In the spring of 1916, ten years before Greenspan was born, the New York Times published an obituary of one of his early heroes: “J. J. Hill Dead,” the headline proclaimed, “Fortune Put at $75,000,000.” James J. Hill had been built like “a buffalo,” his teeth “seemingly fit to crunch iron,” and although he had amassed interests in shipping, farming, and banking, his greatest monument by far was his audacious rail network, a six-thousand-mile web that stretched from the Minnesota boundary to the Pacific. Hill had willed this system into existence by sheer obstinacy of spirit, laying tracks through virgin wilderness bereft of produce or people, then building up the farms and settlements that would make his lines profitable. Herds of hogs and cattle populated the plains, and towns sprang up where none had been, hurrying into life before the weeds had grown over the railroad embankments. Moreover, whereas lesser railroad magnates had relied on government subsidies and land grants, Hill had pursued his vision without federal assistance. “The greatest constructive genius of the Northwest is gone,” Minnesota’s governor lamented after Hill’s passing.1
Such were the grand industrialists who stirred a bookish autodidact from Washington Heights to seek out his own form of greatness. Until he passed the age of forty, Greenspan duly pursued his ambition in a way that Hill might well have recognized, rising from modest origins as the captain of an independent firm, driving himself forward by dint of a strong will and a keen mind, identifying naturally with Ayn Rand’s swashbuckling enterpriser heroes. But then, when he signed on with the Nixon campaign in 1967, Greenspan’s life turned down a different path: he forsook the individualistic endeavor of an enterpriser for the collective work of politics; he left a realm in which success could be measured neatly in dollars, embarking on a murkier quest for influence and reputation. Greenspan’s new habitat—Washington, D.C., as it existed from the late 1960s—could scarcely have been more different from James J. Hill’s unplowed frontier. Nothing could be accomplished in the nation’s capital without cynical tactics and inglorious compromise. Having chosen government as his calling, Greenspan could never hope to match the tycoons who had inspired him.
For any chronicler of any outsized life, the great-man theory of history stands as a temptation. The lure is especially enticing during periods that empower heroes, periods featuring military conquest or dramatic change; or periods featuring especially egregious inequality, which concentrates power among a handful of leaders. Philosophers of history, reaching for circumstances in which great men made a clear difference, frequently invoke antiquity: “If there had been no Themistocles there would have been no victory of Salamis,” mused John Stuart Mill, “and had there not, where would have been all our civilization?”2 But if antiquity provided the ideal playground for greatness, James J. Hill’s era came a close second. The technological frontier and the physical frontier were receding at once; the combination of rail power and the momentum of westward expansion gave Hill his opportunity. Perhaps not surprisingly, many nineteenth-century intellectuals shared the young Greenspan’s romantic fascination with outsized individuals. “[A]ll things that we see standing accomplished in the world are properly the outer material result . . . of the thoughts that dwelled in the great men sent into the world,” proclaimed the British historian Thomas Carlyle in the classic statement of Victorian hero worship.3
For the biographer of Alan Greenspan, however, the great-man theory of history is a trap. Far from inhabiting a playground for Randian supermen, Greenspan came of age in a very different time: a time of cookie-cutter suburbs, mass-produced consumer goods, an absence of heroic wars, and relatively low inequality. Rather than living in the heyday of individualism, Greenspan confronted imposing collectives: big corporations, big unions, and increasingly big government. With his imagination fired by the tycoons of the nineteenth century, Greenspan resisted as stoutly as he could, pronouncing Ayn Rand’s atavistic hero worship in Atlas Shrugged to be “radiantly exact,” and rejecting the homogenizing bonds of family life even as baby making boomed around him. But limited mortals cannot escape their times, and Greenspan’s entry into the public arena sealed his fate. By the late twentieth century, nobody, not even the U.S. president, could evade the checks and balances of political life: rival government departments that fought selfishly for turf; lobbies that captured portions of Congress; an intellectual climate that threw open some paths and rendered others all but impenetrable. The paradox of Alan Greenspan is that by embodying the American economy in a period of prosperity, he came to seem all-knowing and all-powerful. But a fair evaluation must place him in his true context—a context that made it extraordinarily hard for individuals to stamp their mark on progress.
