QUESTIONS TO THE MAESTRO

The memoirs of Alan Greenspan were published in early September 2007. His critics say the former head of the Federal Reserve was responsible for financial crises and the US real estate bubble

By Thomas Fischermann

[This article published in: DIE ZEIT 38, 9/13/2007 is translated from the German on the World Wide Web, images.zeit.de/text/2007/38/greenspan.]

The entry from August 31, 2007 posted on the Internet was the most unusual finance market web-blog of all time. Firstly, it consisted of five paragraphs about financial crashes, booms and the economic prospects for 2030. Secondly, the author was Alan Greenspan, the maestro, Mr. Dollar and master of the universe as they called him when he was head of the Federal Reserve between 1987 and 2006.

This was a little excitement – a clear intelligible statement from Greenspan, the man who murmured incomprehensibly and encrypted his real purposes for 18 years. In one place, there was even an exclamation point!

The sudden urge to communicate from the 81-year old had its reasons. Greenspan is on a book tour. Next Monday, his memoirs titled “The Age of Turbulence – Adventures in a New World” will appear. The German title “Mein Leben fur die Wirtschaft” (My Life for the Economy) is a little more tedious. The British publishing house Penguin paid him an impressive advance of $8.5 million and must be repaid. Therefore he wrote the web-blog and plans a series of appearances on American television shows. The book trade gives him a hype to kindle a “sensation” for the fall season.

Ravi Batra knows all about a man named Greenspan who can sell books. The economist from the unknown Southern Methodist University in Dallas is a best-selling author in the United States. His five books about the economy and politics of the US have sold well. That has much to do with Batra’s sharp attacks on the supposed master of money.

In 2005, Batra’s book “Greenspan’s Fraud” appeared, the most unfriendly biography ever written about a head of the Federal Reserve Bank. In January 2007, Batra spiced up his latest writing “The New Golden Age – The Revolution against Political Corruption and Economic Chaos” with scathing chapters about the retired Federal Reserve banker. What is Batra’s opinion of Greenspan’s memoirs? “I wish him much success,” he says. “Perhaps he will be memorialized and earn much money. I am only grieved about the poor people who suffer today for his decisions.”

Why is there so much bitterness against the man who gave nearly boundless confidence to investors, bankers and financial jugglers for 18 years? The American economy functioned under Greenspan. The demand from the US pulled some rigid economies from the mud. Greenspan was the “greatest central banker who ever lived,” the monetary theoretician Alan Blinder from Princeton University wrote. “In Greenspan We Trust.” So Fortune magazine summarized the mood.

IS HE A HERO OR DID HE CAUSE PROBLEMS?

The great confidence had to do with a series of financial crises in Greenspan’s time in office that he countered with a calming hand. After a few weeks in office, Greenspan had to deal with the notorious Black Monday in 1987, a record collapse on the stock market. Fist-fights broke out on the stock exchange but Greenspan stayed cool and saved the economy through financial injections and comforting words.

He repeated this again and again with the currency crises of the late 1990s in Latin America, Asia and Russia, the collapse of the large hedge fund LTCM in 1998, the bursting of the Internet bubble at the turn of the millennium and after the terrorist attacks on September 11, 2001.

Critics like the economist Batra see things very differently. Greenspan may have been the rescuer in distress – but he also caused some crises. For example, according to Batra, Greenspan fueled the speculation bubble with technology stocks in the 1990s. “In the middle of the dot com bubble, Greenspan said the profit expectations of these firms were solid,” the economist scolds. “Afterwards the dot com boom took off like a rocket.”

At that time, Greenspan was infected by the New Economy fever. He predicted the Internet would make businesses more productive and was right about this from a long-term perspective. However many critics reproach him that gossip from the head of the Federal Reserve seduced finance market speculators to wantonness.

Then he lowered the prime rate in 1998 as a reaction to the finance market turbulence at that time. That reaction kindled the stock boom. When interests fell, stock prices usually rose. Greenspan tried to counteract this. The maestro known for his formulations hedged in clauses clearly denounced the “irrational exuberance” of many market actors.

In 2001 Greenspan pulled out the same prescription for crisis management. When the technology bubble burst, the American economy threatened to collapse. In the fall, Al Qaeda pilots drove three aircraft into the World Trade Center and the Pentagon. In this situation, Greenspan let the prime rate rapidly fall from 6.5 percent to only 1 percent in the following years. Many critics today say this was the prerequisite for the current real estate bubble in America. Greenspan was responsible for the credit problems that now shake the world finance markets.

GREENSPAN’S DECISIONS FORCE UP HOME PRICES

American home prices have actually risen rapidly since 2001. The reason is that the interests fell and more people could afford a mortgage credit. Their rising demand for real estate drove up home prices. These high home prices seduced real estate firms to build more structures. In addition, the notorious sub prime market for mortgages arose that creates problems for many banks and investors today. Money was lent to more and more people with little creditworthiness. Greenspan praised this in 2004 as a welcome social development. He refused to see a real estate bubble. At most “froth” had formed.

The deeper the crisis, the louder becomes the criticism of the maestro. On the Internet, a new discussion website titled “The Chaos Left Behind by Greenspan” is devoted exclusively to this theme. “He firmly believes he saved the finance markets,” says Greenspan critic Batra, “but his real inheritance is very different: a strong economy built on gigantic debts.”

It is still too early to judge whether this was good or bad. We must wait and see whether the present real estate crisis will vanish in thin air. If it does, Greenspan’s hero status will be assured for the time being. If it does not, the inheritance of the maestro will be in serious danger. “The human species has not found any remedy against bubbles,” Greenspan defended himself at the beginning of September in a speech before economists in Washington. He always claims even a Federal Reserve banker cannot do much against the excesses of speculation. We must wait for the bursting of the bubble, gather the remnants and protect the economy. Many economists see this similarly including Greenspan’s successor in office, Ben Bernanke.

A second reproach is raised against the former Fed chief. He was very closely allied with the Hush administration and did what politically pleased that administration one way or another. Critics do not have proofs but rely on evidence. Thus Kenneth H. Thomas from the Wharton School in Philadelphia sifted through Greenspan’s 2004 appointment book and discovered that the Federal Reserve banker was very often at the White House and the departments of the Bush administration, more than past Fed chiefs. Donald Ketti from the University of Wisconsin in Madison spoke of a “shocking rise in communication (between the Federal Reserve and government) so that one can only ask what was really said.”

Did they say that Greenspan drastically lowered the int4erests since 2001 to help the Bush administration? What about Greenspan’s public support for Bush’s great tax cutting program that only benefited the super-rich? Greenspan supported Bush’s plans publically and with vigor. Afterwards top politicians of the Democratic Party doubted his independence. The economist and critical Bush commentator Paul Krugman criticized Greenspan for a “lack of seriousness.” Krugman has lost “trust in the office of head of the Fed.”

The time for the publication of Greenspan’s memoirs could not be more explosive. At the beginning of the year, the former master of money hedged when he gave an unusually pessimistic economic prognosis. He said a recession could occur at the end of 2007 or the beginning of 2008. The stock market collapsed shortly thereafter. Greenspan was again in his old trade. Before he was an economic advisor of presidents and then head of the Federal Reserve, he directed an economic forecasting firm in Washington. Only in this point are his biographers agreed. Greenspan’s prognoses were never especially correct.