Alan Greenspan's publisher did not send me a copy of his new The Map and the Territory. So at the moment I am running on the two different books read by Larry Summers and Steve Pearlstein:
Larry Summers: The Map and the Territory:
It was my privilege to work closely with Alan Greenspan for the eight years I served at the Treasury during the Clinton administration. His new book, The Map and the Territory, brings me back to fond memories of our conversations over the years. I haven’t always agreed with my friend but he has always left me wiser and with something to ponder. I have been struck… by the way… his approach… draws both on commitments to an individualist, libertarian philosophy and on extensive and deep immersion in economic statistics…. The range of topics and arguments makes this book a very important statement, whether one ultimately agrees or disagrees with the author. I found myself doing plenty of both. Greenspan’s range, vision and boldness is especially important at a time like the present, when Washington is preoccupied with the political and petty….
Now that we have seen… real turbulence… Greenspan has much to reflect on… acknowledges having changed his mind… in particular by greatly elevating the significance he attaches to “animal spirits”… he sees a stronger warrant for regulation--particularly with respect to the capital and liquidity position of major financial institutions…. In what will come as a surprise to some, he is very worried about the problem of “too big to fail”…. On this he is surely right…. Strikingly, Greenspan joins many of his traditional opponents in suggesting that “too big to fail” can very easily lead to crony capitalism….
One of the areas where Greenspan has been most extensively criticised is in the failure of the Federal Reserve to do a better job of protecting consumers in the run-up to the financial crisis. He sidesteps the issue by asserting his focus on regulation, rather than fraud issues. But matters may not be so simple. An essential insight of the new sub-field of behavioural economics that Greenspan quotes approvingly is that people can be manipulated without being defrauded. If, as JK Galbraith observed, “Conscience is the knowledge that someone is watching”, then questions of regulation and fraud are closely related…
Steve Pearlstein: Alan Greenspan still thinks he’s right:
Greenspan’s … “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 where he began--to an unshakable faith in free markets, an antipathy toward market regulation, and a conviction that progressive taxes and social spending are to blame for slow growth, stagnant wages and exploding deficits…. Greenspan… gave the green light to bank consolidation… pushed financial deregulation… advocated new global rules that would have reduced bank capital reserves… 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.”…
His journey begins with a reconsideration of… “animal spirits”… comes to a new appreciation of the danger posed by extended periods of economic stability, which lull people to take undue risks… [the] hypothesis… [of] left-wing economist Hyman Minsky, whom Greenspan curiously fails to mention…. Greenspan stops to drink the waters of behavioral economics… with the wonderment of someone who has just discovered the existence of Costco or the iPhone….
Greenspan glides through the list without the slightest sign he might have had something to do with those developments…. A good deal of “The Map and the Territory” is given over to attacking… Dodd-Frank…. 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…
Two very different books, no?
Larry appears to be in "I'll take what I can get" mode. He pockets Greenspan's new-found appreciation of herd behavior, positive-feedback investment strategies, "animal spirits", and the hypothesis-that-dare-not-speak-its-Minskyite-name-of-financial-instability to deploy against rational-expectations economists who claim that even the most egregious bubbles and crashes are simply rational revisions of optimal forecasts in light of new information about risks and their utility costs. He pockets Greenspan's criticisms of "too big to fail" institutions and deploys it as an endorsement by Greenspan of the push for greater financial regulation and as a call for breaking the political power of Wall Street.
Steve replaces Larry's Hermaneutic of Goodwill with a Hermaneutics of Profound Suspicion. Steve interprets Greenspan's new appreciation for Keynes and the unmentioned Minsky as the minimal whispering of reality outside Greenspan's Fortress of Epistemic Closure--the "wonderment of someone who has just discovered the existence of Costco or the iPhone".
And Steve focuses on how Greenspan's core commitments--"to an unshakable faith in free markets, an antipathy toward market regulation, and a conviction that progressive taxes and social spending are to blame for slow growth, stagnant wages and exploding deficits"--are untouched and unshakeable. It is, in Greenspan's eyes, still ObamaCare, Medicare, Social Security, Reagan's expansion of the Earned Income Tax Credit, top marginal tax rates greater than 28%, the possibility of taxing private-equity carried interest, and Dodd-Frank that are America's big problems.
For what Larry sees as Greenspan's honest grappling with the problems of financial regulation, Steve sees as a cheap partisan shot at Obama, Bernanke, Dodd, and Frank--that Greenspan claims to be for regulation in the abstract but will always find a reason to be against any concrete really existing form of it, and sees no problem with complaining that Dodd-Frank does not contain provisions that it in fact does contain.
Now it is not the case that the publisher played a trick on Steve and Larry by sending them two different books. Steve read the same abjuration of efficient markets and rational expectations that Larry did--it's just that Steve dismisses it because it remains peripheral and does not cause Greenspan to mark any of his core beliefs to market. Larry has the same jaundiced view of Greenspan's complaints about the role of Ronald Reagan's (and Milton Friedman's!) EITC into a nation of moochers as Steve does. And Larry piles on along further dimensions with:
Greenspan regards raising the US saving rate as a central priority… output appears to be constrained by demand rather than by supply… long-term real interest rates are at near-record low levels… t is much less clear to me than Greenspan that raising savings rates is the right growth strategy…
And:
I found myself disappointed that the events of the past few years had not led Greenspan to any revision of his anti-Keynesian views on macroeconomic policy…
And:
Even in retrospect, he regrets the decision to save hundreds of thousands of jobs by having the government provide [the debtor-in-possession] financing in connection with the GM and Chrysler bankruptcies…
the financing that the private sector would normally have provided, but could not because of the financial crisis.
Yes. They did read the same book. They just read it… differently. Most of reading does take place between the ears of the reader, after all.
And since I do not have the book, I cannot referee as to whether Larry's hermeneutics of goodwill or Steve's hermeneutics of profound suspicion is more appropriate.
One thing that makes me lean toward Steve is that Larry's op-ed contains one paragraph that seemed to me strikingly knotted:
One of the areas where Greenspan has been most extensively criticised is in the failure of the Federal Reserve to do a better job of protecting consumers in the run-up to the financial crisis. He sidesteps the issue by asserting his focus on regulation, rather than fraud issues. But matters may not be so simple. An essential insight of the new sub-field of behavioural economics that Greenspan quotes approvingly is that people can be manipulated without being defrauded. If, as JK Galbraith observed, “Conscience is the knowledge that someone is watching”, then questions of regulation and fraud are closely related.
Raise your hand if you think Larry has said clearly what needs to be said here. Anyone?
I would rewrite it as:
Greenspan sidesteps criticism that he should have done more to protect consumers in the run-up to the financial crisis by asserting that his focus is on systemic regulation rather than fraud. But without inappropriately lax regulation, fraud remains small-scale and cannot become a mass-production industry. And if fraud becomes a mass-production industry, dotting the regulatory i's and crossing the regulatory t's does nothing to control systemic risks.
And I would add:
In retrospect, his Randite belief that adults should protect themselves against 419, AAA-ratings, and other frauds rather than relying on the government made Alan Greenspan a bad choice to run the Federal Reserve in the 2000s.
But now I need to go back and reread and criticize my own highly complimentary review of Alan Greenspan's last book, his Age of Turbulence. The Monday DeLong Self-Smackdown is now in the order flow…
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