The Age of Turbulence: Adventures in a New World

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  Like many Americans in this time of economic crisis, I figure I need to study up on economics, maybe even take a refresher course, as I have lost confidence in the conventional wisdom of recent decades. I recently picked up former FED chair Alan Greenspan's The Age of Turbulence, and felt intellectually stretched by it. I don't tend to spend my leisure time reading texts on economics. This one is accessible and well-written.

  Greenspan provides a good primer on U.S. economic history since the... (show more)

  Like many Americans in this time of economic crisis, I figure I need to study up on economics, maybe even take a refresher course, as I have lost confidence in the conventional wisdom of recent decades. I recently picked up former FED chair Alan Greenspan's The Age of Turbulence, and felt intellectually stretched by it. I don't tend to spend my leisure time reading texts on economics. This one is accessible and well-written.

  Greenspan provides a good primer on U.S. economic history since the 1970s. Published in 2007, the book does have a rather large and obvious flaw. In the second sentence on the back of the book jacket, Greenspan declares the global capitalist economy "self-correcting." Events since 2007 have proven Greenspan wrong, and to his credit, in interviews and in congressional testimony since he published the book he has had the intellectual honesty to admit he was wrong, that he took a too-hands-off approach to regulating the financial services industry. He even suggests that the U.S. should temporarily nationalize the banks.

  Even so, it's hard to argue with some other premises in his book that the global capitalist economy is "vastly more flexible, resilient, open...and fast-changing than it was even a quarter century earlier." As proof of that, he points to the capitalist South Korean economy -- amazingly, it's larger than Russia's -- and contrasts it with the command-and-control centrally-planned North Korean economy that cannot feed its own citizens and leaves so many impoverished.

  He's modest enough to note that his own field -- "economic forecasting" -- is no more reliable than predicting the weather. Economic forecasters are never correct 90 percent of the time, he says. At best, they are correct 60 percent of the time.

  Greenspan was thrilled to see the emergence of competitive market economies in places like Russia and China from centrally planned economies. In his book, he foresees market capitalism permanently defeating planned economies -- socialism -- but since 2007, we have certainly seen more economies, including the U.S., embrace a kind of market socialism. Whether that's temporary or part of a decades-long trend remains to be seen.

  Clearly some of the anti-regulatory measures that he advocated, such as airline deregulation of the late 1970s (also championed by Ted Kennedy), and deregulation of gas and oil prices by Jimmy Carter had mostly positive effects -- significantly lower prices for consumers. Deregulation of the telecom industry after the breakup of the old AT&T led to huge innovation and lower prices for consumers as well.

  In contrast, deregulation of the savings and loan industry by the Reagan administration and supported by Greenspan was disastrous. Too lenient accounting rules and less regulatory oversight ultimately caused the collapse of the thrift industry. Because the S&Ls were "too big to fail," taxpayers were left with a huge multi-billion dollar bill that contributed to the large deficits and the recession of the early 1990s.

  The 1999 repeal of the banking regulation act, Glass-Steigall, with Greenspan's strong support, also proved to be a big mistake. As writer Scott Piraino notes in this linked article, "the central role of the Federal Reserve in this disaster, and Alan Greenspan in particular, has not been publicized."

  In Age of Turbulence, Greenspan glosses over these scandals, asserting that the collapse of the savings and loans and bailout by the government ultimately cost taxpayers "far less than feared...only $87 billion when the Resolution Trust Corporation shut its doors in 1995." (A GAO study in 1996 estimated the cost to taxpayers at $124 billion.)

  In his book, Greenspan doesn't see the trend toward deregulation as a mixed bag. But by now, after the collapse of the financial services industry, it's undeniable. He seemed to foresee the stock market and housing bubbles, but did little to prepare or ease the nation into perspective about them, thinking that he'd do more harm than good. In retrospect, it's hard to understand why he failed to stem the sub-prime lending crisis or did not see the rising tide of foreclosures as dangerous to the entire economy.

  He may also take a more cheery view of globalization than is warranted. He writes of how wonderful it is that China and India are producing goods and services far cheaper than can be done in America, keeping prices low. The solution to the exporting of US jobs to emerging economies, he says, is to improve the US education system and to get American workers to focus on higher end, higher wage, high-tech jobs. But of course that's easier said than done. He's also a strong opponent of almost every kind of protectionist measures, and sees protectionism, in the guise of economic populism, as a real threat to global and US prosperity.