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All this being said, how should we judge Greenspan? As an observer, analyst, and forecaster, he was formidable. Thanks to his early training in the old-fashioned empiricism of the New York school, he focused more on data than on fallible econometric models, avoiding the mathematical hubris of the next generation of economists. Thanks to his early education in finance, courtesy of his mentor Bill Townsend, he understood the interactions between markets and the real economy better than most of his contemporaries. Aside from the times during his thirties when he fell under Ayn Rand’s eccentric spell, he managed to be right about most things: right about the interaction between asset values and growth, which he laid out in 1959; right about the inflationary bias in an overregulated economy, starting in the 1960s; right about the interplay between monetary policy and housing finance in the late 1970s; right about the irresponsibility of Reaganite supply-siders in the 1980s; right about the productivity acceleration in the mid-1990s; and right about the threat of lowflation in the 2000s. In this long string of successes, the productivity call was by far the most noted. “I don’t think most other people who could have been Fed Chairman would have seen it,” Lawrence Summers said, summing up the consensus in the economics profession; the “call on the productivity acceleration was truly a great one,” the Fed governor Laurence Meyer agreed—“He got it right before the rest of us did.”4 But the truth is that Greenspan’s less remembered pre-Fed judgments were equally prescient. Unlike Milton Friedman, he anticipated the failure of Nixon’s price controls in the early 1970s; unlike almost everybody, he argued that the public’s revulsion at inflation later in the decade would create a predicate for its conquest. Academic economists, unaware of Greenspan’s record as a forecaster and observing his empiricism and his impatience with models, occasionally expressed doubts about his grasp. But those who worked closely with him almost always took a different view. “Alan is one of the smartest people I’ve ever known in my life,” declared the eminent Princeton economist Burton Malkiel, after serving with Greenspan in the Ford White House.5
Setting aside his early Randian lapses, Greenspan was ultimately guilty of one serious analytical error—admittedly, a consequential one. Although he understood the frailty in finance, he underestimated the cost in doing little about it. His nonchalance in the face of proliferating derivatives and leveraged shadow banking recalled the classic silent movie Modern Times, in which Charlie Chaplin puts on roller skates and a blindfold and pirouettes about the floor of a department store, oblivious to the fact that he is inches from a steep drop over an open balcony.6 How this costly misjudgment should be weighed against a lifetime of wise insight is itself a matter of judgment, as we shall see presently. But in fairness to Greenspan, the collective nature of this error should at least be recognized. As late as the spring of 2007, Greenspan’s successor, Ben Bernanke, assured the public that the impact of falling house prices on the broader economy was “likely to be contained,” and the International Monetary Fund declared that global economic risks were declining. Greenspan may have resembled Chaplin’s blind roller skater, but so did virtually all forecasters.
As a doer rather than an observer, however, Greenspan’s record was not so distinguished. His participation in the Nixon campaign was often immature or craven, especially when he attacked Bobby Kennedy for supposedly stoking racial violence after Martin Luther King’s assassination. Later, during Nixon’s presidency, he allowed himself to be co-opted into a plot to neuter an economist whom he revered and an institution that he would embody. As chairman of Ford’s Council of Economic Advisers, he began by reassuring Senator William Proxmire that he would not force his libertarianism on the president if he was in “a minority of one.” But then he delivered on this promise almost too much, failing to resist an increase in the federal budget deficit even when his weekly GNP estimates indicated that no stimulus was necessary, and even when other presidential counselors were urging budgetary responsibility. The clearest instance in which Greenspan urged Ford to stand on principle turned out to be misjudged. He offered impractical antibailout purism when New York flirted with bankruptcy.
