With its charts, graphs, and vertiginous dives into the busts and booms of U.S. history, former Federal Reserve chairman Alan Greenspan’s latest book tries to assess how no one – not even the Maestro himself – could predict the Great Recession.
But The Map and the Territory offers everything dismal science fans could ask for. Except, maybe, an apology.
Since his book was released earlier this month, Mr. Greenspan has also taken some criticism for not being aggressive enough in taking on the growing economic threat. But as he argues, that wobbly foundation underneath the housing bubble was laid before he took over chairmanship of the Federal Reserve in 1987.
Moreover, the Fed doesn’t police miscreants of the financial sector.
If that sounds like a deflection, the 87-year-old Maestro of Libertarianism shows remarkable philosophical flexibility. Contrary to what he believed earlier, this Ayn Rand admirer isn’t so sure that bankers can act in their own self-interest without doing harm to others.
Although he has great faith in self-regulation, he is calling for much higher capital requirements from banks.
A critic of John Maynard Keynes, Mr. Greenspan now believes that behavioural psychology should play a key role in predicting markets. And troubled by the growing obligations of entitlements, the prophet of Boom sounds a little more like the Oracle of Doom.
Mr. Greenspan spoke with The Globe and Mail on Monday about public opinion of him since the financial crisis of 2008.
You sound surprised that Americans are demanding contrition from you. If not you, where should they redirect their frustrations?
The problem is that I tried my best with forecasting. It’s not an exact science, and if you come out with 75 per cent accuracy, that’s extraordinarily good. And with the issue of contrition, if you are somehow doing something unethical or immoral, that does require apology. But no one has accused me of that.
You blame the failure to detect the recession on faulty forecasting, which simplistically put, is built on people acting rationally. Now, you’re a tennis man. How much of this is blaming the racquet rather than player?
No. I made the tennis racquet!
So what does the racquet maker do? Does he change the model to adjust for irrational behaviour – what’s known as animal spirits?
There is a second school – not a replacement for the first – that is called behavioural economics which raises questions about whether or not the rational long-term self-interest actually describes the way people behave and it became quite clear from the first time I was reading it around 2006. I wasn’t able to do much reading when I was chairman of the Reserve Board. The workload was too large, and the luxury of reading was not available to me. So I caught up a good deal when I left office.
But the idea of animal spirits has been around since Keynes, the 1930s. Did you have an initial allergy to the idea and you were won over?
No, no. I always believed in animal spirits. It’s not their existence that is new. It’s the fact that they are not random events, but actually replicate in-bred qualities of human nature which create those animal spirits. The initial title for my book was “Econometrics of Animal Spirits or of Human Nature.” My publisher sort of looked at me, and I had the impression that what he was saying was, “And to whom do we sell book number five?”
What can the U.S. do to change its ways?
Not only has risk management failed, credit rating agencies failed, so did regulation. In short, there were no winners here. No heroic moments. But lots of things can be done very readily. I believe that capital requirements have to be raised very significantly. We went through a near 100-year-period in the United States where capital was nearly 30 per cent and came all the way down to 8 or 9 per cent.
In your book, you single out entitlements as a particular threat to U.S. economy. That’s something that the Tea Party has also identified. Do you think they have raised a valid concern?
They have a certain nostalgia for a certain kind of rugged individualistic society. When you go back and look at American history, it’s not terribly different from Canadian history. If you weren’t self-reliant on the prairie, you wouldn’t survive. What I hear is a plaintive cry to get back to that kind of relationship and it’s the 21st century. I don’t fully know what they actually stand for but I do know they’re causing a lot of problems.