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Book Review 90: The Age of Turbulence

September 29, 2009 - Harry Eagar
THE AGE OF TURBULENCE, by Alan Greenspan. 531 pages. Penguin, $35

“The Age of Turbulence” was published in September 2007 by a man who many people -- including himself -- believed had understood the fundamentals of economic activity and knew, to a large extent, how to assist it to do what it was almost magically capable of doing all by itself.

Even on the date of publication, the first strong signal that Alan Greenspan didn’t know what he was talking about was evident, and by the following March his delusions were obvious to anyone not blinded by ideology. In particular, what he had told the Congress on Sept. 18, 2001, was not true, it was not true that “deregulated financial markets . . .  had created an economy of unexampled resilience.”

What was true was that deregulated markets crash.

That the crash did not turn into a collapse, as in 1929, was only because governments intervened massively.

Now we go back to the beginning, to New York City in the ‘30s and ‘40s, where the son of a stockbroker began seeking to understand how a modern economy works. Earnestness is no substitute for openmindedness, and my estimate of Alan Greenspan, never high, fell very far when I learned that Ayn Rand was the major influence on his thinking, along with Adam Smith and Milton Friedman.

I read Rand, too, but all I got out of her was that the combination of greed and cruelty gets you more power, money and sex than either greed or cruelty alone. Greenspan didn’t merely read her but sat at her feet -- literally, in her parlor.

Surprisingly, this book is clearly, even gracefully written. Greenspan says he had to learn to speak obscurely as chairman of the Federal Reserve Board. If only he had not adopted the obscurantist cult of monetarism.

The first half of the book retells his life. He seems to be an easy-going, humorous man. The second half contains his assessment of many (but nowhere near all) aspects of the current state of the economy, with analysis of the challenges ahead. This part is hilariously wrongheaded. I laughed out loud on dozens of pages, but some of deepest belly laughs came when Greenspan wrote:

-- “I concluded, and I suspect most regulators agree, that the first and most effective line of defense against fraud and insolvency is counterparties’ surveillance. For example, JPMorgan thoroughly scrutinizes the balance sheet of Merrill Lynch before it lends.”

-- “China is in dire need of financial expertise. . . . In December 2003, Liu Mingkang, the new chairman of the China Banking Regulatory Commission, visited the Federal Reserve Board. He acknowledged that Chinese banks lacked the professional expertise to judge what enabled a loan to be repaid.”

-- “Holders of close substitutes (for riskless Treasury bonds) such as . . . mortgage-backed securities can be induced to swap for treasuries without undue disturbance to markets.”

Because he is a cultist and not an analyst, Greenspan was and is oblivious to market signals. To him, any sort of regulation is pernicious (and, in today’s automated markets, not even doable), and the answer to many perceived problems is deregulation.

He managed to maintain this outlook despite living through the deregulation of civil aviation, followed by the collapse of civil aviation; and the deregulation of savings and loan banks, followed by the collapse of savings and loan banks; and the rise of unregulated hedge funds, followed by the collapse of hedge funds, including Long-term Capital Management, which very nearly brought down most of Wall Street along with it.

Other people would have interpreted these events as calls from important economic sectors to “Please, regulate me!” but not Greenspan, and not his acolytes either.

Since Greenspan believes in the magical ability of markets to “rebalance” without the need for any conscious intervention by anyone, it follows that the concept “too big to fail” is not in his worldview, and in fact it is never mentioned in these 500 pages.

Nor is commercial paper. Not so very long after this book went to press, Greenspan’s successor Ben Bernanke had a chance to experiment with the belief that the economy is magically resilient and flexible. He and Treasury Secretary Henry Paulson decided to run an experiment on Lehman Brothers. Their belief that nobody is too big to fail did not survive the weekend, nor did about 3 million (and counting) other Americans’ jobs. But they are still collecting paychecks. Wall Street is a no-fault zone.

Commercial paper, that humdrum lubricant of our economy, too dull to take notice of, collapsed and the financial markets seized up.

In an envoi, summing up everything he thinks he has learned in 60 years of studying and cheerleading for unsupervised markets, Greenspan writes: “Since markets have become too complex  for effective human intervention, the most promising anticrisis policies are those that maintain maximum market flexibility -- freedom of action for key market participants . . . , The elimination of financial market inefficiencies enables liquid free markets to address imbalances. . . . Many critics find this reliance on the invisible hand to be unsettling.”

Count me among them.

It has been a long time since I have read a book that was so perfectly silly. Well, not quite perfect. There is one sensible statement, although you have to persevere to page 420 to find it: “There is no getting around the fact that portfolio risks jeopardize retiree benefits.”

And how.


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