After Ford’s presidency, Greenspan’s performance as a doer remained checkered. He resisted the supply-side radicals who gathered around the new Republican standard-bearer, Ronald Reagan, but he was not always a profile in courage. When the moment of truth came at the Palmer House Hilton in Chicago, Greenspan signed off on the dangerously rosy forecasts that disguised the recklessness of Candidate Reagan’s budget plan; then he went out and convinced the press that the plan was responsible. After Reagan’s election, Greenspan ducked the challenge of using the Social Security commission to reform government pensions, even though, from the perspective of a libertarian, his appointment represented a golden opportunity to offer more than tweaks and patches. Finally, as Fed chairman, Greenspan was not quite the all-powerful leader that most Americans supposed. The recovery from the 1987 crash owed less to him than to a cast of lesser-known players: Gerald Corrigan, the domineering boss of the New York Fed; Leo Melamed, the scrappy chief of the Chicago Mercantile Exchange; Stanley Shopkorn of Salomon Brothers and Bob Mnuchin of Goldman Sachs, who bought the market at a crucial time, perhaps averting catastrophe. Likewise, the remarkable moderation of inflation in the 1990s reflected, at least partly, the downward pressure on prices from deregulation and globalization. As Greenspan himself was the first to acknowledge, these were not of the Fed’s making.
Greenspan’s specialty as a political actor lay in a sort of manipulative genius. As a business consultant who served fee-paying executives, he had learned to combine data-infused counsel with a dash of flattery and guile: he taught clients to depend on his advice, but he knew better than to alienate them by contradicting them directly. Thanks to his apprenticeship in the Nixon campaign, Greenspan learned to maneuver politically as well—he watched Patrick Buchanan perform a U-turn on farm subsidies when chased by the “Dakota wolves,” then switched from penning strident denunciations of the Great Society to offering calibrated political advice, informed by his keen polling analysis. By 1975, Ayn Rand’s unworldly chief economist had mastered Washington so completely that he could stymie no less an infighter than Henry Kissinger on the question of the Iranian oil deal—a fact that did not stop him from teaming up with Kissinger five years later in an attempt to maneuver Ford onto Reagan’s presidential ticket. From this period forward, Greenspan went to extraordinary lengths to cultivate the media, instructing his assistants to pull him out of meetings if a big newspaper called, and emerging as a favorite talking head on television. As a result, as Fed chairman, Greenspan enjoyed an almost reverential press. He captured the credit for stabilizing the economy after the 1987 crash; he dominated Time’s cover showing “The Committee to Save the World,” even though the two smaller figures at his flanks (the Treasury secretary and deputy Treasury secretary, no less) had spearheaded the emerging-market rescues. To an extent that had never been true before for central bankers, Greenspan’s pronouncements on all manner of subjects came to be treated as gospel. He was, as he joked nervously, the Zipswitch chairman. He was the maestro.
Despite his extraordinary prestige, Greenspan knew he could survive in Washington only by avoiding fights, or by engaging them passively and deviously. It was an approach that came naturally to a sensitive, shy man. Haunted by the absence of a pale father, intimidated by the presence of a vivid mother, he often lacked the confidence to confront others personally and directly. And so, from early in his public service, Greenspan became a master of passive aggression, pretending to sympathize with Kissinger while stalling him, inviting anti-supply-side economists to difficult meetings in the early Reagan period so that they would make his arguments for him, feigning sympathy with the gold bugs of 1981 while deliberately sabotaging their project. Later, as Fed chairman, Greenspan turned away suggestions that the Fed should regulate the GSEs, preferring to encourage reformers privately behind the scenes rather than joining the front lines of the struggle. Even at the start of the George W. Bush administration, when Greenspan was supposedly at the height of his powers, he caved in to the White House on the first tax cut, despite having been a budget hawk for the previous four decades. On financial regulation, similarly, Greenspan was a follower more than a leader. He took care to vote with the majority on the Federal Reserve Board, deferring to the Fed’s general counsel whenever possible. The exceptions to this pattern of passivity came when the Fed’s turf was threatened, notably at times when the Treasury proposed to usurp its authority to supervise the banking system. Although he shrank from open conflict when he could, Greenspan adored power and was prepared to fight for it.
