Interview with Greg Ip, Wall Street Journal blog, October 19, 2016. Alan Greenspan's Legacy to Central Banking: 'The Guru Can Punch Back'.
Sebastian Mallaby's biography of Alan Greenspan2 is highly readable and thought-provoking. The book raises questions that are of interest to libertarians. To what extent did Greenspan stick with libertarian principles, and to what extent did he abandon them? If he abandoned them, then along with Mallaby we can wonder, was this due to expediency?
Mallaby sees the behavior of Greenspan, or any individual, as arising from a complex set of factors. Temperament, ability, ambition, and circumstances all play a role.
Mallaby portrays Greenspan, born in 1926, as highly introverted, spending a lot of time as a child by himself memorizing train schedules and baseball statistics. Mallaby speculates that individualistic libertarianism may have appealed naturally to this loner temperament.
Somewhat paradoxically, despite his shyness and discomfort among strangers, Greenspan became a highly skilled social networker. His first marriage lasted less than a year, but his wife helped start Greenspan's career by taking him to meet Ayn Rand in 1953 at Rand's apartment. Through Rand, Greenspan would meet Martin Anderson, who a decade later became an adviser to Richard Nixon's 1968 Presidential campaign. Anderson would in turn introduce Greenspan to leading figures in the Republican Party. From then on, Greenspan's social graph gets increasingly impressive, ultimately connecting him to such luminaries as the owner of the Washington Redskins, prominent journalists including Greenspan's second wife, Andrea Mitchell, and even Oscar de la Renta, the high-end fashion designer. Mallaby writes,
Sometimes, when Ayn Rand heard about a rarefied social gathering that Greenspan was attending, she would seem momentarily piqued. "Do you think Alan might basically be a social climber?" she once asked her lover, Nathaniel Branden. (Mallaby, page 79)
Another aspect of Greenspan's temperament was what young people today would call "commitment issues." This can be seen in the many dalliances he had in the nearly 50 years between his two marriages. His relationship with Andrea Mitchell had lasted a dozen years before he offered marriage, and even then his proposal was less than full-throated.
An aversion to commitment carried over into Greenspan's professional life. He was most comfortable in the role of detached analyst, providing input that others could use to make decisions. His Wall Street firm offered data and macroeconomic forecasts to business executives and money managers, but Greenspan himself was not a professional trader or industry captain.
Although he is often blamed for the financial deregulation that took place during the decades in which he was in public life, Greenspan left his mark on none of the important decisions of that period. Even as Chairman of the Federal Reserve, he delegated regulatory issues to other Board members or senior staff. He was reluctant to usurp the authority of other public officials or industry executives.
Greenspan was capable of taking a strong stand on matters of turf and status. For example, as Fed chairman, he dug in against a reform proposal that would have consolidated financial regulation under the Treasury Department, thus taking away the Fed's authority over banks. When he browbeat other members of the Federal Open Market Committee to vote in favor of his decisions to tweak interest rates, this may have reflected his desire to assert his personal prerogative as much or more than a belief in his superior macroeconomic analysis.
Mallaby lauds Greenspan's wisdom on macroeconomics and finance. He points out that Greenspan, as early as 1959, expressed a view that high stock prices encourage business investment. Well before the advent of behavioral finance, Greenspan rejected the doctrine of efficient markets populated by rational investors. In the 1960s and early '70s, when macroeconomists were enamored of fancy econometric computer models, Greenspan instead saw value in human experience and judgment. Greenspan believed in macroeconomic demand management, scorning the "rational expectations" school that argued against discretionary policy moves.
However, I would point out that all of Greenspan's views, while not prevalent in academia, were standard fare among his peers and among business economists. In the 1970s, Greenspan was just one of dozens of economic soothsayers who would participate in periodic macroeconomic forecasting surveys conducted by the Conference Board or the Wall Street Journal. In addition to independent consulting firms such as Greenspan's, there were in those days prior to industry consolidation many banks in New York and elsewhere trotting out chief economists to give analysis and forecasts.
