The Map and the Territory: Risk, Human Nature and the Future of Forecastingby Alan Greenspan (Allen Lane, £25)
It is never too late for a sinner to repent. Alan Greenspan, former Chairman of the Federal Reserve and high priest of free market capitalism, has come to appreciate that markets sometimes get it wrong. He once talked of “irrational exuberance” in the stock market and did nothing about it. But in his new book, he writes that it may be possible “to identify emerging asset price bubbles in equities, commodities and exchange rates—and even to anticipate the economic consequences of their ultimate collapse and recovery.”
Readers might be forgiven, then, for thinking the rest of the book will be a mea culpa for Greenspan’s 19 years at the Fed. His tenure coincided with bubbles in emerging markets, dotcom stocks and housing, saw a massive build up of debt in the financial sector (and the US economy generally) and was followed, very swiftly, by the crisis of 2007-8, from which the world is still recovering.
But Greenspan spends most of the book trying to pin the blame for the crisis elsewhere, particularly on the US government. The build up of subprime (that is, dodgy) mortgage debt would not have been possible, he argues, without the support of Fannie Mae and Freddie Mac, two government-created agencies. The lack of investment in the US economy is down to the tax burden on high-income individuals, those who are most likely to save; those taxes have been diverted to pay for costly programmes such as social security (pensions) and healthcare. Regulators failed to monitor the banking system adequately, hence the folly of new regulations like the mammoth Dodd-Frank Act.
Greenspan is certainly right that banks should have had more capital before the crisis, although he wasn’t saying that at the time. And forcing banks to hold more capital now is the best way of preventing a repeat of the collapse. But he fails to think through the implications of even this limited reform.
The only people who can insist that banks should hold more capital are the much-despised regulators. The banks are not going to do it on their own. On the contrary, as Greenspan admits, the banks’ risk managers failed to anticipate the additional capital that would be needed to survive a market downturn and many banks “sailed into the investment storm with financing that depended on a level of liquidity that was about to vanish.”
So the bankers were clueless. But Greenspan rationalises the massive rise in inequality over the last 30 years, in which the financial sector played a huge part, as being caused by the global demand for talent. The bankers, it seems, were brilliant and clueless at the same time. A simpler explanation is that financiers prospered thanks to the willingness of central bankers, led by Greenspan, to rescue the finance sector when it wobbled by cutting interest rates, for example during the stock market downturns of 1987 and 1998. This belief in the “Greenspan put,” as it was known, encouraged excessive risk taking.
Just as he is unwilling to absorb blame, Greenspan fails to give credit to those who were more farsighted than he. Hyman Minsky warned that speculation in the financial sector could lead to economic instability; he does not get a mention in the book. Robert Shiller was smart enough to point out that share prices were overvalued in the late 1990s and house prices in 2005; he is also ignored.
Perhaps we can’t expect Greenspan to completely rethink his legacy in the twilight of his life. But five years after Lehman failed, the top 1 per cent of the US population has seen a 31 per cent rise in real incomes while the bottom 99 per cent have seen gains of less than 1 per cent. Main Street is still suffering from a crisis that most people feel was caused by Wall Street. Greenspan’s attitude is all too reminiscent of the Bourbon monarchy, restored briefly to the throne in 1815; he has learned nothing and forgotten nothing.
It is never too late for a sinner to repent. Alan Greenspan, former Chairman of the Federal Reserve and high priest of free market capitalism, has come to appreciate that markets sometimes get it wrong. He once talked of “irrational exuberance” in the stock market and did nothing about it. But in his new book, he writes that it may be possible “to identify emerging asset price bubbles in equities, commodities and exchange rates—and even to anticipate the economic consequences of their ultimate collapse and recovery.”
Readers might be forgiven, then, for thinking the rest of the book will be a mea culpa for Greenspan’s 19 years at the Fed. His tenure coincided with bubbles in emerging markets, dotcom stocks and housing, saw a massive build up of debt in the financial sector (and the US economy generally) and was followed, very swiftly, by the crisis of 2007-8, from which the world is still recovering.
But Greenspan spends most of the book trying to pin the blame for the crisis elsewhere, particularly on the US government. The build up of subprime (that is, dodgy) mortgage debt would not have been possible, he argues, without the support of Fannie Mae and Freddie Mac, two government-created agencies. The lack of investment in the US economy is down to the tax burden on high-income individuals, those who are most likely to save; those taxes have been diverted to pay for costly programmes such as social security (pensions) and healthcare. Regulators failed to monitor the banking system adequately, hence the folly of new regulations like the mammoth Dodd-Frank Act.
Greenspan is certainly right that banks should have had more capital before the crisis, although he wasn’t saying that at the time. And forcing banks to hold more capital now is the best way of preventing a repeat of the collapse. But he fails to think through the implications of even this limited reform.
The only people who can insist that banks should hold more capital are the much-despised regulators. The banks are not going to do it on their own. On the contrary, as Greenspan admits, the banks’ risk managers failed to anticipate the additional capital that would be needed to survive a market downturn and many banks “sailed into the investment storm with financing that depended on a level of liquidity that was about to vanish.”
So the bankers were clueless. But Greenspan rationalises the massive rise in inequality over the last 30 years, in which the financial sector played a huge part, as being caused by the global demand for talent. The bankers, it seems, were brilliant and clueless at the same time. A simpler explanation is that financiers prospered thanks to the willingness of central bankers, led by Greenspan, to rescue the finance sector when it wobbled by cutting interest rates, for example during the stock market downturns of 1987 and 1998. This belief in the “Greenspan put,” as it was known, encouraged excessive risk taking.
Just as he is unwilling to absorb blame, Greenspan fails to give credit to those who were more farsighted than he. Hyman Minsky warned that speculation in the financial sector could lead to economic instability; he does not get a mention in the book. Robert Shiller was smart enough to point out that share prices were overvalued in the late 1990s and house prices in 2005; he is also ignored.
Perhaps we can’t expect Greenspan to completely rethink his legacy in the twilight of his life. But five years after Lehman failed, the top 1 per cent of the US population has seen a 31 per cent rise in real incomes while the bottom 99 per cent have seen gains of less than 1 per cent. Main Street is still suffering from a crisis that most people feel was caused by Wall Street. Greenspan’s attitude is all too reminiscent of the Bourbon monarchy, restored briefly to the throne in 1815; he has learned nothing and forgotten nothing.
