The Man Who Knew: The Life and Times of Alan Greenspan (A Review)
06.24.22
“Just prior to World War I emerged one of the historic disasters in American history, the creation of the Federal Reserve System.”
— Alan Greenspan, 1964
In 1979, Paul Volcker, a “lumpy Old Testament scourge,” as some perceived him, assumed office facing double-digit inflation. Milton Friedman sent him a scornful letter of congratulations. “My condolences to you on your ‘promotion,’” wrote Freedman. “As you know, I do not believe that the System can rise to that challenge without major changes in its method of operation.”
To Friedman and other critics, the Federal Reserve was a toothless institution that served as an ill-disguised pawn of the executive branch. After bungling two inflationary world wars, exacerbating the Great Depression, and enabling the “most serious peacetime inflation in the nation’s history,” the idea that the Fed could dominate monetary policy, much less actively counter inflation, seemed preposterous.
Twenty-seven years later, Friedman changed his tune. Alan Greenspan had accomplished the impossible: in his nearly two decades as chair of the Federal Reserve Board, prices had risen at an average annual rate of just 2.4 percent, and Greenspan oversaw the longest Goldilocks economy in U.S. history. The “Maestro,” as he was known, enjoyed worldwide adulation and was hailed as the “guardian angel of the financial markets” by the Financial Times. “Alan Greenspan’s great achievement is to have demonstrated that it is possible to maintain stable prices,” declared Friedman. “He has set a standard.”
Fortunately for Friedman, he croaked before he had to do another about-face. Friedman did not live to see the Great Recession or the legion of critics that pointed a finger at Greenspan after the fall. “There never would have been a sub-prime mortgage crisis if the Fed had been alert,” charged Anna Schwartz, perhaps the most widely acclaimed woman research economist of the 20th century. “Monetary policy was too accommodative. Rates of one percent were bound to encourage all kinds of risky behavior.”
How culpable was Greenspan? And will 2008 color his entire legacy? These are the central questions asked by Sebastian Mallaby in his definitive biography of Alan Greenspan, The Man Who Knew: The Life and Times of Alan Greenspan. Spanning three books, nine decades, and eight hundred pages, Mallaby’s intimidating biography portrays the many faces of Alan Greenspan — Greenspan the data nerd, Greenspan the society bachelor, and Greenspan the imperial statesman — as he matured from a free-market ideologue into a political pragmatist.
He emerges as a likable, if enigmatic, figure: the kind of man who could look at Congress, blank-faced, and tease them: “Since I’ve become a central banker, I’ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”
Book I: The Ideologue
Mallaby attributes Greenspan’s individualist bent to his father’s early abandonment (Herbert Greenspan left the family at three and only came crawling back when his son had achieved considerable professional success) and his mother’s ceaseless devotion. “To be a single child can be character forming,” writes Mallaby. “To be a single child of a single mother can be overwhelming.”
Greenspan shared a one-bedroom apartment in Washington Heights with his maternal grandparents and his adoring mother Rose, who capitalized on his early mathematical talent by having him perform arithmetic stunts in front of his relatives. He was the “kind of person who knew how many thousand flat-headed bolts were used in a 1964 Chevrolet and what it would do the economy if you took out three of them,” remarked an awe-struck acquaintance later in life.
Despite his precocious feel for numbers, Greenspan showed more interest in music, railroad timetables, and baseball statistics than school. After narrowly avoiding the draft (a medical check revealed a suspicious spot on his lung that disqualified him from service), Greenspan joined a middling traveling jazz band, where he offered to do the tax returns for fellow jazz members. During breaks, “the other band members would sneak upstairs to the Walgreens drugstore … and smoke dope in the phone booths,” writes Mallaby. Greenspan, meanwhile, studied books on finance. “He was a better bookkeeper than musician,” confessed the big band leader. Later, the band admitted that they knew he wouldn’t last long because he was “too good at doing their taxes.”
