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Gerard Baker on Greenspan the gossip
Alan
Greenspan: Frank talk from Mr Ambiguous
In the hierarchy of Washington life, there is no more revered figure, none
more guaranteed enduring success in a notoriously fickle and back-stabbing
environment, than the consummate insider.
While political careers may still be decided out on the great battlefields of
election campaigns, in the jungle warfare of the Washington bureaucracy
success means knowing your way through the complex rules and conventions of
the world’s most powerful city.
It means knowing when to attach yourself to a rising star and precisely when
to distance yourself from someone on the wane; to whom you should
demonstrate complete fealty, and from whom you should be prepared to
demonstrate your principled independence; when to use the media to your
advantage, and when to stay mum.
Almost no one can do this for very long. The contortions required are just too
large, the inevitable enemies acquired just too numerous. So when you hear
that someone has managed to occupy one of the highest of those positions for
almost 20 years, you really want to find out how they did it.
In his long-awaited and massively promoted memoir (beating, by my estimation,
in publicity terms even that of Bill Clinton a few years ago) Alan Greenspan
provides the answer.
What leaps out from the pages of the former Federal Reserve chairman’s history
is not so much Mr Greenspan’s judgments on monetary policy, much of which is
a familiar rehash of many of his speeches over the past decade or so. It is
the sheer proficiency of his bureaucratic survival skills, how assiduously
he laboured to press the right buttons and open the right doors in his
Washington career. They don’t desert you, these skills. Even in retirement,
he is smooth. Boy, is he smooth. Take his account of his first meeting with
Gordon Brown, when the young shadow chancellor stopped by with Tony Blair to
see Mr Greenspan on a visit to Washington in 1994.
“As we exchanged greetings, it appeared to me that Brown was the senior
person. Blair stayed in the background while Brown did most of the talking
about a ‘new’ Labour”, he writes.
This, of course, is the same Gordon Brown who is now Prime Minister and who
has appointed the former Fed chairman to an unusual advisory role. It is the
same Tony Blair who is now gone, discredited and discarded.
Or take his various judgments on the presidents he served.
There are nothing but kind words for Bill Clinton. This is not unreasonable.
Mr Clinton’s economic record was a good one and he achieved it by taking
decisions that were sometimes unpopular.
But it is surely no accident that this is the same Mr Clinton who may just be
about to return in triumph to the White House as the First Spouse of the
next President Clinton.
He bashes George W. Bush with abandon - not exactly an act of courage now that
the President has an approval rating of about 30 per cent and is almost into
the final year of his controversial presidency.
Mr Greenspan saves some of his sourest venom for the Republicans who
controlled Congress for most of the past ten years. Those Republicans, you
will recall, were turfed out by the electorate last year, just as Mr
Greenspan was getting ready to submit his manuscript.
The former Fed chairman’s disillusionment with his own Republican Party in
fact offers the most powerful example of his skilful ability to avoid
inconvenient truths.
He denounces them as fiscally irresponsible, turning the government surplus
they inherited into large deficits. But, as those who followed those early
debates of the Bush presidency well know, Mr Greenspan himself carries a
large burden of responsibility for this fiscal incontinence.
A few days after Mr Bush took office in January 2001, the chairman testified
before Congress on the budget outlook. A deadlocked Senate was about to
consider a massive tax cut plan from Mr Bush that critics said would
squander the budget surpluses so recently achieved.
Mr Greenspan’s reputation by this stage was so great that a critical word, a
word that would have been merely a consistent restatement of his repeated
warnings in the 1990s of the need for fiscal discipline, might well have
shifted the debate.
However, the Fed chairman knew where his priorities were – and he wasn’t about
to challenge the man he knew had the power to reappoint him for another term
later that year (he did, of course).
Sure enough, the Fed chairman turned on an intellectual dime and endorsed the
tax cuts on the ludicrous pretext that the federal surplus threatened to get
dangerously large. In the book he denies that he encouraged fiscal
indiscipline, but history will be less forgiving.
Much of the book takes the form of an economic treatise on the benefits of
free markets and an oddly detailed forecast of the global economy for the
next 25 years: US GDP up by 75 per cent, but inflation “markedly above” the
current 2.2 per cent, by 2030; Britain doing well, the rest of Europe maybe
not; China, dynamic economically but uncertain politically.
But the main point of interest for economic historians will be his explanation
for some of the more controversial decisions of his time at the world’s most
important central bank.
There has been something of a surge in Greenspan revisionism in the past few
years. When the economy was booming a few years back, he was hailed as the
“Maestro”, in the title of the famous biography by Bob Woodward, the
Watergate reporter.
However, as the United States has grappled with the damage caused by a
succession of financial messes – the tech bubble, the current sub-prime
mortgage debacle – the verdict has changed somewhat. Mr Greenspan is now
widely criticised for pursuing a monetary policy that was altogether too lax
through his term of office.
He defends his decisions to lower interest rates after the 1987 stock market
crash and the 1998 global financial crisis, both of which have been
criticised as leading to financial and economic troubles later on.
He repeats his now familiar arguments for not raising interest rates in the
mid1990s even as the US economy was expanding at what was once thought to be
well above its potential rate and the stock market was booming on the back
of the high-tech bubble.
His own judgment is that dealing with the consequences of financial problems
is much better than trying to preempt them – an argument that has much
academic respectability. Central banks can stop bubbles from inflating only
by raising interest rates so high that they do enormous damage to the
broader economy. His successors at the Federal Reserve seem to share this
view, though there is also concern that perhaps the central bank was a
little too willing in the Greenspan years to act not just as a backstop for
the economy but as a rescue vehicle for people who had no business being
rescued.
Certainly, the Greenspan legacy is very much on the line at present. If
nothing else, his book demonstrates that he has not lost the carefully honed
capacity for a skilful and uncannily well-timed intervention, designed to
protect and further his own reputation.
In his own words
On sub-prime mortgages
“I was aware that the loosening of mortgage credit terms for sub-prime
borrowers increased financial risk and that subsidised home ownership
initiatives distort market outcomes. But I believed then as now that the
benefits of broadened home ownership are worth the risk. Protection of
property rights, so critical to a market economy, requires a critical mass
of owners to sustain political support”
On Britain’s economic performance
“The United Kingdom has had a remarkable renaissance since Margaret Thatcher’s
freeing up of market competition. To its credit ‘New Labour’ embraced the
new freedoms. Britain has welcomed foreign investments and takeovers of
British corporate icons. The current Government recognises that aside from
issues of national security and pride, the nationality of British corporate
shareholders has little impact on the standard of living of the average
citizen”
On China’s future
“No matter what official rhetoric may be, the tangible lessening of power from
one generation of leaders to the next gives hope that a more democratic
China will displace the authoritarian Communist party. While some
authoritarian states have for a time successfully adopted competitive market
policies, over the longer term the correlation between democracy and open
trade is too stark to ignore”
On the risk of a return of inflation (he expects inflation to rise to 4.5
per cent or higher)
“The continuing acceleration of the flow of workers to competitive markets
during the past decade has been a potent disinflationary force. That
acceleration has depressed wage growth and held down inflation virtually
uniformly across the globe. Accordingly an easing of disinflationary
pressures should foster a pickup of price inflation and wage growth”
