Full Transcript
ANNOUNCER: Alan Greenspan has been one of the world’s most powerful men for over 18 years. But at the end of this month he retires from the position that’s made him so important — chairman of the American central bank — the Federal Reserve. Under his watch, he’s guided the world’s biggest economy through tumultuous events including: the stock market crash of 1987, the emerging market currency crisis of the late 1990s, and the bursting of the dotcom bubble in 2000. In a special programme, Sir Howard Davies, the Director of the London School of Economics and former deputy governor of the Bank of England, and chairman of the F S A, now explores the man and the legacy of The Greenspan Years.
BROWN: It’s now a particular pleasure for me to welcome today the man acknowledged to be the world’s greatest economic leader of our generation, Dr. Alan Greenspan, Chairman of the Federal Reserve of the United States…as chairman of the Federal Reserve for an historic four terms, for eighteen years; the longest and I say not only the most successful tenure in history, but one truly admirable for his vision, his wisdom, and his strength in both good times and testing times.
DAVIES: The ‘greatest economic leader’ of our generation? Present company excepted, I am sure Gordon Brown meant to add.
DAVIES: Chairman Greenspan was in London last month for his last G7 finance ministers meeting. After his speech he collected the Freedom of the City. One of the obscure privileges of a new Freeman is the right to drive livestock over London Bridge, though the Lord Mayor thought the traffic might in practice prove an obstacle.
GREENSPAN: I am slightly disappointed. I did bring my flock of sheep along in the hope that I could shepherd them across London Bridge but I am…
DAVIES: Rare public evidence of Greenspan’s lighter side. He is usually portrayed as a lugubrious, dry as dust character, but his wife, Andrea Mitchell, Chief Foreign Affairs Correspondent for NBC News, claims that the true man is very different.
MITCHELL: I love his sense of humour. He is one of the funniest people I have ever known. He keeps me laughing all the time and that says a lot about either him or me or both of us. But he really is a very different person privately.
DAVIES: I experienced Greenspan’s lighter side myself in 1992, when Director-General of the CBI. On a sultry August day I called on the great man in his Washington office. I was on holiday with my wife and sons, but our Ambassador, Robin Renwick, suggested I should call in – to explain why British business supported the Government’s valiant struggle to keep the pound within the ERM. I made my case. We could hold position in the ERM if we toughed it out. Greenspan was polite but clearly unimpressed, as well he might be. On the way out he asked me what I was doing in Washington in the dog days of August. I explained I was on holiday and that my wife, astonished by how cheap things were in the States, as a result of the over-strong pound, was at an outlet mall buying the children’s winter clothes. “Your wife’s economics are better than yours”, he said with a smile. Damning praise from a man who has, as Gordon Brown says, dominated the world economy for two decades. Lauded for his sure touch on the interest-rate tiller, famous for his command of both the big picture and the detail. How did he reach this pre-eminent position? Wesley Halpert, who grew up with his cousin Alan in the New York of the 1930s, knows part of the answer.
HALPERT: Alan was a fountain of numbers. He knew at his age level, when he was eight or nine years old, he knew every baseball player, the records of all these guys. He was very mathematical. He could do numbers, multiply numbers in his head like you wouldn’t believe.
DAVIES: Obsessive memorisers of cricket statistics can take heart. You may not be wasting your lives.
MUSIC: (Music being played)
DAVIES: As many mathematicians are, he’s also a keen musician. He played the clarinet and, like Bill Clinton and Woody Allen, the saxophone – with some success. Wesley Halpert again.
HALPERT: He decided that he didn’t know what he wanted to do in college but he was playing the clarinet all these years. So he left college because he wasn’t sure where he wanted to go. He joined this Henry Jerome Band which travelled around the United States.
DAVIES: But economics quickly became his principal passion and he enrolled at New York University here in downtown Manhattan, clustered around Washington Square, still filled with students today. Robert Kavesh, subsequently a Professor of Economics at New York’s Stern School of business, was a fellow student in the late 1940s.
KAVESH: Greenspan and I, he was a year ahead of me actually at school. What really bound us together was the sense that economics was undergoing a transition and we were there at the frontier. Anyone who was studying economics at that time was determined that there would never be another major depression. The depression of the 1930s had led to World War Two, and so there we were imbued with the sense that we couldn’t let this disaster occur again. It was hard to find anyone who was not strongly influenced by the democratic party and John Maynard Keynes and his idea about the very strong role that government could and should play in dominating economic affairs.
