Greenspan Looks at Risk in the Rearview Mirror
What do you do after laying the groundwork for the worst financial crisis in 70 years? You write a book exonerating yourself, and go on a book tour.
Former Federal Reserve Chairman Alan Greenspan spoke in New York as part of a promotional tour for his new book, The Map and the Territory: Risk, Human Nature, and the Future of Forecasting. Small-business owners may find little of direct takeaways applicable to their companies, but many will be curious simply because they have been left with the consequences of the financial meltdown, including a terrible climate to finance their businesses, continued, weak consumer demand and wrenching uncertainty about their prospects.
Greenspan appeared Wednesday night at the Barnes & Noble bookstore at Union Square, where people were required to purchase his book to attend--cost about $35. About 100 people showed up, including his wife, the newscaster Andrea Mitchell, who presumably did not have to pay. The audience was not allowed to ask questions of Greenspan, who spoke in response to prepared interviewer queries for about 40 minutes, and who was escorted away upon conclusion.
British journalist Sebastian Mallaby conducted the interview, asking incisive questions about the financial meltdown, what lessons we had learned from it and potential structural fixes to prevent future crises.
Greenspan was expectedly erudite and his sprawling intellect was obvious, even if he rambled at times. That can be forgiven a man of 87. What cannot, perhaps, is his apologist stance for the financial meltdown.
"Why did we all miss this?" Greenspan asked at one point.
There is ample evidence that financial experts and economists, including Greenspan, were well aware of what was happening. By decreasing the federal funds rate and keeping it low following the dot-com implosion in 2000, many financial experts argue, Greenspan helped feed the debt frenzy that inflated the mortgage bubble.
"We all knew we were living in a [mortgage] bubble, but no one knew when it would burst," Greenspan said, appearing to contradict himself.
Greenspan, who led the Fed from 1986 to 2006, saw some of the most dramatic business cycles the U.S. has ever experienced--including the market crash of 1986, the dot-com bubble and subsequent burst, the aftermath of September 11th, and the run up to the 2008 financial crisis.
In hindsight, Greenspan said, he knows now there are two types of financial bubble--essentially good ones and bad ones. The former, represented by the dot-com era, did not lead to structural financial failures. The latter, represented by the 2008 crisis, did. The difference was the attachment to toxic debt, Greenspan said.
If that seems overly simplistic, his book can seem that way at times too. The Map and the Territory loops in the idea of "animal spirits," essentially another spin on behavioral economics. Man is a rational being, and to some degree markets behave rationally, at least in the long run, some economists have argued. But humans are also irrational, and hence subject to irrational euphoria and fear, fear being the worst for markets, Greenspan said. New models of economics have to include this emotionality. Not doing so leads to blind spots, such as the ability to predict the collapse of the housing market.
That all sounds well and good. The newly-minted Nobel laureates for economics in 2013--Eugene F. Fama, Lars Peter Hansen and Robert Shiller, all from the U.S.--were awarded prizes in part for creating models using financial data that acknowledge this unknowable element of human behavior.
Still, Greenspan seems unable to formulate much beyond the knee-jerk conservative reaction to fixing embedded structural problems, which is to cut social entitlements.
"To fund our generosity we have foraged in every corner of our federal budget to meet the rise in social benefit spending," Greenspan wrote in his book. "We are eating our seed corn and damaging the very engine of America's comparative strengths in the world."
While that sentiment may be open to debate, it certainly has its adherents among small-business owners.
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