Monday, September 24, 2007

Greenspan's Book & A Week of Reactions

Last week's business media was filled with news of and interviews with Alan Greenspan, retired Chairman of the Federal Reserve.

Appearing on CBS' 60 Minutes, NBC's Monday morning talk show, and numerous CNBC interviews, Greenspan was plugging his just-published book, "The Age of Turbulence."

Monday's Wall Street Journal had an 'official' staff article reviewing the book. It was pretty standard fare, recounting Greenspan's comments concerning various Presidents, how he handled the 1987 and 1998 market crises, his views on the current President and various economic affairs.

I think it's fair to say that the initial 48 hours of 'shock and awe' at Greenspan's apparently magisterial disrobing of his past obfuscations contained an almost-uniform measure of reverence. As if the various pundits and interviewing heads were saying,

"Alan said it, so it must be so. He was so awesome as Fed Chairman, we're lucky to get these nuggets of wisdom for only $35."

Then James Grant, editor of Grant's Interest Rate Observer, and noted monetary conservative, weighed in on Tuesday. In a Wall Street Journal review of the book, he panned Greenspan's consistency, credentials, and motives.

This passage aptly illustrates Mr. Grant's tone and perspective on Greenspan, and his book,

"The fantastic irony of Mr. Greenspan's career path -- from gold-standard libertarian to federal interest-rate fixer -- seems hardly to have registered on Mr. Greenspan himself. The closest he comes to acknowledging it is his description of how the Fed looked to him from the outside. It was, he writes, a "black box." Having watched his mentor, Arthur Burns, struggle with the chairmanship, Mr. Greenspan notes, "it did not seem like a job I felt equipped to do; setting interest rates for an entire economy seemed to involve so much more than I knew." A deeper kind of libertarian might have added: "Maybe nobody can know enough to set interest rates for an entire economy." "

He goes on to write,

"So Mr. Greenspan, a consulting economist of no special attainments (on the eve of the 1974 stock-market collapse, he was quoted in the New York Times saying "it is rare that you can be as unqualifiedly bullish as you can now"), agreed to perform the impossible. Succeeding Paul A. Volcker, he became America's monetary central-planner-in-all-but-name. Mr. Greenspan ruled the roost in 74 fiscal quarters, of which recession darkened only five.

Nobody can identify a bubble as it is inflating, Mr. Greenspan has long insisted -- though, as you will not read in these pages, Mr. Greenspan was so certain that he detected a stock-market bubble in 1994 that he tried to prick it by pushing interest rates up. Strangely, the author's bubble-sensor failed him later in the decade. He did, in 1997, utter the innocuous phrase "irrational exuberance," but that was as far as he went in attacking sky-high equity valuations.
Mr. Greenspan now writes that the enlightened central banker will let speculation take its course. Following the inevitable blow-up, he will clean up the mess with low interest rates and lots of freshly printed dollar bills -- thereby gassing up a new bubble.

Only one of the troubles with this prescription is that it requires an enlightened central banker to carry it out. Nowhere in this book does Mr. Greenspan own up to his role of underestimating the severity of the credit troubles of 1990, or of cheering on the tech-stock frenzy in 1998-2000, or of dangling the most beguiling teaser rate of all during the mortgage frolics of 2004 -- i.e., that 1% federal-funds rate. In February 2004, only months before the Fed started to raise its rate, in a speech titled "Understanding Household Debt Obligations," Mr. Greenspan demonstrated next to no understanding. His advice to American homeowners was not that they lock in a fixed-rate mortgage while the locking was good, but rather that they consider an adjustable-rate model. He who set the rates got it backward."

Grant pulls no punches in questioning Greenspan's consistency as a libertarian, and acolyte of Ayn Rand, by ending up as the sole determiner of the economy's key interest rate. He makes clear Greenspan's lack of significant accomplishment as an economist or equity savant, prior to his role as Fed Chairman, and his misunderstanding of housing finance, after he took the position.

As Joe Kernen, an anchor on CNBC, articulated, Grant also seems to question Greenspan's motive in writing this book. Whereas Kernen opined that Greenspan wants back in the limelight, Grant suggests it's about trying to write his own legacy, before someone else writes a less flattering one.

As the week went on, the Fed cut rates half a point, and the market surged, more people were beginning to wonder if perhaps Greenspan was being rather too self-important by writing his book.

By comparison, Greenspan's predecessor, Paul Volcker had a much harder job to do, and left things in far better shape than he found them. Yet, in over twenty years, Volcker has never spoken out about his Fed tenure, told tales out of school, nor, to my knowledge, even remarked on either Greenspan's or Bernanke's performances and policies as Fed Chairmen.

Instead, being, obviously, incredibly secure, Volcker moved on and continued his career of public service, assisting in cleaning up the Arthur Andersen mess, and hunting out graft and corruption in the recently-retired UN Secretary General Kofi Annan's troubled administration.

Were that Alan Greenspan were possessed of similar self-esteem, that he would not have needed to attempt another run into the public spotlight which he so recently left, when he retired as Fed Chairman. In some sense, he reminds me of Jack Welch, now-retired CEO of GE, who seems to have to pop up on business talk shows with now-annoying regularity, spouting little of current relevance.

I've always thought that Paul Volcker received far too little acclaim or gratitude for the heroic, difficult job he performed, taming the roaring inflation of the 1970s, left to us by Lyndon Johnson's fiscal policies during the Vietnam War, and compounded by economic mismanagement and taxation policies during the ensuing decade.

Compared to him, Greenspan seems to have performed capably, steering a large ship on, for the most part, calm seas. However, this summer's debt market troubles suggest that perhaps Greenspan's legacy won't be sterling, because it's now becoming evident that he owns the source of this latest marke.....ahhh.... turbulence.

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