DAVIES: Greenspan did not, however, remain a believer in the healing power of strong government. In the 1950s, while poring over statistics in his day job as a steel-industry analyst, he fell under the spell of Ayn Rand, author of The Fountainhead and Atlas Shrugged. A Russian émigrée, she was the inspiration to a generation of libertarian thinkers, deeply suspicious of state power. Nathaniel Branden was a leading light in Ayn Rand’s circle.
BRANDEN: One day we were riding down on an elevator, Ayn Rand and I, and Alan Greenspan and his girlfriend happened to be waiting for the elevator at the bottom, so they were introduced. And he used to wear these very dark suits and he had, as you can see, a very sombre manner and Ayn Rand made the remark after we’d parted and walked away, “he looks like an undertaker.” Rand made that like a one time joke, you know, a review which she was to radically revise as she got to know him.
DAVIES: What happened in that circle?
BRANDEN: We used to meet typically every Saturday night at the apartment of Ayn Rand in New York City. She was writing out Atlas Shrugged and we would be passing chapters around and reading and re-reading and then go on talking philosophy till 2, 3, 4 in the morning.
DAVIES: Was he always a laissez-faire liberal or was there some evolution in his thinking at that time?
BRANDEN: He was definitely pro-capitalist and, in a general sense, pro free market when I met him, but he was not a consistent intransigent advocate of complete laissez-faire. Ayn Rand persuaded him in that direction.
DAVIES: These Saturday evenings spent at the feet of Ayn Rand did not prevent him building an outstandingly successful economic forecasting firm, Townsend Greenspan. They did, however, propel him across the political spectrum, into the right-wing Republican camp. So much so, that while his friends were not surprised when President Nixon invited him in 1974 to chair his Council of Economic Advisors, they were shocked that he accepted. Robert Kavesh again.
KAVESH: I suppose in the transition, Nixon was about to resign, Ford was about to take over and I was taken aback. I said, “Alan, you are a dyed-in-the-wool republican, more so, you’re a follower of Ayn Rand. You think that government is corrupt by definition. Now you’re going to go down to Washington as the Chief Economic Spokesman and you’re going to appear before congressional committees and they’re going to ask you about this, that, and the other thing, and you’re going to answer in the words of Ayn Rand or the equivalent.” I said, “they’re going to eat you up, spit you out.” And he kind of smiled, well I was so wrong. The members of the committee, democrats and republicans alike, were standing up and applauding what he had to say. Not necessarily his policy prescriptions, but the way in which he looked at things.
DAVIES: This first exposure to life within the Washington Beltway was relatively brief. By early 1977 he was back in New York, though he remained a prominent commentator on policy. His powers of economic analysis brought him, first, a new girlfriend in Andrea Mitchell – and only later a new job.
MITCHELL: I was covering the Reagan White House and trying to figure out how they were going to balance the budget as they claimed and I kept pestering some of the White House officials with questions and finally one of them said, “Why don’t you ask a real economist? Call Alan Greenspan.” And I just called him and we started talking over the course of more than a year about economic effects and budgets and the trickle-down economics and supply-side theories and eventually he said, “Why don’t we have lunch or dinner if you’re ever in New York?” So we ended up having dinner in New York and discovered that we both loved music and baseball, which is enough to cement a relationship.
DAVIES: This may be the first concrete result from trickle-down economics, I guess.
MITCHELL: Exactly.
DAVIES: Paul Volcker had become Fed Chairman in 1979. His tough interest-rate policy squeezed inflation down from 12% to 4%, at great cost to his personal popularity, and in 1987 Volcker decided he had had enough. Greenspan was by then an obvious choice to succeed him.
VOLCKER: When I left of course he said, “well who would you recommend?” I had two people in mind and Alan was one of them and he said, well the thought had occurred to them I think at the same time, so it wouldn’t surprise you.
DAVIES: Although Volcker had tamed inflation, it was still a baptism of fire. It’s often said that financial markets like to test the resolve of a new Fed chairman. In 1987 they certainly did. On two days in October – Friday 16th and black Monday the 19th – the stock market fell 23%, bringing fears of a sharp recession. Greenspan acted quickly. Steve Beckner is senior correspondent for Market News International.
BECKNER: He immediately swung into action coordinating with Treasury, with central bankers around the world and set up a war room in his office at the Fed, working together with particularly the New York Fed, Federal Reserve Bank, which overseas a lot of the important financial institutions. They did such things as call up major banks and use moral suasion, as they say, to keep banks from calling loans, so that the credit system didn’t seize up.
