This book is so interesting. During his near 20 year tenure as Chairman of the Fed, we did not know what he thought. Now, we do. Instead of speaking through his cryptic Fed-speak, he expresses himself in clear prose. His mind set (free markets and deregulation) seems now antiquated. But, it will return in favor. This is the best finance type autobiography since Robert Rubin
In an Uncertain World: Tough Choices from Wall Street to Washington
.
This book has four parts:
1) An autobiography;
2) An outlook of major countries;
3) Investigation of crucial economic issues such as rising income inequality; and
4) An economic forecast till 2030.
Greenspan is an original individual who has lived a full life. He was a professional musician. But he soon developed a yearning for data. He was influenced by Ayn Rand objectivism and by Joseph Schumpeter's "creative destruction." In 1953, he co-founds a succesful economic consulting firm Townsend-Greenspan (TG). He becomes an early expert in econometrics modeling, and gets a PhD in economics from NYU in the late seventies.
Greenspan met all the Presidents since Nixon. He thought Nixon was very smart but paranoia. He liked Ford and thought he was much smarter than the Media conveyed. He had no relationship with Carter. He liked Reagan, as they shared a free-market philosophy even though they were different. Reagan was the master of the soundbite while Greenspan is a technocrat. In 1981, Reagan appoints Greenspan to chair the Greenspan Commission to shore up Social Security. This was a success of bipartisan politics as in 1983, the Social Security program was shored up and deemed to remain solvent until 2050. He had a cold relationship with George Bush Sr. as the latter felt monetary policy was too tight and ultimately cost him an election.
He had a great relationship with Clinton. Both men played the sax. Greenspan also got along with Robert Rubin, Treasury Secretary, and Lawrence Summers, Assistant Treasury Secretary. The three will engineer the successful 1994 Mexican loan bail out. The Bush Jr. administration turned out differently from the reincarnation of the Ford administration. Now politics dominated pragmatism. Partisanship made governance dysfunctional.
Greenspan met many foreign leaders including Yeltsin. He thought he was smart and when sober. He also met British leaders including Thatcher, Blair, and Brown. He was very impressed by Thatcher and Brown. He met Sarkozy when he was finance minister just before becoming France's President.
His objective as Fed Chairman was "maximum sustainable long-term growth and employment." Greenspan explains why pricking stock market bubbles is risky: "The risk in clamping down during a stock-market surge is especially acute-it can pop the bubble of investor confidence, and ... can trigger a severe economic contraction." Later he explained how he developed an alternative: raising rates by only 25 bp more frequently to preempt inflation.
Greenspan notices the onset of the housing bubble in the rapid home price appreciation since 2002. He attempts to slow it down by increasing the Fed Funds rate by 350 bp between the end of 2003 and beginning of 2006, when he retires. In 2006, 40% of home mortgages were either Subprime or Alt-A. Those will be associated with the credit crisis. The latter was more due to credit underwriting than monetary policy.
In the next part, Greenspan analyzes the economic status of the World's countries. This part compares evenly with David Smick's
The World Is Curved: Hidden Dangers to the Global Economy
and Fareed Zakaria's
The Post-American World
. He sees the EU as the archetype slow-growth welfare state-capitalism.
He states Japan suffered two decades of stagnation because of its inability to resolve their insolvent banks. China is a perplexing mixture of communism and market capitalism. He thinks it will become more democratic and its economic system will resemble Europe. This is after China improves its inefficient banking system. Hong Kong, Taiwan, Korea, and Singapore all fully recovered from the Asian currency crisis of 1997. And, they moved up the curve to exporting increasingly sophisticated goods.
India has to overcome huge handicaps. Only 1.5 million Indians are employed in the outsourcing information sector. 2/5th of its population is illiterate. 250 million Indians still live on less than a $1 a day. Half of India's homes have no electricity. The infrastructure is decripit. The electricity grid is inadequate. Labor laws, property rights, and bureaucracy are not supportive of market capitalism.
Moving on to Russia, he observes Putin's effort to fully control its governance and economy. Russia economy has succeeded solely due to rising energy prices as its economy is not diversified.
In the third part, moving on to complex issues he first addresses the U.S. Current Account Deficit (CAD). He states the CAD is due to the U.S. rising productivity and a decline in foreign investors risk premium when investing in the U.S. Those factors caused the U.S. to run huge net capital inflows which by definition equal CADs. This subject is well covered in Martin Wolf
Fixing Global Finance (Forum on Constructive Capitalism)
. Moving on to globalization, Greenspan confirms Smick's analysis in "The World is Curved." Globalization has increased living standards worldwide. But, it is vulnerable to backlashes of populism, protectionism, and regulations.
Next, Greenspan explains the "conundrum" whereby the Fed does not control long term rates by manipulating Fed Funds. They respond instead to the huge inflow of funds (capital surplus associated with the CAD).
The rising income inequality in the U.S. is due to a shortage of highly skilled labor. He recommends increasing immigration of the highly skilled and increasing the pay of math school teacher to boost the supply of the highly skilled.
Addressing the fiscal liabilities of Social Security and Medicare, he confirms the findings of Kotlikoff in
The Coming Generational Storm: What You Need to Know about America's Economic Future
. Those programs are not sustainable as currently funded. Taxes will have to be increased; benefits will have to be curtailed or a combination of both.
Addressing long-term energy prospect, he states: "none of the tight balance between supply and demand is due to any shortage of oil in the ground. The problem is that ... those who would like to invest (private sector international companies) cannot find profitable investments, and those who can invest (national companies) choose not to." Thus, there is no shortage of oil reserves but shortages of production and refining capacity. He anticipates nuclear energy will emerge as the scalable clean energy source. He also concurs with Bryce
Gusher of Lies: The Dangerous Delusions of "Energy Independence"
that energy independence is a Utopian political construct. We will rely on oil as long as we can.
Regarding the 2030 forecast, Greenspan sees the U.S. economy growing at 2.5% p.a. (2% productivity; 0.5% growth in labor force). He anticipates long term rates to increase due to the high fiscal needs worldwide to finance social entitlements (retirement and health care benefits). Read also
Global Aging and Financial Markets: Hard Landings Ahead (CSIS Significant Issues Series) (Csis Significant Issues Series)
on the subject.
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Top reviews from other countries
Peter de Toma sen.
Very important historic document
Reviewed in Germany on October 14, 2016Serghiou Const
A central Banker reminisces, comments on present turbulence and reflects on the future
Reviewed in the United Kingdom on September 27, 2007Dr. Helmut Z. Baumert
Zum Teil widersprüchliche Argumente
Reviewed in Germany on December 17, 2011Tom Rubython
A book of two halves
Reviewed in the United Kingdom on November 5, 2007
