The Undertaker

The memoirs of former American Federal Reserve Board chairman Alan Greenspan offer insights into the working of the most powerful economy in the world

Prasenjit Chowdhury, Kolkata, Hardnews

If you think the American president is the most powerful man on earth, think again. Because the huge economic clout that made the US the superpower it is today is mostly due to the financial administration of what is called the US Federal Reserve. The Fed, as it is often called, is the supreme lever of the power of market capitalism not only in America but all its adherents worldwide, and the policies of the Fed are dictated by its chairman. The chairman of the Fed from 1987 to 2006 was Alan Greenspan - a man with owlish spectacles, a zeal for obscure statistics and a penchant for skewed locutions, the world's most influential economic policymaker, whose new memoir-cum-treatise is the subject of this review.
The US economy has made and unmade many a US president and here is a gripping book by an American kingmaker.
A professional-calibre jazz clarinettist in New York in the 1950s, playing his sets and then reading his economics books during the breaks while fellow musicians went backstage to party and get high, Greenspan, at the age of 26, was a "math junkie" snug in his logical integrity. Until, that is, he was knocked down by a Russian-American libertarian called Ayn Rand in 1952 in New York, when she pulled Descartes' "I think, therefore I exist" move on him, prising open his inner contradictions. Rand, the novelist - objectivist author of The Fountainhead and Atlas Shrugged - and apostle of laissez-faire capitalism with its central notion of making it on one's own in the marketplace, became the fount of intellectual wisdom for Greenspan when he was just getting started as an economist, and he joined her circle of close friends. Rand nicknamed him 'The Undertaker.' Another big influence on Greenspan was economist Joseph Schumpeter, who thought 'creative destruction' was the lifeblood of market capitalism.
A libertine capitalist, Greenspan drew heavily upon the Rand philosophy. People work to support themselves; they have a right to do so, and they should not be enslaved to group needs. Society will prosper, Rand wrote, if people are allowed to work free of regulations and the government's role is limited mostly to providing police protection. People should be entitled to keep the money they make, untaxed. Inflation is considered one of the worst taxes because it eats into the value of savings.
This book is thus a paean to the immutability of capitalism, if even Mao's attempt, during the Cultural Revolution, to wipe out all traces of capitalism, ended up in the triumphant return of the philosophy. By the time the Berlin Wall fell, East Germany was a complex example of central networks and central regulators going haywire in their attempt to control markets because, as Greenspan says, reactionary caps and regulations often end up as being heavy handed, setting off cascading imbalances.
But his years of making capitalism work were not smooth. Greenspan was able to build his credibility as Fed chairman only months after taking over the job from Paul Volcker, when in October 1987 the New York stock market lost more than 20 per cent of its value in a single day. During his 18 years at the Fed, Greenspan braved the Black Monday stock crash of 1987; the first Gulf War and the recession that followed in 1990 and 1991; the dot-com bubble that burst in 2000; and the housing boom that collapsed just after he left the Fed. As one of the leading doyens of market libertinism, Greenspan was convinced that market forces were here to stay because even the 9/11 cataclysm could only create a ripple in the eddying behemoth of American capitalism. The resilience did prove the point that markets have a potency and auto-mechanism of their own to stabilise themselves.
So, simply put, Greenspan as the Fed chairman had to make a substantive decision about whether to raise, lower or keep the levels of US interest rates the same, roughly twice a year. To lower interest rates is to make the future more valuable relative to the present, that is, to shift economic attention and focus from the present to the future; and to raise interest rates is to make the future less valuable. But is the job that simple? During his tenure at the Fed, he made roughly 36 substantive decisions about the direction interest rates should go. He proved prodigiously correct in a spooky majority of them, though not always without his fair share of flak. His detractors did point out that, having warned of "irrational exuberance" in 1996, he should have used dearer money to restrain the dotcom boom on the New York stock market that ended in a bust in 2000. His habit of keeping interest rates too low for too long, tolerating and even encouraging bubbles in the stock market and the housing market has been, off and on, looked at askance.
But Greenspan was no neophyte to the job and embodied his own version of market capitalism. This 'libertarian' Republican became chairman of the White House Council of Economic Advisers just as President Richard Nixon was resigning. He stayed on to serve President Gerald Ford, forging close friendships with top Ford officials like Dick Cheney, the future vice president, and Donald Rumsfeld, the future defence secretary. By the time President Ronald Reagan named Greenspan to run the Federal Reserve in 1987, he had already become the quietly influential man off to the side, about to be a sharply on-stage man.
In 40 years of involvement in American public policy, beginning with his participation in Nixon's presidential election campaign in 1968 and ending with his almost 19-year stint as Chairman of the Federal Reserve, he was quite the mainstream economist and mathematician who had the enviable task of trying to educate, serve and guide as many as six US Presidents - Nixon, Ford, Reagan, Bush I, Clinton, and Bush II. It is interesting to note that Bush II entered the office on a trail of impeccable Nixonian credentials, if only by family inheritance. Bush I had been a protégé of Nixon's; he was Nixon's ambassador to China. Dick Cheney, Donald Rumsfeld, and a number of top figures in the latest administration were likewise veterans of the Nixon years, hard-beaten 'realists' one and all. And Greenspan, too, was fascinated by Nixon.
In his book, Greenspan sounds contrite about the fact that though Bush II mishandled economic policy by cutting taxes sharply without restraining public spending, Greenspan foolishly allowed himself to be used in the campaign for those cuts. This shows that he felt torn between his Republican identity and his independent role as the leading economic policy maker of America. His testimony before Congress in 2001, calling for a tax cut, was critical of Bush's successful mustering of the political support he needed for his mammoth tax cut, the benefits of which went mostly to wealthy Americans. The Bush tax cut drained the federal treasury, eliminating the entire budget surplus within months.
To the exclusion of Jimmy Carter, Greenspan has worked with every president since 1969. But he reserves a special word of praise for Gerald Ford who "always understood what he knew and what he didn't know." Wonder of all wonders, Greenspan ranks Bill Clinton, despite the latter being a Democrat, as next to Ford in his "consistent, disciplined focus on long-term economic growth." It was Greenspan who, along with Clinton, recognised early on that technology was transforming the economy. The 1990s boom was really a product of Greenspan's willingness to take a fresh look at the high-tech economy that was emerging in America and reject the economic models created in a different era, the credit of which normally goes to Clinton. Clinton, was a "risk-taker", who had shown a "preference for dealing in facts", and something of a soulmate for the data-obsessed Greenspan: "I never ceased to be surprised by his [Clinton's] fascination with economic detail: the effect of Canadian lumber on housing prices and inflation . . . He had an eye for the big picture, too."
"The world would become a better place," Greenspan learned, "if people focused exclusively on what was knowable and important, which was precisely logical positivism's aim." He preferred hard data to standard economic models as his empiricism had deep roots - as a young man he had been deeply influenced by Ludwig Wittgenstein and logical positivism.
But will all be hunky dory? Dark prognostications are already being sounded that even if a Democrat were to retake the White House in 2008, the government will be seriously cash-strapped. Primary and secondary schools will lack the necessary resources to provide young people from lower-income families with the education they need. Tens of millions of Americans will continue to lack health insurance. Infrastructure will continue to deteriorate. But America will weather it, says Greenspan, the ultimate spin-doctor.
As market capitalism is about to sweep the world, Greenspan's book is thus no less than Das Kapital as it deals with the inner dynamics and onward march of the libertarian power of capitalism, Marx be damned.