DAVIES: For Jean-Claude Trichet, President of the European Central Bank, this ability to react decisively to financial market crises, marks Greenspan out as a master craftsman – the central banker’s central banker.
TRICHET: He found out in all circumstances appropriate responses but he was certainly very creative and very imaginative and he has played a very important role in permitting the improvement of credibility of central banks in general.
DAVIES: And his prompt corrective action should not be confused with the relaxed attitude to inflation. With the economy back on track, the Fed raised rates to head off the risk of rising prices. This was not welcome news for President Bush the elder. Steve Beckner explains.
BECKNER: After it became clear that the economy was regaining its footing, he undertook a rather steep course of interest-rate hikes and thereafter when they started cutting interest rates, they did so in very slow incremental fashions, described by some people in the first Bush administration as the Chinese water torture and there’s still some enmity there for him allegedly having torpedoed Bush’s re-election chances.
DAVIES: So, whether or not Greenspan can be held personally responsible for Bush’s defeat, a Democrat entered the White House in 1992. Some then forecast an untimely end to the Greenspan chairmanship. But Clinton famously sat him at Hillary’s right hand for his inaugural address, and he proved wholly compatible with the Treasury team of Robert Rubin and Larry Summers. Dubbed ‘the Committee to Save the World’, the three of them dealt sure-footedly with a series of problems. The Asian crisis was an early test. Rubin clearly found no difficulty dealing with a man at the other end of the political spectrum.
RUBIN: If we had all started with what you might refer to as ideologies, or sets of beliefs, I don’t think we could ever have functioned together effectively. But what actually happened was: we sat down in the face of what were, in many ways, unprecedented circumstances, and circumstances of great importance, not only to our country but probably to the whole global economy. And we looked at the facts and then we reacted analytically and we worked our way through to what was a common view as to the appropriate strategy
DAVIES: The late summer of 1998 was the most delicate time. In August Russia defaulted on its debts, sending shockwaves through the financial system. In September, the huge hedge fund, Long Term Capital Management, had a near-death experience, resolved at the last minute only after intervention by the Fed itself. Once again, Greenspan rode to the rescue. Alice Rivlin was Vice-Chair of the Federal Reserve at the time.
RIVLIN: At the moment we cut interest rates, we cut them three times in the Fall of 1998. What we were worried about was that the currency crises might ricochet around the world. It turned around remarkably quickly and by spring of ’99, the crisis seemed to be over and we were thinking about raising interest rates again.
DAVIES: So crises which could have triggered a wholesale meltdown in global markets proved transitory, and the US and global economies moved ahead. Soon, though, another hazard emerged. The stock market surged. Corporate profits burgeoned. The US economy seemed to be defying gravity. Was this just froth, or was the so-called new economy creating a sustained boost in productivity? Were American workers, in the information technology revolution, producing goods and services much more efficiently than before? Jean-Claude Trichet gives Greenspan great credit for his understanding of what was happening.
TRICHET: He was the first to analyse the fact that the US economy was registering since 95/96 an explosion of labour productivity progress, which was really a very very visionary understanding of the situation.
DAVIES: But while Greenspan’s analysis was fundamentally correct, it did not explain the sheer scale of the boom. The Dow Jones share-price Index, which started the 1990s at 2500, reached almost 12000 by the end of 1999. To his credit, Greenspan saw the risks of a stock market bubble earlier than most. In 1996 he put a warning shot across the bows of investors and companies alike. The phrase he used then has entered the vocabulary on both sides of the Atlantic.
GREENSPAN: How do we know when irrational exuberance has unduly escalated asset values which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
DAVIES: Irrational exuberance. A nice turn of phrase but inside the Federal Reserve, there were concerns about the potential impact of his remarks. Alice Rivlin was certainly anxious.
RIVLIN: I did pick up on the phrase before he said it and I think asked him, “do you really want to say that”, and he said, “yes I do, I want to send a message here”, and indeed he did. And perhaps it would have been sensible to do it again. The market reaction was short and not very significant and the stock market went on barrelling up to new heights and we were all worried about what to do.
DAVIES: Eddie, now Lord George, was Governor of the Bank of England – my boss – for ten of the Greenspan years. They met regularly at the Bank of International Settlements in Basle.
GEORGE: He talked about irrational exuberance ahead of time and the markets took no notice and so Alan went away and asked himself, well why do they not see the thing in the same terms as I do, and I think that was what led him to realise that there was an extraordinary surge in productivity growth in the United States. And to do that he’d gone right down to the kind of corporate level and he monitored that, so that when he came to Basle, you know, he would say, “well I think that this is spreading through the US economy.” Two or three months later he’d say, “well it’s continued and it’s gone this much further.”
