Adventures in the bank

Written by Sandipan Deb | Updated: Sep 30 2007, 07:07am hrs
As Chairman of the Federal Reserve Board, Alan Greenspan held the second most important job on the planet for nearly two decades. And no Fed chief in history possibly had to manage as many crises. In 1987, within weeks of his taking over at the central bank, US stockmarkets crashed, in part due to his raising interest rates by 50 basis points. The Soviet Union meltdown, the Asian contagion, the Latin American fiscal crisis, the savings-and-loans industry implosion, the integration of global markets, the consolidation of the European Union, the rise of China and India, the decade-long Japanese recession, the dotcom boom and subsequent bust, the Bush administrations tax cuts leading to huge deficits this former management consultant was centrestage through all of this and much more. So his memoirs, one can expect, should be exciting stuff.

Greenspan, who already boasts a biography by Bob Woodward titled Maestro, does not disappoint on that count. For a central banker whose work credo necessarily included being as obscure and cautious in his statements as possible to make sure markets were not riled, he has written a remarkably lucid and easy read. (Greenspan says that his current wife, who he dated for 14 years, claims he proposed to her thrice, and the first two times, she simply didnt get it because he was phrasing it in Fedspeak. He then goes on to assert that his wife is wrong; he in fact proposed to her five times). And for people interested in the global economy and the way it functions, parts of the book are as gripping as a good thriller.

Columnists like Paul Krugman in The New York Times and Alan Beattie in The Financial Times have alleged that in some areas, especially relating to the Bush administrations fiscal policies, Greenspan has been less than truthful, that he did not oppose the tax cuts as strongly as he claims in his book, but went along with them to ingratiate himself with the new regime. Be that as it may, the most fascinating parts of his book are really about Greenspans thought processes, and how he had to adapt, innovate and reinvent his economic thinking as the world went through gigantic changes that turned conventional macroeconomic wisdom on its head. For instance, the interlinked global economy is taken for granted today by most nations, but Greenspan had to actually think these new realities through and figure out that as Fed chairman, he could no longer think only about the US economy, that it was imperative to convince American presidents that it was in US interest to make sure that the Brazilian and Mexican economies did not collapse, that South Korea defaulting on its foreign loans could send entire Asia and the world into an economic tailspin.

Most interesting is his recollections of the hi-tech boom that powered the US economy through the 1990s. While conventional wisdom saw the economy as distinctly overheated and called for a raise in interest rates, Greenspan drilled through the numbers, and found that, defying all historical experience, even as GDP growth was soaring, productivity and profitability remained high, and inflation low. He reached the conclusion that this was a totally new type of business cycle, something without any precedent in history, and that the usual econometric models were useless for projecting its progress. The data fanatic realised that data was not enough anymore. Greenspan introduced a new form of policy-making that the Fed had never seen before, that reached beyond econometric models to factor in broader, though less mathematically precise, hypotheses about how the world works. Some economists argue that such an approach to policy is too undisciplined overly complex, seemingly discretionary, difficult to explain, he writes. (But) as elegant as modern-day econometrics has become, it is not up to the task of delivering policy prescriptions. So Greenspan did not raise rates for four years. He simply sat and waited for the inevitable crash, with a clear plan of what the Fed would do as soon as it came. And ensured a soft landing for the US economy after 2000s Black Friday.

The second half of the book is Greenspans reflections on capitalism, the world economy, and several national economies such as China, Russia and India. These essays, lucid and insightful as they are, seemed the less interesting part of the book to this reviewer, compared with the hurly-burly of the first half, the memoirs. One must however mention that on India, Greenspan is less than rah-rah, mincing no words. His view as usual backed by data and anecdotes is that India is not liberalising fast enough, that the ghost of Fabian socialism still haunts our politicians, that the economy suffers from far more statism than makes any sense. I am sure the readers of this newspaper will wholeheartedly agree. And even those who do not, will undoubtedly enjoy reading about how much thought, analysis and stress underpin a 25-basis-point rise (or fall) in interest rates, and how it feels to go to work every day and have a helicopter view of the entire world economy.