THERE ARE PLENTY of nice things one might say about Alan Greenspan. He is smart, savvy and well connected and he is a charming and gracious dinner guest. He certainly has political staying power. During nearly two decades as chairman of the Federal Reserve he has been one of the world's most powerful and influential figures.
Indeed, as Greenspan prepares to retire, commentators are lining up to praise him and his work. The dominant view is that he was a kind of mystic saviour – like the diminutive Yoda of Star Wars fame – who could foretell the future and understand the forces that would lead to prosperity and peace. During the upcoming months, many commentators will uncritically applaud Greenspan's record, often with good reason, for there is much to praise.
But now that the Greenspan era is ending, it is time to view the man through something other than thick rose-coloured glasses. Was the relationship between his actions and relatively low unemployment, low inflation and high growth merely correlation rather than causation? Put another way, would just about any qualified Fed chair have made the same or similar moves to those Greenspan made? Did the world become more prosperous because of Greenspan, or did Greenspan become more popular because of prosperity?
A strong case can be made against the notion of Alan Greenspan as economic saviour. Instead, many people believe he has lost his grip on the markets, and he has admitted as much on occasion, saying he has been wrong about growth estimates and wrong at times in setting interest rates. Most recently, Greenspan labelled low long-term interest rates a "conundrum", and waffled about the costs and benefits of credit derivatives.
His spoken words remain opaque; it has been several years since he conjured up a master phrase, such as "irrational exuberance" or "infectious greed", to suggest that he understands the challenges facing modern financial markets. Asset price bubbles and financial innovation continue to confound him because they do not fit his preconceived notions of how markets work.
Perhaps most importantly, Greenspan is losing respect among his most important constituencies: central bankers and sophisticated market participants. Many believe Greenspan should have left the Fed a long time ago.
It is worth taking a closer look at how and why so many people came to revere this man and why they might be wrong. To understand Alan Greenspan, it is necessary to focus not only on what he has done but also on who he is. And it is impossible to get a picture of who he is without knowing a bit about his past.
Strict libertarianism
Alan Greenspan's childhood is summarized in an incomprehensible quote from his father Herbert, an economic pundit who published a book called Recovery Ahead! in 1936. In this book, Herbert Greenspan argued that if the government spent more money, the country could escape the Great Depression. He was an ardent supporter of Democratic president Franklin D Roosevelt's New Deal.
He proudly gave his eight-year-old son a copy of the book, with the following words scrawled in longhand inside the cover page: "May this my initial effort with a constant thought of you branch out into an endless chain of similar efforts so that at your maturity you may look back and endeavor to interpret the reasoning behind these logical forecasts and begin a like work of your own. Your Dad."
Even if young Alan understood what his father meant, the last thing he wanted to do was undertake "similar efforts" or "like work". (Alan would emulate his father's mangled prose soon enough.) Alan's parents were divorced and he didn't want to be like his father, a stockbroker, political activist and policy wonk whom Alan saw only infrequently. Instead, Alan dreamed of becoming a famous jazz musician.
Alan's academic record was undistinguished, and he focused more on learning to play the clarinet than on his studies. He was admitted to the music college now known as the Juilliard School but dropped out to play bebop with a touring big band. However, Alan's music career fizzled out and he quickly realized he was more like his father than he had hoped. As Bob Woodward described in his book Maestro: "While other musicians drank, smoked dope and stayed up all night, [Alan] read economics and business books and eventually became the band's book-keeper." Apparently, the fruit did not fall far from the tree.
Alan completed a first degree in economics at New York University but then dropped out again, this time from a PhD programme in economics. (Few people realize that he never completed a dissertation.) Biographers have described him as both emulating and resisting his father during this time. Alan lacked the drive and aptitude to become a world-class economist, but he was an adept networker and was generally well liked. In 1953, aged 27, he founded a consulting firm, Townsend-Greenspan & Co, Inc, and cultivated relationships with writers, politicians and business people. He balked at his father's left-leaning political sensibilities, though, and instead became the opposite: what he called a "strict libertarian".
Alan fell in with the Objectivist movement, dominated by the writer Ayn Rand, that favoured free markets and opposed strong government. He wrote articles for Objectivist newsletters, and contributed several essays to Rand's book Capitalism: The Unknown Ideal. He was a strong advocate of the gold standard (an irony, given that his fame would derive from the Fed's role in fiat money). In 1957, 31-year-old Alan Greenspan wrote a letter to the editor of the New York Times book review section protesting about a hostile review of Rand's novel Atlas Shrugged. It was the first time his name appeared in that paper.
During this early, pre-political period in his life, Greenspan formed firm, unshakable views. The 1950s were a relatively simple time, and his philosophy was relatively simple, too: regulation bad, free enterprise good. His consulting work for companies such as Burlington Industries and Ryder Systems stressed straightforward analysis of large data sets. He supported his general conclusions with statistical minutiae, an approach he would try to follow as chairman of the Federal Reserve.