DAVIES: Were the colleagues, governors, were they persuaded by his argument about the productivity surge, or was there a lot of scepticism around the table?
GEORGE: The first reaction was that they listened extremely carefully, as they always did, when he was focusing on some of these kind of particular things which he clearly understood very much better than anybody in the room. I mean it made an impact on your own thinking subsequently.
DAVIES: The market continued to rise for four years after ‘irrational exuberance’. But in 2000 the dotcom bubble burst and 2001 was a year of living dangerously. The stock markets fell in New York and London by some 30%. A series of corporate scandals, Enron and others, cast a pall over American capitalism and 9/11 brought the threat of global war. The Fed could not be blamed for fraud or terrorism, but had its actions stoked the boom? Steve Roach, chief economist of Morgan Stanley – on whose Board I sit – is a rare thorn in Greenspan’s side. He thinks the Fed was partly to blame.
ROACH: We had a US central banker who in effect became something of a cheer leader extolling the virtues of a new paradigm of ever increasing productivity growth, corporate profit margins and a virtual circle that will lead to ever higher stock prices. A lot of investors and speculators unfortunately took that as investment advice. And so the bubble that he ended up responding to was to some extent a bubble of his own making.
DAVIES: Eddie George, by contrast, perhaps naturally more aware of the limits on a central banker’s power and influence, thinks there was little more the Fed could have done.
GEORGE: For central bankers to try to focus on controlling, manipulating asset prices is extremely dangerous, and I think if Alan Greenspan had said, “well the markets are not taking any notice of irrational exuberance, therefore I will bring the markets to heel”, which he would have had to do by damping down the economy, I think that would have been far more costly in terms of the impact on wealth because it would have actually constrained the growth of the US economy. What he couldn’t do was predict at what point this thing was going to get out of hand and people’s confidence was going to suddenly erode. But he knew that, if and when that happened, then he could respond in a very kind of aggressive, positive way to actually prevent it creating a great disaster. And actually if you look at what happened, the US economy slowed down and it did actually go technically into recession. But it was a pretty mild recession.
DAVIES: But Morgan Stanley economist, Steve Roach, is surely right, though, that the markets had come to hang on Greenspan’s every word. He had now achieved cult status as guru, guardian angel and Gandalf all in one. But did the market really understand what he was saying?
GEORGE: When he was being questioned by somebody in the Senate Committee, one of the questioners said, “oh so what you’re saying is……” and gave his interpretation of what had happened and Alan said something like, “Well if you think you’ve understood what I was saying, I obviously didn’t explain myself properly.”
DAVIES: As a journalist herself, Andrea Mitchell is kinder about his communication skills, though even she was confused at times.
MITCHELL: There have been times specifically when he’s asked about pending monetary decisions where he simply tries to be opaque. But he has in contrast to that over the years really opened up the Federal Reserve, they released their minutes publicly on a much more rapid schedule. He’s just found over the years that he can get a lot more done without doing television interviews and without doing print interviews.
DAVIES: Does the opacity dimension ever spread into his private life? I gather you’ve referred to Greenspeak as this allusive method of communication?
MITCHELL: He claims that he proposed to me three times before I understood what he was saying. I think that he’s making that up, but it is true that he said he was certainly hinting at marriage long before we ended up deciding to actually get married. So perhaps it is that I didn’t understand him.
DAVIES: At the end of this month, Greenspeak will become, like Latin, a dead language. The world economy will acquire a new conductor in Ben Bernanke, Alan Greenspan’s successor as Chairman of the Federal Reserve. How easy will he find it to replace a man with near god-like status? Robert Rubin thinks the problem is not that serious.
RUBIN: In the case of Volcker, people said when he stepped down no-one could ever take his place and Volcker was a great hero of his time. Alan came along and now Alan is a great hero of his time in the eyes of many, and I think he has done an extremely good job. I think the nature of the institution as such and the nature of the media as such, with the media trying to present things in simplified ways that people can easily relate to, that if a chairman does handle his job reasonably well, then I think it does get certified in the person of the chairman.
DAVIES: Others see bigger risks. They think the Fed has become a one-saxophonist band. Professor Alan Blinder of Princeton was the Vice-Chairman of the Fed Board – supposedly the collective decision-maker on interest rates – in the Clinton years.
BLINDER: I’d say the feeling going into the meetings was that the chairman was going to prevail, he was probably cracked anyway. He already had an illustrious reputation when I joined the Fed in 1994 and there was a real hesitance to be recorded as disagreeing with him by voting against him.
