Known as "the Maestro" for his deft monetary policy touch, Alan Greenspan also wielded formidable political skills and a forceful personality in nearly 20 years as Federal Reserve chairman and a previous decade in national policymaking and politics, according to biographer Sebastian Mallaby.
Describing Greenspan as the "preeminent financial statesman of the post-War period," Mallaby discussed the former Fed chair at a February 2 Public Affairs Forum at the Federal Reserve Bank of Atlanta headquarters. Mallaby spent five years researching and writing The Man Who Knew: The Life and Times of Alan Greenspan. The former Fed chair gave him virtually unlimited access, Mallaby said. Mallaby is a veteran journalist and author who is now Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations.
Striking a balance
Greenspan's reputation has taken a few blows since his retirement. Some view the one-time Maestro as at least partly responsible for the Great Recession by allowing asset bubbles to form. As Mallaby said, Greenspan went from revered to widely criticized quickly, and so in writing the book he sought to strike a proper balance.
In his Atlanta Fed talk, Mallaby related anecdotes that illustrated Greenspan's skills as a political operator. One circumstance involved Greenspan resisting pressure from the George H.W. Bush administration to cut interest rates. Mallaby credits Greenspan for solidly establishing Fed independence from short-term political pressure—core to formulating monetary policy in the best interests of U.S. long-term economic growth.
The author also discussed Greenspan's eclectic personality—he is a musician and car aficionado and was a longtime bachelor—and his intellectual development. The evolution of Greenspan's thinking was especially fascinating, Mallaby said. It turns out that during Greenspan's formative years as an economist, he was preoccupied with financial instability and asset bubbles. In fact, the author said, the focus of Greenspan's New York University doctoral dissertation was the Fed's role in fighting bubbles, the source of later criticism.
Could Greenspan have acted sooner?
Mallaby concludes that the former Fed chairman did not misunderstand the economics of bubbles leading up to the Great Recession. Rather, the problem was that the Fed did not act more forcefully to head off what became a badly overheated housing market.
Greenspan did make some attempt to rein in the housing sector before the financial crisis, Mallaby said. But his efforts were undone as the nation's "Balkanized regulatory structure" thwarted political action. Also, an effective advertising campaign stressing the appeal of homeownership by the government-sponsored enterprises Fannie Mae and Freddie Mac undermined a Greenspan effort to address problems related to the enormous size of the firms' mortgage portfolios, Mallaby explained. (Both firms would later be placed into government conservatorship.)
Reforming financial regulation is difficult, Mallaby said, even for a figure as formidable as Greenspan. Monetary policy was a different matter. The author's main critique was that the Greenspan Fed should have raised interest rates sooner to perhaps head off a housing bubble. On the other hand, Mallaby pointed out, other central bankers mostly defended the Greenspan Fed's course because inflation was not excessive at the time, and price stability is half of the central bank's dual mandate, alongside maximum employment.
In the end, Greenspan was happy with the book, Mallaby said. After publication, the former Fed chair pointed out only a couple of technical data mistakes.
"He was incredibly generous about talking to me," Mallaby said, "but not trying to control me."