November 17, 2009

Book Review

Panderer to Power
The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession
By Frederick Sheehan
McGraw-Hill
US29.94, 390 pages

Reviewed by
Dr. Stephen Murgatroyd
Columnist
Troy Media

Alan Greenspan is to economics and business what Henry Kissinger is to diplomacy and geopolitics – important, but we are already forgetting why. A pivotal figure in the history of the global economy, Greenspan presided over a period of remarkable growth in the US economy, but also completely missed the factors that led to the 2007-2009 economic collapse and global recession.

In his own account of his life and work, The Age of Turbulence (2007), which focuses mainly on his time as Chairman of the US Federal Reserve (1987 – 2006), Greenspan argues that his ability to grasp simplicity on the other side of complexity and his skill at forecasting helped him lead years of continuous growth of the US economy, especially under former US President Bill Clinton. He suggests, without making the direct claim, that his skill in econometrics and his understanding of the dynamics of the global economy enabled him to be a better reader of the economic “tea leaves” than his predecessor, Paul Volker, or other aspirants to the role. Tall claims.

This present book, acid in its criticism of the power seeking Greenspan, takes a different view. Tracing his career from the time he left his jazz playing career (Greenspan is a jazz musician who studied clarinet at the Julliard School of Music in New York), Sheehan sees Greenspan as manipulative, conspiratorial, a user of people and networks and very ambitious. The man who once dated Barbara Walters, who honed his skill of sound bites and press manipulation from an early age, had a lust for power, according to Sheehan. His flirtation with the ideas of Ayn Rand, novelist and philosopher and founder of the objectivist school of philosophy, is seen by Sheehan as a cold manipulative use of influence and social networks to climb a social ladder. Sheehan doubts whether Greenspan understood objectivism as a philosophy – he certainly did not practice it.

Sheehan’s major criticism, echoed by other economists, is that Greenspan allowed monetary policy to become imbued with his personal views and intuitions, and that the Fed’s policy decisions have been driven more by his judgment than by a set of rules and economic models that can be followed and applied by his successor, Ben Bernanke. Indeed, Sheehan’s view is that Greenspan deliberately pursued a strategy of raising his own importance over that of the Federal Reserve as an organization – his own reputation grew at the same time as the reputation of the Fed declined. Further, he ceded rights the Fed had fought hard to retain – in particular, the Fed’s right to rein in financial excesses of financial institutions and the right to increase deposit requirements.

Sheehan also doubts the Greenspan’s perspicacity. He missed the recession of the 1990’s, failed to see the signs of the recent one and failed to warn Congress of the dangers of massively extending house ownership to those unable to afford it. He also failed to see the danger of derivatives as financial instruments which, if left unchecked, could lead the financial system down a blind alley.

Sheehan’s most severe criticisms are focused on the legacy which Greenspan left for his successor, Ben Bernanke, formerly Professor of Economics at Princeton. Greenspan left a rapidly rising level of US personal debt, a shrinking manufacturing economy and an economy growingly dependent on debt, much of which is foreign owned. Greenspan oversaw the mortgaging of the US economy. He also oversaw the blurring of the boundaries between banks and other financial services, the deregulation of many financial services and the development of high risk financial instruments. Hindsight is a wonderful thing, but Sheehan points to many sound and experienced voices which were drawing attention to these and other issues well before Greenspan stepped down in 2006.

Greenspan blamed former US President George W. Bush and the Republicans for much of the recessionary forces operating in 2006-2009. He says “they traded principles for power,” which Sheehan sees as a form of projection. Greenspan has spent considerable tine defending his reputation and seeking to absolve both himself and the Fed from any sense of blame for the 2007-2009 global crisis, despite compelling evidence of complicity. Sheehan remains unconvinced.

This well written, though obviously polemic, text documents the issues as he sees them. When read in conjunction with Greenspan’s own biography, a picture emerges of a complex, obviously smart man who may have been promoted to a position beyond his competence, but was expert at covering up and obfuscation. There were real achievements in the Greenspan era, which Sheehan tends to discount, but the legacy will be problematic. Economic historians will have a field day with the Greenspan era and Sheehan’s book will stimulate more analysis.