Greenspan’s passivity as a political actor exacerbated his single error as an analyst—his underestimation of the potential costs from financial fragility. With the explosion of derivatives, megabanks, shadow banks, and leverage, the financial system changed out of all recognition during his tenure; he should have demanded commensurate change in the apparatus of regulation. His failure to do so is commonly ascribed to his libertarian bias: he “deregulated” finance, it is often said, because he was a laissez-faire ideologue. But by the time Greenspan became Fed chairman, his ideology was mostly gone: he was “a get along, go along, comfortable and increasingly popular” figure, as Senator Proxmire observed at his confirmation in 1987; he was a pragmatist capable of actively backing regulation, as he did during the post-Enron debate on corporate auditors. The real reasons for Greenspan’s tolerance of the new finance therefore lay elsewhere. First, he made a pragmatic judgment that megabanks, derivatives, and securitization might be stabilizing, seeing in them risk-spreading advantages as well as evident pitfalls—and even if this judgment ultimately proved wrong, the fact that it was shared by most Democratic experts as well as the technocrats on the Fed’s staff suggests that it was scarcely ideological. Second, Greenspan made the equally pragmatic judgment that fighting for new regulation would be politically impossible. It would mean forging a united front among multiple regulatory bodies, and it would involve battling powerful lobbies that had the ear of Congress. With his reflexive passivity, Greenspan had no stomach for this fight. “He was not an in-your-face personality; he was an around-the-corner personality,” one close acquaintance said. He was first and foremost a political survivor. He wanted to make friends, not alienate them.
Quite how harshly Greenspan should be judged for this timidity comes back to the question of individuals and history. If Greenspan had demanded a bolder response to the challenge of leverage, megabanks, and derivatives, would he have made a real difference? The best guess is that he would not. The moments when Greenspan did stick his neck out are instructive on this point. He opposed the second George W. Bush tax cut, and the White House rolled over him. He pushed belatedly for GSE regulation, this time with the White House on his side, and he was beaten back by lobbyists. He supported the Fed’s efforts to clamp down on risky mortgages, and the housing lenders soon found ways around the restrictions. He backed the drive for Wall Street resilience conducted by Timothy Geithner at the New York Fed, but this came to almost nothing. It is worth recalling that the redoubtable Paul Volcker resisted the unraveling of the Glass-Steagall regulations to absolutely no avail—why then should we suppose that Greenspan could have made a greater difference? Likewise, it bears noting that Paul O’Neill, the Treasury secretary in the early 2000s, broke Washington’s code of caution and fought hard for his beliefs. He was fired for his trouble.
Greenspan may have been hailed as the maestro, and the width of his briefcase may have been scrutinized by news pundits. But the truth is that there were limits to his power. He was not an Athenian general or a nineteenth-century railroad pioneer. He was maneuvering in cramped political terrain, boxed in by a clamorous multitude of turf fighters and string pullers and influence peddlers. If he often behaved passively, it was partly because he was hemmed in by these constraints. He should not be condemned, for with limited power comes limited responsibility.
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There was, however, one area in which Greenspan exercised untrammeled power: the setting of short-term interest rates. From the time of his first FOMC meetings, when he clashed boldly with the Fed’s top staff forecaster, Mike Prell, Greenspan set about establishing control over this lever. A series of challengers, from the economics team in the George H. W. Bush administration to FOMC members such as Alan Blinder and Lawrence Lindsey, attempted to tell him which way he should pull—he dispatched them forcefully. Much of the economics profession, including the Fed’s in-house brain trust, believed he should give up some of his authority by publicly committing to an inflation target—he rebuffed them repeatedly. Presidents and senators had long been in the habit of sniping at the Fed chairman—in the Greenspan era, they learned to defer to him. Because Greenspan dominated monetary policy so completely for almost two decades, his impact on history is best viewed through a monetary lens. The smoothness of economic growth—the prevalence or absence of humanly costly shocks—is the best test of Greenspan’s legacy.
