Nobelovec Robert M. Solow je za New Republic recenziral novo knjigo Alana Greenspana “The Map and the Territory“. V recenzijji s pomenljivim naslovom “Alan Greenspan Is Still Trying to Justify His Bad Decisions: What the maestro doesn’t understand” sicer najprej pohvali Greenspanova prva leta na čelu Fed, nato pa kritizira njegovo zadnjo tretjino mandata. Za to obdobje (2001-2006) sta značilni dve Greenspanovi napaki: (1) podcenjevanje nepremičninskega balona in (2) njegova prepričanost v to, da se neregulirani finančni trgi samo-uravnavajo. Greenspan še danes ne priznava, da bi karkoli stroril napak.

You remember Alan Greenspan: you know, the one who was chairman of President Gerald Ford’s Council of Economic Advisers from 1974 to 1977, and was then appointed chairman of the Federal Reserve Board by President Ronald Reagan in 1987, a position that he served in for nineteen years, retiring just in time for the financial crisis. His reputation as grand maestro of monetary policy and general oracle about the economy has gone downhill since then, but I think it is only fair to say that he was a very good chairman of the Fed.

Greenspan was masterly in the first two challenges that popped up during his tenure. When the stock market collapsed by almost a third one day in October 1987, the Fed did the classically right thing. It made clear that it stood ready to provide every bit of the liquidity that might be needed to keep the financial system functioning, so that anyone who acted in panic would probably live to regret it. There was no financial breakdown, and the real economy was essentially unaffected by the episode. Score one for Greenspan.

During the long Clinton-era upswing from 1992 to 2000, Greenspan and the Fed faced a much more complex problem, and again did the right thing. Nearly all of the punditry and probably most professional economists (including those in the Fed itself) believed that the key inflation-safe unemployment rate (below which inflation arrives and accelerates) was something like 6.5–7.0 percent. As the upswing continued and the unemployment rate drifted down below that level (and, you may remember, budget surpluses appeared), the Fed was beset with urgent reminders that the time had come, and maybe passed, to tighten credit and choke off the boom before the inevitable inflationary disaster arrived.

Greenspan looked at the data and the economy around him, and saw few, if any, signs of gross imbalance or impending inflation, and persuaded his colleagues to let the expansion go on. In the end the unemployment rate dipped briefly below 4.0 percent without trauma. Greenspan thought that productivity was improving faster than anyone or the conventional measurements realized, and that was what provided the room for further expansion. He was right, though there were several other factors that helped, as became clearer after the fact. Never mind: it was an exhibition of pragmatism and cool that saved the economy from wasting trillions of dollars of output in unnecessary unemployment and idle capacity.

There ends the plus side of the Greenspan ledger. On the minus side, Greenspan’s reputation has suffered from two big mistakes. The first was his failure to see the importance of the housing bubble and the dangerous vulnerability of the financial mechanism that supported it. Had he done so and punctured the bubble promptly, the economy would have been spared the prolonged weakness that it is still suffering. The second was his deep-seated conviction that the unregulated financial system was self-stabilizing, that the self-interest of all those clever and experienced participants with a lot of their wealth at stake would keep the accumulation of risk within tolerable bounds. So he promoted deregulation and financial consolidation (as did others, of course) and, when this simple faith proved wrong, allowed disaster to strike. I think that the first mistake may be partially excusable, but the second mistake was a catastrophe, and it was not an accident.

Hindsight leaves no doubt that it would have been a great idea to prick the housing bubble early. But imagine that Greenspan and the Fed had done so. Suppose they had tightened credit, pushed interest rates higher, put an end to the housing boom, and thus—very likely—created a standard recession like so many of the others. They would surely have been pilloried for destroying a nice prosperity in midstream and creating painful unemployment. And for what? To prevent a later financial crisis? But no financial crisis would be actually visible, not in this version of history. How could anyone know that one had really been averted? It was still a mistake to have let the bubble continue, blandly claiming that it would be easier to pick up the pieces later on. It stands as a bad grade in the Greenspan report card. But it was not simply a matter of foolishness and ideological fantasy.

The second mistake, the bigger one, was both. An unregulated financial system, no matter how many smart people have megabucks in the game, can easily become over-leveraged and then fatally underestimate or ignore the amount of risk that financial institutions have taken on and the depth to which their risky balance sheets contaminate each other in hidden ways. When the edifice starts to collapse, central bankers and other policymakers may be left with the choice between bailing out the very people and institutions whose behavior created the crisis and letting the edifice collapse, doing even more harm to millions of people who played no active part in the disaster. The point is that this was not just a bad hair day, or one of those cases where nature presents nothing but bad options. It was a case of bad ideas coming home to roost. Greenspan was a prominent opponent of financial regulation, and it cost him (and us).

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