Alan Greenspan and America’s economy

Casino capitalism

A jumbled and confused account of the financial crisis

Nov 9th 2013 |From the print edition

The Map and the Territory: Risk, Human Nature and the Future of Forecasting. By Alan Greenspan. Penguin Press; 388 pages; $36. Allen Lane; £25. Buy from Amazon.com, Amazon.co.uk

ALAN GREENSPAN’S reputation has changed since his last book, a memoir, was published in 2007. As the man at the helm of the Federal Reserve through two decades of prosperity, he was hailed as a hero. Readers of his new book will expect him to account for the financial collapse that followed. Given Mr Greenspan’s experience controlling America’s money, he presumably knows where the buck stops.

“The Map and the Territory” could have been fascinating. The book aims to explain the economy’s recent troubles by offering a “macro view” of how everything works. A new, lucid set of macroeconomic principles would be something new for Mr Greenspan, who long eschewed grand theoretical models in favour of trends intuited from data.

But hopes for clarity prove as unjustified as 1990s share prices. This book is a difficult read, jumbled and confused. Mr Greenspan opens intriguingly, by describing the ways in which investor behaviour falls short of perfect rationality. Human “propensities” such as “fear” and “euphoria”, he writes, can drive markets and hinder an economy’s performance.

But Mr Greenspan scarcely builds on this framework. Instead he abruptly changes course, launching into a fairly conventional description of the troubles that lurked in the pre-crisis financial markets. This discussion yields a rare, tepid statement of contrition: “I have since regretted that we regulators never pursued the issue of capital adequacy in a timely manner.” Then he wanders without aim, offering a history of economic-data collection, then a detailed explanation of basic statistical techniques, followed by an analysis of the nature of productivity growth. Though occasionally arresting, these globs of discussion never coalesce into a sustained argument. Reordering the chapters or indeed removing some entirely would do little damage to the book.

If a coherent macro view never emerges, clear themes do, most of which would fit comfortably within a Tea Party polemic. The most attention-grabbing passages diagnose America’s slow recovery. Mr Greenspan blames government for weak growth. Efforts to prop up the economy—through infrastructure spending, for instance, or through aid to carmakers—created uncertainty, he argues. That, in turn, discouraged firms and households from making long-term investments.

His argument rests on a thin reed, however. By his own admission, “long-term investment” mostly means buildings. “Other than construction,” he writes, GDP has “recovered more or less as would have been expected in a ‘normal’ recovery.” Maybe the government spooked households into waiting to buy a home, but tumbling demand and stingy mortgage loans seem more likely villains.

Stranger still is Mr Greenspan’s take on what ought to have been done: the government should have allowed financial markets “to correct themselves through a selling climax”. Some readers will wonder how this squares with his earlier observations on animal spirits and the risks of investor stampedes. He assures that crashes are self-limiting—“the turn in stock prices in early 2009... was a sign of the level of human angst approaching its historical limit”. But prices fell further in the early 1930s, a fact Mr Greenspan neither acknowledges nor explains.

So how should governments handle a slump? Mr Greenspan forgives the Fed for propping up failing banks; for the rest of the economy he favours the “liquidationist” approach of Andrew Mellon, treasury secretary under Herbert Hoover. Let prices plunge enough, Mellon reckoned, and the economy will bounce back. That is a recipe for deflation and depression. Mr Greenspan’s intuition served well enough amid the macroeconomic tailwinds of the Great Moderation. America is fortunate his job passed to a scholar of the Depression before the crisis of 2008 struck.