With Greenspan and the economy, a lot of knowledge proved to be a dangerous thingby Martin Sandbu / November 17, 2016 / Leave a comment
Published in December 2016 issue of Prospect Magazine
In retrospect, it is easy to see what happened. The 2008 crisis was triggered by the mother of all bank runs: a panicky loss of confidence in the financial system, which had loaded up on lousy mortgages that remained unsafe even though they were wrapped up in new and exotic ways. Financial institutions had made too many loss-making investments, but the bubble they had inflated delayed the day of reckoning—until it didn’t.
The surprising thing is not what happened, but that so few people saw it coming. And even that is not quite right. Many did see enough to know the risks. Some of them were even in a position to do something about it. If they did not do so, it was because either they wilfully ignored the dangers or found the potential remedies worse than the disease. In short, they thought the boom was worth having.
Eight years after the crisis—in the wake of a US election campaign fuelled by the political fallout of economic tough times, and with a previously unthinkable President-elect having been chosen—this sanguine faith seems like an obvious delusion. As Donald Trump’s America dawns, we can see that financial laissez-faire has ultimately proved ruinous not only for the economy, but for the liberal political order. But the 1990s and early 2000s were very different times. It was as though economic policy-makers had fallen under a collective spell. At the heart of it all was the chair of the US Federal Reserve from 1986 to 2005, supposedly “the world’s best central banker,” and the man who more than anyone else was responsible for casting that spell: Alan Greenspan.
The ascent of this shy child of Jewish immigrants was hardly written in the stars (except for his doting mother, to whom some of his self-belief can be attributed). But Greenspan’s career illustrates the extraordinary upper-Manhattan milieu of his 1930s youth. Young Alan, a gifted saxophone player and for a while a working musician, practised with the even more gifted Stan Getz. A few years above him at George Washington High School was Henry Kissinger, who would decades later become a rival in White House power games. Greenspan made it first in business as a consultant, then in government by matching his unsurpassed knowledge with a huge appetite and talent for politics.