Tuesday 23 July 2019

Business: Infuriating that Greenspan is still so hopelessy lost

The Map and the Territory, By Alan Greenspan

Alan Greenspan
Alan Greenspan

Daniel Akst

If Alan Greenspan were Santa Claus, what's the last thing you'd want for Christmas? Given his track record, a guide to economic forecasting would have to be the worst present he could bring.

Yet that's exactly what the former Federal Reserve Board chief delivers in his clueless new book, 'The Map and the Territory'. A guide to economic forecasting by Greenspan is about as credible as art history by Mr Magoo.

Let's review. As Fed chairman until 2006, practically the eve of the financial crisis, Greenspan couldn't see the storm on the horizon.

Despite his mastery of the techniques described at somewhat numbing length in his book, he failed to draw any useful conclusions from a host of indicators that were pointing to trouble.

Omens were plentiful: the bubble in housing prices, the gross inadequacy of banking capital, the systemic risks of money-market funds, the explosive dangers of complex derivatives, the rise of an enormous and poorly regulated shadow banking system, the transparent pandering of the bond-rating companies, the collapse in mortgage-lending standards and the massive overleveraging of US consumers.

'The Map and the Territory' pretends to tackle the subject of forecasting while saying next to nothing about the author's historic failure to reduce the risks leading to the crisis, which he calls "almost universally unanticipated".

Resorting all too freely to the first person plural, Greenspan describes the book as "an effort to understand how we all got it so wrong, and what we can learn from the fact that we did".

The remarkable thing is that Greenspan continues to get it wrong.

He acknowledges that banks ought to hold more capital but argues in effect that the real problem is too much government – and too much "social benefits" such as Social Security.

If only these had been held to "a still large 4pc" of GDP, their level in 1965, instead of reaching almost 15pc in 2012 (never mind an ageing society and soaring health-care costs), "little of the fiscal chaos we are now experiencing would have found its way to the front burner of public policy".

"Fiscal chaos" is what we had in 2008, and it had nothing to do with Social Security.

For someone so exercised about federal deficits, Greenspan is strangely silent on his own role in the Bush tax cuts, which might not have been adopted in 2001 (further cuts came in 2003) without his blessing for the general concept.

And there's the Great Recession, which might not have occurred had he recommended, while he was Fed chief, higher capital requirements for banks, better regulation of derivatives and a crackdown on subprime lending.

Greenspan's plodding text oscillates maddeningly between equivocation and chutzpah. He implies that it was a mistake to bail out the big banks in 2008, yet doesn't say what he would have done instead, leaving us to wonder if, in Ben Bernanke's shoes, he would have let the global financial system go up in flames.

Clearly the author is worried about moral hazard, which occurs when firms or people are encouraged to take excessive risks because they know others will bear the consequences.

But this is an odd concern from the man whose actions as Fed chief gave rise to faith in the "Greenspan put," the notion that, while he was in office, the central bank would rush to float sinking markets with lower interest rates if they faltered.

'The Map and the Territory' is an infuriating book, one that will leave readers wondering how its author could have come all this way and yet remain so hopelessly lost.

Irish Independent

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