Each forecasting guru would try to highlight different economic ratios or trends to differentiate his analysis from that of his competitors. These business economists learned that in order to stand out, one occasionally had to take a strong contrarian position, while including caveats to provide an escape route should the forecast go awry. Think of a golfer choosing to hit a risky tee shot on a windy day. If the ball lands on the green, the golfer can exclaim, "Everyone look!" If it lands in the water, he can mutter, "Aww, the wind took it."
For Greenspan, this pattern would continue after he transitioned to government service. For example, in late 1996 he famously wondered out loud if the stock market was suffering from "irrational exuberance," but as share prices kept climbing he backed away from that suggestion.
On the other hand, I found myself impressed with Greenspan's political acumen. He strictly followed a rule of speaking candidly to the politicians that he served while never running to the press with dissenting views. At a meeting in which then presidential candidate Ronald Reagan extolled the virtues of the gold standard, Greenspan (who himself had advocated gold during his Ayn Rand days) argued forcefully that it was not workable. Reagan and other professional politicians appreciated Greenspan's combination of private candor and public discretion.
In contrast, Martin Feldstein, a distinguished Harvard economist who served from 1982 to 1984 as chairman of President Reagan's Council of Economic Advisers, let it be known to the press that he dissented from Reagan's fiscal policies. Not surprisingly, when it came time for President Reagan to appoint a Chairman of the Federal Reserve Board, his choice was Greenspan, not Feldstein.
Because he always made it clear that he deferred to others to make decisions, Greenspan could on occasion voice extreme libertarian positions without making politicians feel threatened. For example, in 1974 he was nominated by President Nixon (on the verge of resigning to be replaced by Gerald Ford) to chair the Council of Economic Advisers. At his confirmation hearing before a Senate committee, Greenspan stood by his opinion in favor of a flat income tax, but in a disarming way. Mallaby writes,
"My view on this is perfectly clear," Greenspan answered. Then he added that nobody else in Washington agreed with him. "I am a minority of one," he said squarely. (page 160)
Once in office at the Council, however, Greenspan did nothing to help an economy that could have used some libertarian policy direction. He stood by as President Ford adopted policies that were empty gestures: an attempt to conquer inflation with sloganeering ("Whip Inflation Now," printed on buttons), and a temporary tax rebate that Greenspan could see was an unnecessary stimulus. Meanwhile, government controls that stifled the energy and transportation industries were kept in place, and only four years later, toward the end of the Carter administration, was a major deregulation initiative undertaken.
Greenspan's career took an important step forward when in 1982 he chaired a commission to shore up the finances of Social Security. The commission was successful in getting its recommendations adopted, but they consisted of minor band-aids, not radical surgery. Libertarian solutions, or indeed any real cure, were off the table.
The period from the late 1960s to the end of the 1980s saw the financial sector in transition. At the outset, it was highly regulated, with ceilings on deposit interest rates ("regulation Q") and laws against banking across state lines. Moreover, financial firms were kept in separate "silos," with deposit-taking institutions not allowed to trade securities, banks not allowed to offer insurance, and so on.
Deregulation proceeded in fits and starts, often spurred by regulation-evading innovations, such as the money market fund. By 1990, most of the restrictions were gone. This allowed for the creation of "financial supermarkets" in which one firm could offer all services. It allowed for massive consolidation, with local banks superseded by large national institutions.
The process of deregulation was arduous because of the intense lobbying that each industry undertook in order to try to gain as much advantage as possible from whatever legislation emerged. Once the rent-seeking dust had settled, one could argue that what emerged was a more rationalized US financial industry. However, the regulatory structure that was designed to fit the old, fragmented system was kept in place, in spite of an attempt under the first President Bush in 1991 to correct this.
It made no sense for banks to be regulated by four separate overseers, the administration pointed out; it would be better to consolidate power at the Treasury, which answered directly to the taxpayers who were on the hook to pay for bank bailouts. To achieve the desired consolidation, the administration proposed to roll the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the supervisory part of the Federal Deposit Insurance Corporation into a new Treasury unit called the Federal Banking Agency; and this superagency would also gobble up the Fed's supervisory authority...