By now there should be no suspense about the verdict on Greenspan’s monetary policy. On the one hand, he brilliantly limited fluctuations in inflation—even if deregulation and globalization partly explained inflation’s low level, monetary policy also played a part, and Greenspan’s steadying presence deserves credit for its low variance. On the other hand, Greenspan utterly failed to limit leverage and bubbles, and this failure magnified financial fragility. Because he conducted monetary policy with a view to ensuring price stability, not financial stability, Greenspan allowed this fragility to grow and grow. Like Chaplin’s blind roller skater, he underestimated the abyss that lay beneath him.7
How did the man who knew the risks in financial cycles back in 1959 nonetheless commit this error? It is not enough to invoke Greenspan’s own explanation here, for the Fed chairman was capable of making arguments that he only half believed if he saw tactical gain in them. Thus, in the aftermath of the tech crash and even more insistently during his retirement years, Greenspan and his sympathizers would repeat a three-part mantra: central banks should not raise interest rates to combat asset bubbles because bubbles are impossible to identify in advance; they should not do so because the debris from bust bubbles can be cleaned up after the fact; and they should not do so because interest rates would have to be raised by such a large amount that they would puncture the economy. Yet none of these assertions is really persuasive. To be sure, bubbles cannot be identified with certainty; but Greenspan had no hesitation in diagnosing bubbly markets at countless FOMC meetings, and the post-Greenspan consensus among central bankers, which holds that incipient bubbles should be deflated with regulatory tools, presumes the possibility of diagnosis. Likewise, it is true that central banks can sometimes clean up after bubbles, but this option is neither reliable nor cost free: the Fed’s cleanup operation following the tech bust contributed to the next bubble in housing; and when the housing bubble burst in 2008, no amount of cleanup work could prevent a prolonged downturn. Finally, the assertion that it would require a crippling amount of tightening to let the air out of a bubble is merely that—an assertion. The impact of higher interest rates on asset prices depends on market psychology, whose shifts are too fickle to predict confidently.
Because Greenspan’s three-part mantra is not convincing, there are times when it makes sense for central banks to raise interest rates to fight asset bubbles. They should not do this when other considerations point strongly the other way: when unemployment is high or when deflation threatens. But just as it would be wrong to give up on the quest for better regulation, despite the many obstacles that lie in its way, so it is unreasonable to rule out the use of interest rates to fight bubbles at all times and in all circumstances. During Greenspan’s Fed tenure, he should have raised rates to fight bubbles on two occasions—in late 1998 and early 1999, and again in 2004–5. In both instances, unemployment was low, deflation was not threatening, and yet markets were evidently too hot. The Fed should have raised rates more aggressively, accepting somewhat lower growth in the short term in exchange for a more stable economy in the medium term.
Why did a man as historically conscious as Greenspan fail to do more to fight bubbles? A clue to the answer can be found in the 1960s, when another school of economists found itself in an analogous position. At that time, the fathers of modern portfolio theory confronted a highly inconvenient truth: contrary to their efficient-market assumptions, price changes in asset markets do not follow the “normal distribution” depicted by a bell curve; rather, very large price moves occur far more frequently than the thin tails of the bell curve anticipate. At first the efficient marketers responded open-mindedly to this objection, acknowledging that its main proponent, the maverick mathematician Benoit Mandelbrot, was right. But then they swept Mandelbrot’s protests under the carpet because his message was too difficult to live with. Deprived of their bell-curve assumption, the efficient marketers’ mathematical techniques would cease to work. “Mandelbrot, like Prime Minister Churchill before him, promises us not utopia but blood, sweat, toil and tears,” Paul Cootner, an efficient marketer, objected. “If he is right, almost all of our statistical tools are obsolete—least squares, spectral analysis, workable maximum-likelihood solutions, all our established sample theory, closed distribution functions. Almost without exception, past econometric work is meaningless.”8
Greenspan is misleadingly remembered as an efficient-market believer, even though he spent much of his life worrying about bubbles. Paradoxically, he is not usually remembered for what he and the efficient marketers genuinely shared. Like the efficient-markets school, Greenspan grasped a crucial weakness in his outlook: if the central bank’s job is to protect workers from economic shocks, then price stability is not enough—financial stability is as essential. Indeed, given Greenspan’s failure to establish that driving inflation below, say, 5 percent would bring faster gains in productivity or other obvious boons, he might have concluded that financial stability was more essential. But like the efficient marketers, Greenspan turned his eyes from the weakness in his outlook because it was too awkward to live with. If he had tried to make bubbles and leverage a central part of his mission, the Fed’s mandate from Congress, requiring it to focus on inflation and employment, would have needed revision. Likewise, the expectations of politicians and the public, which created the enabling environment around the Fed, would have required reshaping. For a man who was averse to picking unnecessary fights, it was all too daunting.
