With the timing of a senior trader in financial markets, Alan Greenspan chose both the moment of his retirement and the publication of this memoir perfectly. This book was published when confidence in financial markets was slowly eroding, but had not yet led to the demise of Lehman, or the massive support actions for AIG and other financial institutions across much of the Western world (strangely, no Asian or Southern European institutions were affected).
As chairman of the Federal Reserve, Mr. Greenspan presided over the Great Moderation, one of the longest economic expansions in modern history. The self-proclaimed libertarian Republican shared a well-accepted opinion that we should allow for creative destruction as much as society accepts, as it is good for economic growth, which is good for society. With the tool-set of the neoclassical Chicago School he cared mainly about inflation and the money supply. Debt levels, exchange rates, and current account deficits are basically ignored, as markets will correct them automatically.
The book chronicles Mr. Greenspan's development from nerdy business economist to head of the FED with dozens of friends in high places, plus a description of those parameters of the global economy he deems important for the coming decades. The first part is relatively short and sympathetic. I found the part about his years at the helm of the FED somewhat disappointing. We learn little about the inner workings of this organisation of global importance, as if Mr. Greenspan was only busy with inflation and trying to convince the Washington political machine to implement healthy long-term economic policies instead of pork (Congress and the Bush Administration are not spared). The part about future developments is interesting, as we see Mr. Greenspan at work, fitting real world developments into his theoretical framework. Compared to an article in the FT or the Economist, it is a relatively slow and somewhat cumbersome process, but depending on how well you read the financial press, you may find more or less new information here.
However, in 2010 we cannot but see this book in light of the developments of 2008 and 2009. In later interviews Mr. Greenspan has expressed his “shocked disbelief” in the behaviour of those playing the markets (his nerdy character has definitely been a disadvantage here, and I doubt if he had put so much trust in markets had he been experienced as a trader or a banker).
While Mr. Greenspan thought he could keep interest rates low and the money supply high at the same time, because globalisation and Chinese factory workers kept inflation in check, an 800-pound gorilla was maturing right under his eyes: the easy availability of money reduced the returns on traditional financial instruments and was an important reason for investors to accept high risk propositions (and it also reduced the rational for saving by private citizens). Mr. Greenspan argued that "real" prices of financial assets cannot be known, which is true to a large extend, but turned lethal .
Mr. Greenspan expanded his benign neglect to financial market supervision, where risky behaviour was slowly creating the conditions for an old-fashioned Kladeradatsch. He states in his book that supervisors cannot assess a counterparty as well as other market participants, a claim he does not substantiate. A supervisor has an asymmetric information advantage versus market participant, who base themselves on upon reading financial statements, credit value at risk calculations, and ticking boxes like “under supervision [Y/N]”. Only the number and quality of staff (which is partly based upon the salaries the supervisors pay) can give supervisors the disadvantage. Given his trust in market participants’ common sense and long-term outlook, the FED did not advocate any restrictions on mortgage quality requirements, executive pay structures or centralised clearing of standardised over-the-counter derivative trades.
So all-in-all it is an interesting book, but overtaken by a new reality that you can find explained much better by the likes of Paul Krugman (http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=2&em=&pagewanted=all) or William White (http://ineteconomics.org/sites/inet.civicactions.net/files/INET%20C%40K%20Paper%20Session%201%20-%20White.pdf)....Continua
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More or less an essential reading for the past couple of years.
Turns out it's less difficult to understand than I have expected. Perhaps something to do with the clear fact that since mid 90's the world has entered into an era of historically low interest, thanks primarily to globalisation that keeps investment returns generally low across the globe.
It really tells something about Greenspan's experience and insight by starting with this point and then build the whole book around it....Continua