Confronted with the Treasury's turf grab, Greenspan had no choice but to fight it... the Fed's regulatory clout was essential to his authority. Stripped of their mission to supervise one thousand or so of the nation's lenders, the regional Federal Reserve banks would become shadows of their former selves, and the stature of the twelve Fed presidents would shrivel accordingly. To retain the Fed presidents' loyalty, Greenspan had to defend them.... The Fed's sprawling network provided Greenspan with powerful allies. If the Treasury was out to gut his power base, Greenspan would counter-attack. (page 404)
As a result of these sorts of political and bureaucratic considerations, the proposal to consolidate bank regulation died. The failure to address the archaic regulatory architecture would lead to a number of anomalies in the supervision of financial firms. Most notably, during the financial crisis of 2008, it was surprising to learn that AIG insurance, which dominated the market for writing credit default swaps on mortgage securities, was overseen by the ill-prepared Office of Thrift Supervision.
Let us return to the questions with which we began. First, to what extent did Greenspan abandon his libertarian principles? Second, did he abandon them more from expediency or from changing his views on political economy?
I believe that the record is that his libertarian principles turned out to be largely irrelevant. By temperament, he was inclined to defer to others to make decisions. For example, Mallaby points out that while Greenspan is often given credit for the Fed's widely-praised response to the crisis of the Black Monday stock market crash of 1987, it was Gerry Corrigan of the New York Fed who took charge, while Greenspan largely shied away.
Greenspan invested little or no political capital in substantive policy issues. When he voiced libertarian positions, he allowed that such views were extreme and politically impractical.
Although he is a popular scapegoat for the radical changes in the financial industry and the excesses that emerged in the decades leading up to the financial crisis of 2008, the truth is that he was not a player in the sphere of financial regulatory policy. He only undertook a strong personal effort in the regulatory turf battle discussed above.
Greenspan earned a reputation as a "maestro" through a combination of fine tuning of interest rates when the economic seas were relatively calm and by letting others craft responses when storms threatened (such as Black Monday or the implosion of the hedge fund Long Term Capital Management). The crisis responses almost always involved bailouts. Fine tuning and bailouts are anathema to libertarians. However, Greenspan's views on those policies owed more to his identity as a Wall Street business economist than to any association with Ayn Rand.
To me, it appears that like most humans, Greenspan sought status and adulation. His success at attaining those goals was due to a number of factors. First was his uncanny ability to make personal connections, to enlist the aid of others in furthering his career, and to avoid making enemies who could derail him. Second was his good fortune that his Republican patrons, such as Martin Anderson and Dick Cheney, gained stature at a young age and continued to dwell in the halls of power for several decades. Finally, it just turned out that on issues where his libertarian principles were strong, everyone knew that his views were political non-starters; but when at the Fed he dealt with monetary policy and crisis response, his views were not shaped by libertarian principles.
I recommend reading Mallaby's biography and arriving at your own conclusions. I came away with the impression that Alan Greenspan was sincere in his libertarian thinking. However, he was never committed to changing the world in the direction of his ideas. The political system absorbed his piecemeal macroeconomic judgments while filtering out his libertarian principles, and he was personally quite content with that.
Mallaby himself concludes,
America's political culture adores leaders, but is merciless when they fall short. From hero to antihero, from maestro to villain, his story is a fable of the land that made him. (page 685)
For more information, see also the EconTalk podcast episodes Luigi Zingales on Incentives and the Potential Capture of Economists by Special Interests and Nocera on the Crisis and All the Devils Are Here.
It is up to the public to adopt libertarian principles. Rather than blame public figures like Greenspan who need to be worshipped, ultimately we should fault the people who do the worshipping.
Interview with Greg Ip, Wall Street Journal blog, October 19, 2016. Alan Greenspan's Legacy to Central Banking: 'The Guru Can Punch Back'.
Sebastian Mallaby, The Man Who Knew: The Life and Times of Alan Greenspan. Penguin Press, 2016.