DAVIES: And Paul Volcker has noticed a marked reluctance to disagree with Chairman Greenspan.
VOLCKER: It seems a little odd to me because it hasn’t been the tradition over a period of time. I guess that reflects, to some degree, the fact that he’d been there so long and had this kind of centre of attention for so long.
DAVIES: So do you think a bit of dissent is a good thing in the system?
VOLCKER: Oh I think if somebody feels like dissenting he ought to dissent and not dissent because it’s the tradition not to dissent.
DAVIES: The bigger question though is about the inheritance Greenspan bequeaths to his successor. While inflation may be under control, the US fiscal and balance-of-payments deficits are ballooning. Neither is his direct responsibility of course, but he supported President Bush’s tax cuts, which are one major factor behind them. Martin Wolf of the Financial Times thinks his ideological slip was showing when he supported Bush.
WOLF: We all know he’s a very competent technocrat and a very competent central banker, but he is also a very conservative economist in the American sense, a libertarian, and he believes in a small state. So he has tended to support things which he thinks will move the United States in the direction of a small state.
DAVIES: Larry Lindsey, another former Fed Board member, and a Republican, takes a different view.
LINDSEY: He thought it was the right thing to do. In fact it was essential for those tax cuts for an aggressive fiscal and monetary policy to take effect in order to cushion the downside of the bubble. It was text-book economics, it was straight from John Maynard Keynes.
DAVIES: But Steve Roach of Morgan Stanley in New York thinks that this was his major mistake, and sees serious problems ahead for Bernanke as a result.
ROACH: Mr Greenspan will regret the strong endorsement he gave for Bush administration tax cuts because while it seemed like a wise and prudent thing at the time, that judgment was heavily coloured by a distorted view of the business cycle. In retrospect that played a key role in pushing down our national savings rate and in raising our current account deficit, an outcome that I think Mr Greenspan cannot help but regret.
DAVIES: Even Greenspan himself has drawn attention to the risks we run, as he explained in his final speech in London as Fed Chairman.
GREENSPAN: If, however, the pernicious drift towards fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalisation, the adjustment process could be quite painful for the world economy.
DAVIES: What is Paul Volcker’s judgment on his successor’s legacy? Do you think that history will consider Alan Greenspan to have been a great Fed Chairman, do you think his reputation is secure?
VOLCKER: I think it’s reasonably secure but it depends upon what happens in the next year or two with so much dependence upon the dollar around the world and such a build up of dollar assets. The other side of it, there’s a big current account deficit in the United States which keeps putting dollars out there. We’ll see how that all comes to a conclusion in the end and I wouldn’t blame that at all on the Federal Reserve if we had a problem. But I think how this works out in the long run is yet to be seen.
DAVIES: So is Greenspan the greatest central banker of all time? It is, as Paul Volcker argues, too soon to tell. In his 18 years at the Fed he has certainly presided over a period of remarkable growth in prosperity with low inflation. He has reacted decisively to a series of crises, preventing them from getting out of hand. And he has shown acute awareness of the impact of US decisions on the world economy. But by comparison with the Bank of England, where nine members of the Monetary Policy Committee vote independently on interest rates to meet a pre-announced inflation target, Greenspan’s regime has been highly personal and discretionary. Academic economists, including his successor, Ben Bernanke, tend now to favour inflation targets and collective decision-making, rather than relying on one man’s judgment. Though however much help he gets from his colleagues, Bernanke will certainly need Greenspan’s sure touch, and some good fortune, as the US twin deficits unwind – especially if the unwinding is rapid and undisciplined.
DAVIES: We have not, however, heard the last of Alan Greenspan. Though approaching 80, he has no intention of riding off into the sunset. What will life now hold for the Greenspan family? Andrea Mitchell:
MITCHELL: It’s going to be very very different. He’s going to write, he has many ideas about how economies work and free markets. So I think one of his first projects will certainly be a book. He leaves January 31st and on February 1st he becomes a private citizen and he can first begin to look at offers. So he’s not been able to entertain any meetings or suggestions until then. He’ll open an office that day, downtown in Washington, stay in Washington and speak out on public policy and he has some ideas that might prove to be very controversial. But as a private citizen he can certainly express them without fear of offending anyone in Congress or in any way compromising the Federal Reserve.
DAVIES: Greenspan’s unvarnished opinions on public policy should make our red-socked ambassador’s memoirs pale into insignificance. Publishers must already be forming an orderly queue.
