Steve Pearlstein: Alan Greenspan still thinks he’s right:
[Greenspan's] latest book, oddly named “The Map and the Territory,” is meant to be an account of his intellectual journey to discover why, as the nation’s top bank regulator and its most famous economic prognosticator, he failed to see it all coming. Why had the markets, which for centuries had been so adept at self-correction, failed this time? Why had bank executives, with every incentive to protect their fortunes and reputations, knowingly gambled it all away?
What we find, however, is that Greenspan’s journey of discovery brings him right back to… an unshakable faith in free markets, an antipathy toward market regulation, and a conviction that progressive taxes and social spending are to blame….
Greenspan… gave the green light to bank consolidation, Greenspan… pushed financial deregulation, Greenspan… advocated new global rules that would have reduced bank capital reserves and Greenspan… blocked efforts to crack down on abusive subprime lending. But if you are looking for him to accept any responsibility for the crisis that ensued, you will be sorely disappointed. Instead, he shifts the blame to subsequent policymakers for bailing out the financial system and imposing “massive” new regulation that, he asserts without proof, has cast “a pall of uncertainty” over the economy and ushered in an era of “crony capitalism.” “Unless we reverse the inexorable increase in the role of government,” he warns ominously, in language he could have lifted from the Romney-Ryan campaign site, “we will surely lose our pre-eminence as the undisputed global leader.”
To take him at his word, Greenspan began to have doubts about his understanding of how the economy works after the financial collapse, which he characterized as an “existential crisis”…. His journey begins with a reconsideration of… John Maynard Keynes…. Greenspan also comes to a new appreciation of the danger posed by extended periods of economic stability, which lull people to take undue risks and sow the seeds of the next crisis… the left-wing economist Hyman Minsky, whom Greenspan curiously fails to mention…. Finally, Greenspan stops to drink the waters of behavioral economics….
I have come around to the view that there is something more systematic about the way people behave irrationally, especially during periods of economic stress, than I had previously contemplated
he declares with the wonderment of someone who has just discovered the existence of Costco or the iPhone.
From these new insights, Greenspan moves on to a straightforward review of major factors in the financial crisis…. Like Fred Astaire on the dance floor, Greenspan glides through the list without the slightest sign he might have had something to do with those developments. What he does remember is that during his watch, the markets and the economy quickly recovered after asset bubbles burst….
A good deal of “The Map and the Territory” is given over to attacking… Dodd-Frank… specifically a provision that mandates greater oversight for firms so large and interconnected that they could pose a risk to the system. Greenspan interprets that to mean that the government has officially conferred on them the status of “too big to fail”…. The better approach, he argues, would be to put any failing bank through an orderly, government-managed liquidation in which shareholders would be wiped out, executives fired, assets sold and creditors forced to accept serious losses.
Reading this critique, you’d have no idea that it was Greenspan, back in the 1990s, who first revived the “too big to fail” doctrine when the Fed arranged a bailout for… Long-Term Capital Management…. More significantly, if he’d looked more closely at Dodd-Frank, he would have discovered that his preferred method for dealing with failing banks is precisely the one set out in the new law….
One reader who surely won’t be too happy with the book is Ben Bernanke, Greenspan’s successor and onetime colleague at the Fed. Bernanke was an architect of the bank bailout that Greenspan now says was misguided, as well as a key behind-the-scenes player in crafting the Dodd-Frank law that, by Greenspan’s account, is leading us to socialist ruin. Careful readers… will also note a paragraph near the end of the book in which Greenspan questions whether the Fed will have the political will to unwind the trillions of dollars in monetary stimulus it has pumped into the financial system since the crisis--a bout of money-printing that he warns could lead to double-digit inflation if not fully reversed. Among central bankers, that’s trash talk.