prices down . . . owning stocks became a seemingly . . . less risky activity,” he writes. “Our modest forays therefore had . . . set the stage for further [stock-price] increases.” Greenspan could have raised rates severely and collapsed the market and the economy along with it – but nobody wanted that.
The housing bubble illustrates the same point. The Fed kept rates at rock-bottom levels between 2001 and 2003, because it was worried about deflation, the opposite of inflation and just as bad.
But in 2004, in part to push mortgage rates up and cool the housing fever, the Fed hiked its rate. Long-term interest rates and mortgage rates, though, stayed stubbornly low. That’s because they are market rates, not set by one person’s whim. Greenspan’s failing here, perhaps, was in not using his powerful position to warn the public about the dangers of adjustable-rate mortgages with “teaser” low rates.
But many of the criticisms of Greenspan in the past week tell us more about ourselves than about him. We want some fairy godfather to save us from ourselves, whether we’re buying houses we know we can’t afford or expecting the dollar to stay strong when we’re running up global deficits as baby boomers retire.
A steady hand
The real Greenspan legacy is that over nearly two decades, Americans nearly forgot about inflation.
Today, the euro competes with the dollar for the world’s savers giving us less room for error when we screw up. At the same time, those savers are becoming consumers, demanding fewer dollars to save. (They’re also demanding higher wages, increasing the cost of our imported goods.)
In closing his book, Greenspan expresses concern about these pressures and our ability to deal with them. “When pressures and . . . long-term interest rates rise, the degree of monetary restraint required to contain any given rate of inflation will increase,” he writes. That’s Fedspeak for saying that it might not be so easy over the next two decades to keep inflation in check – and it might involve economic pain.
As Greenspan’s tenure indicates, the Fed can’t save us from all of our economic, fiscal and monetary problems. Nor is it supposed to.
But it could do a lot of harm if it forgets that inflation comes first.
Nicole Gelinas, a chartered financial analyst, is a senior fellow at the Manhattan Institute.