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For most of his tenure as Chairman of the Federal Reserve, Alan Greenspan was accorded an almost demi-god status: as he recalls here, ordinary citizens whom he encountered in the streets thanked him for the performance of their stock portfolios, Congressional committees consulted him on a host of issues that would normally be considered as well outside the remit of a central banker, and financial markets re-sponded to his every word as if he were endowed with a unique ability to divine the future.
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Indeed, your reviewer attended a talk (with several hundred others) that Greenspan gave to coincide with the publication of this book, and was struck by how he was mobbed and followed round in a groupie manner more reminiscent of a rock star.
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Perhaps as a result of the awe in which he has been held, we have a book consisting of an account of his early years, the various jobs before becoming Chairman, an account of his eighteen years at the Fed, and, then, over two hundred pages on a whole host of topics including the prospects for Russia, China and India, the global energy situation and what the world might look like in 2030.
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Overall, the book is a very entertaining read. Along the way Greenspan is not reticent about his views about many of the movers and shakers he has interacted with. For example, we are told about President Nixon: "He wasn’t exclusively anti-Semitic. I don’t know anybody he was pro. He hated everybody… When Nixon left office, I was relieved. You didn’t know what he might do, and the president of the US has so much power that it’s scary." (p 59) |
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Even those with a more parochial interest in recent British political figures will not be disappointed. For example, we are informed that after Britain’s exit from the ERM in 1992, Denis Thatcher held out hope that Margaret would be reinstated as Prime Minister. Also, at his first meeting with Blair and Brown in 1994, Greenspan informs us that "…it appeared to me that Brown was the senior person, Blair stayed in the background while Brown did most of the talking." (p 283)
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Many came to admire Greenspan because he was early to recognise that higher productivity growth and some of the beneficial effects of globalisation would allow him to give growth a chance, and not raise interest rates when some of his colleagues might have preferred otherwise. Indeed, many of the other central banks (including the ECB and BoE) were also rather slower than Greenspan in appreciating the beneficial effects of globalisation on the equilibrium rate of unemploy-ment. However, it is disappointing that this important episode does not get a more detailed treatment. On the other hand, while Greenspan’s views on the likely evolution of the Indian economy or the global energy market are interesting, it is not obvious to the reviewer that the ex-Chairman of the Federal Reserve is likely to be able to offer us any unique insights in this area. Indeed, for this reason, I found that the parts of the book where Greenspan strayed from his own areas of expertise were, sometimes, rather superficial, and contributed to making this book too long.
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Since the publication of the book, the credit crisis has contributed to a greater questioning of the Greenspan record. Back in the nineties, those of us who questioned whether the Federal Reserve should do more to "lean against the wind" during asset bubbles were a small minority. However, in recent months it has become increasingly fashionable to wonder whether our current credit crisis would have been a rather more muted affair if Greenspan had followed a different monetary policy. I found the treatment of this issue to be quite unsatisfactory. For example, after his famous speech on ‘irrational exuberance’ in December 1996, the Federal Reserve did increase interest rates by a quarter-point in March 1997. We are then told that the Dow fell after this hike, but then came roaring back by June. Greenspan says that the Fed learnt a lesson from this episode and did not attempt to rein in stock prices again (p 179). What is puzzling to this reviewer, though, is why anyone would have thought that a mere quarter-point would have been enough to deal with the emerging equity-price bubble, and why, having started in March 1997, the Federal Reserve did not follow through? Greenspan does tell us that: "I was reasonably certain that seeking to defuse a mounting bubble with incremental tightening would be counter-productive. Unless the tightening broke the back of the economic boom and with it profits, an incremental tightening would, in my experience, reinforce the perceived power of the boom. Modest tightening was more likely to raise stock prices than to lower them." (p 201)
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The author merely asserts this. We are offered little in the way of empirical evidence or economic theory. This is frustrating, as this is a hugely important issue, and all of us could profit from understanding the author better. Suffice it to say that the author’s assertions about the effect of interest rates on stock prices would be regarded as questionable by many financial market economists.
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Even so, it is worth repeating that this is an enjoyable book and anyone interested in monetary policy would learn a lot from it.
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Sushil Wadwhani |
| Wadhwani Asset Management |
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