In moments of honesty, Greenspan admitted this. In March 1994, reflecting on the recent bond-market collapse, Greenspan mused to his FOMC colleagues that price stability might coexist dangerously with financial instability, as it had done in the 1920s. The implication was that fixating exclusively on stable inflation might involve missing the main threat to the economy. But then he quickly backed away, acknowledging that the implications of his hypothesis were impossibly unsettling. “All of our concepts about how the monetary system works will have to go into a radical revision, which I can’t at this stage even remotely contemplate,” he confessed, sounding as desperate as the efficient marketer Paul Cootner. For the rest of his tenure, Greenspan danced around this dark problem. In 1996, when he mused aloud about “irrational exuberance,” he was not merely suggesting that the market was too high; he was asking whether monetary policy should do something about it: “Evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy,” he stated. Likewise, in the twilight of his tenure, in February 2005, Greenspan confronted his colleagues with tantalizing questions. “Are we dealing solely with the prices of goods and services, or do asset prices enter into the evaluation?” he wondered. “Is macroeconomic stability, and specifically financial stability, a factor that must be taken into account?”
In short, Greenspan knew that financial instability mattered. But he focused instead on inflation for a simple and not entirely good reason. Controlling asset prices and leverage was hard; fighting inflation was easier. At a time when deregulation and globalization were bringing down prices anyway, and when Paul Volcker had established the legitimacy of an inflation-fighting Fed, Greenspan chose the path of least resistance. To be fair, even this easier path was no cakewalk: during the first third of his tenure, when the battle against inflation was not yet won, Greenspan bravely fought off public attacks from the George H. W. Bush administration. But as inflation abated and financial excesses started to build up, the chairman should have pivoted to face the new challenge—he should have conducted monetary policy with an eye to stabilizing finance. Failing to execute that pivot was Greenspan’s most consequential error, one that he did not have to make. Although he presided over the Fed during the years when inflation targeting came to be accepted internationally, he did not have to follow this fashion. In the world of monetary technocrats, as distinct from the world of regulatory politics and deep-pocketed lobbies, he was powerful enough to kick away constraints—the Fed’s monetary policy was whatever he wanted it to be. Inside the Fed’s boardroom, Greenspan was as mighty as his hero James J. Hill. With great power comes great responsibility.
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As I conclude my writing in early 2016, the conventional verdict on Greenspan seems doubly perplexing. He is commonly condemned for his regulatory errors. And yet, as I have tried to show, he made pragmatic judgments about finance that were widely accepted at the time; he backed regulation more than his critics care to recall; and it is not at all clear that a stronger push would have made a difference. In contrast, Greenspan’s monetary policy, entailing a single-minded focus on inflation, is commonly lauded. And yet, as I have argued, focusing on inflation distracted the Fed from the perils of finance. By committing itself more formally to inflation targeting after Greenspan’s retirement, the Fed has unfortunately compounded this problem.
If the life of Alan Greenspan teaches us one thing, it is that democracies must be realistic about what they expect from their leaders. Greenspan was honest, decent, and profoundly wise—he was a model of a public servant. But he was not infallible or omniscient or endowed with magical courage, particularly when it came to confronting powerful adversaries. Precisely because modern American democracy is so gridlocked, there is a tendency to wish for superman saviors—a tendency that is evident, incidentally, in the current fashion for “macroprudential” regulation, which involves central bankers identifying pockets of troubling financial risk and then coolly commanding mighty banks to pull back from them. But systems of public administration that presume the existence of omniscient saviors will inevitably fail—and the cycle will then turn, and the supermen will be condemned bitterly. America’s political culture adores leaders, but it is merciless when they fall short. In this sense, also, Alan Greenspan teaches a lesson. From hero to antihero, from maestro to villain, his story is a fable of the land that made him.