The Maestro of the Free Market
Alan Greenspan: A force for good
If old soldiers never die, retired generals never stop refighting their old battles. All the same there is something wholly admirable in Alan Greenspan's publication of another volume on economics and public policy. Greenspan may be approaching his 88th birthday, but he still has fresh things to say. The title of his new book, The Map and the Territory, may baffle at first, but it refers to Greenspan's more than 60 years of analysing the peaks and troughs, the hills and valleys, of the American business cycle. His two decades as chairman of the Federal Reserve, which ended in 2006 before the onset of the Great Financial Crisis, were widely regarded as a great success at the time. Bob Woodward, one of the two journalists behind the Watergate scoop, wrote a book on the period called Maestro. Everyone knew to whom that referred.
But Greenspan's reputation is not what it was. The severe economic downturn of late 2008 and early 2009 occurred under his successor, Ben Bernanke, but the instability is alleged to have originated in the financial excesses of the Greenspan era. The 20 years to 2006 have been condemned as a period in which the American people took on too much debt, making inevitable a phase of retrenchment and recession. In congressional testimony in 2008 Greenspan confessed to error. He acknowledged to a committee of the House of Representatives that "those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included", were "in a state of shocked disbelief".
A former acolyte of the libertarian philosopher Ayn Rand, Greenspan has always been an articulate supporter of free-market capitalism. In the heyday of President Reagan and Prime Minister Thatcher, he was a prominent advocate of deregulation, including deregulation of the financial system. His 2008 congressional testimony was therefore seen as a remarkable about-turn. But was his recantation sincere? The Map and the Territory has given Greenspan an opportunity to present and defend his true beliefs.
But the result is a muddle and, frankly, a disappointment. Greenspan suffers from the besetting sin of all economists except the one-armed variety, that they can say "on the one hand this" and "on the other hand that". On the one hand, Greenspan reiterates his conviction that government meddling harms private enterprise. Chapter seven, "Uncertainty undermines investment", identifies "the threat of arbitrary intervention" arising from undue policy activism as a major block to the current American economic recovery. He is particularly critical of "the vast and troubled financial regulations mandated by the Dodd-Frank Act".
On the other hand, he repeats and endorses his 2008 congressional testimony, and on several occasions concedes that something went horribly wrong in the closing months of that year. He makes unembarrassed statements that in his view the breakdown in financial markets necessitated government intervention as an initial response and justified extra regulation as the longer-term remedy. He dislikes the Dodd-Frank Act, but he approves of the big increases in banks' capital requirements that have been orchestrated since 2008 by the Bank for International Settlements in Basle.