  One can agree with him that the sharp double-digit inflation of the 1970s and early 1980s was robbing everyone and needed to be vanquished. The FED, led by Democrat Paul Volcker, broke the back of inflation with a prolonged tight money policy in the early 1980s. The downside or cost of getting inflation under control was a prolonged period of high unemployment (1979-83). Greenspan kept inflation low throughout his long tenure, even though more inflation in wages of workers might have resulted in real gains in purchasing power if not followed by larger hikes in prices. He doesn't acknowledge or address the fact that the wages of most workers have not kept up with inflation since the early 1970s.

  Though Greenspan describes himself as a "libertarian Republican," he had better relations with at least one Democratic President, Bill Clinton, than some Republican ones. He thought the economic policies of Richard Nixon, like Nixon himself, lacked integrity. (Nixon violated free market principles by proposing wage and price controls in 1971 order to get re-elected in 1972.) He admired President Ford, thought President Carter was too hesitant and dispirited to be able to articulate the need for economic renewal, found President Reagan (who appointed him chair of the Federal Reserve in 1987) to be just right for the economy, and clashed with President G.H.W. Bush on economic policy. Bush 41 blamed Greenspan's stubborn refusal to lower interest rates in 1991-2 for the slowness of the economy, the high unemployment, when he was up for re-election in 1992, and therefore blamed Greenspan for his defeat. Greenspan was later disillusioned by Bush 43 and the Republican Congress, put off by their runaway spending and lack of concern for the huge growth in the deficits, their willingness to jettison fiscal conservatism to win more congressional seats.

  Greenspan got along swimmingly with Clinton, whom he described as brilliant and most economically knowledgeable of the presidents he dealt with. Clinton may have lacked a certain kind of personal fidelity and integrity, but to Greenspan Clinton was faithful to certain economic principles, that deficits matter and must be brought under control in order to keep interest rates low and economic growth humming.

  Related article:
  
  Libertarian Free Market Philosophy is Now Completely Bankrupt: Devastating Critiques of Greenspan's Reign at FED from the Left and Right

  http://jimbuie.blogs.com/journal/2009/04/market-fundamentalism-implodes-devastating-critique-of-greenspans-rein-at-fed.html (show less)

   

  by Jim Buie on Apr 11, 2009 at 07:06PM

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  The first part of the book is engaging and interesting, and reminds you that the US was lurching through various economic crises in the 1970s and 1980s, with their own attempts at price controls. Short, interesting sketch of Nixon. The glimpses of the Ford administration, with Donald Rumsfeld and Dick Cheney are fascinating, and I would have been curious to read much more. So as memoirs, very readable.

  The second part of the book is an overview over key economic questions -- I found this a ... (show more)

  The first part of the book is engaging and interesting, and reminds you that the US was lurching through various economic crises in the 1970s and 1980s, with their own attempts at price controls. Short, interesting sketch of Nixon. The glimpses of the Ford administration, with Donald Rumsfeld and Dick Cheney are fascinating, and I would have been curious to read much more. So as memoirs, very readable.

  The second part of the book is an overview over key economic questions -- I found this a little flat. It's like a basic primer on Economics from a libertarian point of view. Too many topics to gain any depth. If you are a regular reader of, say, the Economist, you are unlikely to gather any new insights. Only one quote stood out, which he had from Martin Feldstein which went something like >In India, electricity was regarded as a right, which is why so few people have it. Cellphone services have been regarded as a luxury, and left to the market, which is why they are so available<. That more or less sums up the view that is being put forward in that second part of the book. Some readers may even find it pretentious that Greenspan believes he has something to say about everything that happens on the globe.

  The biggest problem, however, is that Greenspan doesn't really have an eye for market failure. While he insists that accurate pricing of risk is critical, he doesn't seem to see that regulation may play a constructive in ensuring such pricing.

  Other passages are likely to go down in economic history, p 372: "Any government restriction on fund investment behavior (that's what regulation does) would curtail the risk taking that is integral to the contributions of hedge funds to the global economy, and especially to the economy of the United Stataes. Why do we wish to inhibit the pollinating bees of Wall Street?" Why indeed.

  So ultimately this book is lacking where it would be most interesting (memoirs), and otherwise a testimony to a fundamental misunderstanding. (show less)

   

   

  by Facebook-gebruiker on Apr 04, 2009 at 06:02AM

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