'We still live in Alan Greenspan’s shadow'

The publication of Alan Greenspan’s memoir, The Age of Turbulence – a detailed apologia of his 19-year tenure at the US Federal Reserve (1987-2006) – coincided with the first gusts of the looming credit storm. In Britain, a historic bank run on Northern Rock was underway. “Inevitably, we now see his tenure through the prism of the current financial situation. Crisis may be too strong a word, but turbulence is certainly accurate,” noted a Guardian review in October 2007. To which the contemporary reader might add, you ain’t seen nothing yet.

Nearly two decades on, as Greenspan, 99, approaches his own centenary, the question posed by economist Howard Davies in 2007 hasn’t changed. “How far should the Fed be held responsible for sowing the seeds of the whirlwind by running an excessively lax monetary policy and… turning a blind eye to the explosion in subprime mortgages and the rapid growth of complex credit derivatives?” The only difference now is scale. If Greenspan’s Fed fuelled the global cataclysm of the Great Financial Crisis, it must also bear partial responsibility for everything that has happened since – from the distortions wrought by quantitative easing (QE) and the vast debt piles now crippling Western economies, to the growing chasm between the asset-rich and poor and the abandonment of notions of “moral hazard” in markets. If the great art of central banking – as outlined by Greenspan’s predecessor Paul Volcker – is knowing when to remove the “punchbowl” from the party, we are still nursing the hangover from the Maestro’s lengthy 1990s “Great Moderation” gig, which, as Britannica Money points out, remains “the longest official economic expansion in US history” and cemented Greenspan’s reputation as a “rock star” central banker.

After the 2008 crash, Greenspan’s public image “imploded as quickly as America’s overheated housing market”, noted Prospect in 2016. How did the man who invented the phrase “irrational exuberance” – to define the speculative excess of the turn-of-the-century dotcom era – became so blind to his own role as an enabler? The question of what Greenspan foresaw, but played down or ignored, has followed him down the years. The title of Sebastian Mallaby’s biography, The Man Who Knew, was “not necessarily a flattering sobriquet”. One thing that Greenspan certainly knew about was data. He was “recognised as unbeatable both on his raw knowledge of detailed economics and his instinctive grasp of the bigger picture”. While studying for a doctorate at Columbia in 1952 he met the polemical novelist Ayn Rand and became a member of her inner circle. Greenspan went on to form his own economic consulting firm, Townsend-Greenspan & Co., before cutting his political teeth – at Rand’s urging – as an adviser for Richard Nixon’s 1968 presidential campaign, later serving as chairman of the Council of Economic Advisers during Gerald Ford’s presidency.

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“The Greenspan put”

In 1987, Ronald Reagan nominated Greenspan to replace Volcker, says the Financial Times. A practised operator in the corridors of power, “he relished Washington’s social bubble and could play the status game with the best of them”, says Prospect. But it was his ability to deal with crises – from the October 1987 market crash through to the millennial dotbomb – that reassured his political masters over five successive terms. He became renowned for “the Greenspan put”: aggressively lowering rates to fight the popping of asset bubbles – a pragmatic approach at odds with his “hot-gospelling libertarian beliefs”, which fomented years of excessive risk, says the FT. Greenspan’s urgent desire to be at the heart of policymaking overcame his instincts – until eventually the mother of all bursting bubbles (to date…) overcame him.

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