I am reading an excellent biography of Alan Greenspan by Sebastian Mallaby titled The Man Who Knew. I recommend it as much for its illumination of the economy, the Fed’s role, and political decisions as for its portrayal of Mr. Greenspan.
A few observations:
Greenspan is clearly a very brilliant man and was able to digest and analyze vast sources of very detailed data. He was one of the first economists to consume details from specific industries and digest it into original insights that the other economists of his day missed. Few leaders today do such research themselves; they are more likely to depend on minions to provide it. The problem with depending on such intellects is that they are rare. What happens when that power is wielded by lesser minds?
As brilliant as Greenspan is, he missed some significant calls. This does not diminish his genius, but it notes that the economy is a complicated machine and even the brightest minds are incapable of understanding it completely.
The independence of the Fed is a myth. The President and Congress are often in opposition to Fed policies and they can be brutal is their pressure on them. It takes a very confident and unusual character to stand up to the political pressure. While fighting shrewdly to maintain the Fed’s independence, Greenspan was still sensitive to the political liabilities of his actions. Paul Volcker and Greenspan took a lot of heat for their efforts to remain independent. We benefited from it greatly. Volcker painfully wrestled inflation down from its highs of the 1970s. Alan Greenspan took painful actions not to undo Volcker’s considerable accomplishment.
Greenspan was one of the first to consider the impact of the growth of the financial industry in his decisions. Laissez faire attitudes that may have been suitable when the financial sector was 7% of the GDP may not be acceptable when it is 37% of the economy.
The guidance of time proven principles is often contingent on new realities and structure. The Phillips curve proved inapplicable in the 1970s. The link between deficits, inflation, and interest rates was a point of disagreement between Greenspan and his colleagues. It did not hold during the bond bubble of the early Clinton years, to Greenspan’s dismay.
On the other hand when a factor seems less influential than before it may be because its function is hidden elsewhere in the economy. The growth of highly leverage hedge funds magnified the impact of Fed action. The growth of monetized credit and mortgage markets substituted for money creation.
While financial innovations change the effectiveness of old solutions, they only obscure and empower the old problems of excess debt and the blindness of greed.
Greenspan combined a rare talent for data and analysis, a brilliant economic mind, an understanding of political realities, a Machiavellian use of power that spanned political partisanship, and a temperament ideally suited for his job. His influence often exceeded the president he served.