Greenspan used the earnings from his jazz band days to pursue an economics degree at “The Factory,” aka NYU’s School of Commerce, whose goal was to “churn out accountants, insurance specialists, real estate managers and such.” He excelled there before joining the National Industrial Conference Board, which developed the first version of the consumer price index and was the definitive source on unemployment data during the Depression.
During his brief ten-month marriage to Joan Mitchell, a Canadian art history student, Greenspan fell under the charms of the famed Russian novelist Ayn Rand. At the time, according to conservative historian George Nash, “no articulate, coordinated, self-consciously conservative intellectual force existed in the United States.” At best, “scattered voices of protest” existed, most prominently amongst them Ayn Rand.
Her personal appeal attracted an eclectic group of male libertarians. “Rand went about in a short black cape that flowed impressively in the breeze, worn, as she admitted, in imitation of Supergirl,” writes Mallaby. “She smoked cigarettes from a tapered holder; and since the success of her 1943 epic, The Fountainhead, she had surrounded herself with male admirers who quoted from her novel the way Baptists quote from the Bible.”
Despite a lackluster first impression — after observing his penchant for somber suits and gloomy debate, Rand dubbed Greenspan “the Undertaker” — Greenspan quickly joined her bevy of disciples. The relationship permanently influenced his personal ideology and would later be dredged up during Greenspan’s public excoriation post-2008, as evidence of his belief in “laissez-fairey tales.”
Indeed, Greenspan became Rand’s “de facto chief economist,” offering her metallurgical advice for her second novel from his experience studying the steel industry. When Atlas Shrugged was denounced by popular critics (the Chicago Tribune compared Rand to Hitler, while the Los Angeles Times admitted that “it would be hard to find such a display of grotesque eccentricity outside an asylum”), Greenspan leaped to her defense with a public letter to the New York Times.
Inspired by her objectivist viewpoints, in 1964 Greenspan delivered a series of ten lectures (personally edited by Rand) on the Economics of a Free Society, whose purpose was to “show why a laissez-faire economy is the only moral and practical form of economic organization.” His writings praised the earlier era of “free banking,” advocated for a return to the gold standard, and disavowed anti-trust laws. “Greenspan had been turned into a committed advocate of laissez-faire not by some luminary within the economics profession but by a charismatic novelist,” concluded Mallaby.
Book II: The Objectivist
Greenspan was first pulled into politics through Marty Anderson, a fellow Randian who attended one of his objectivist lectures. After watching Rand defer to Greenspan on all things economics, he later invited Greenspan to join a small group of advisers clustering around Richard Nixon.
To his alarm, Nixon proved resistant to deregulation and substantial welfare cuts. In January 1971, Nixon confessed to a television news anchor, “I am now a Keynesian in economics,” which the anchor compared to “a Christian crusader saying, ‘All things considered, I think Mohammed was right.’” Determined to fight inflation without slashing the budget or raising interest rates, Nixon resorted to wage and price controls on the economy.
Greenspan watched, horrified, as a small team in Nixon’s administration “pulled an all-nighter, making seat-of-the-pants decisions on hundreds of prices in a blaze of cigarettes and coffee. By the time the secretaries emptied the ashtrays the next morning, [the] central planners had drawn distinctions between apples and applesauce; popped and unpopped corn; raw cabbage and packaged slaw; fresh organs and glazed citrus peel.” When the team checked to see how stores were implementing the controls, they found that each vendor interpreted them differently.
Despite the chaos, price controls provided a brief respite from inflation, and Greenspan found himself as the lone voice of reason. “That politicians advocate a legalized freeze on prices and think it will solve the problem, I find disturbing,” wrote Greenspan in the Wall Street Journal in April 1973. “That the majority of economists, in a state of despair, acquiesce, I find inconceivable.”
A few months later, inflation shot back with a vengeance, and Greenspan’s efforts were vindicated: he was nominated to chair the White House Council of Economic Advisers, one of the top three economic jobs in Washington.
During the Senate’s questioning, Senator Joe Biden admitted, “I am glad that the president picked you. If he picks a conservative, I want him to pick a straight one and a bright one.”
Senator Proxmire disagreed with him. “I am not so sure that if you are going to pick an executioner that you want to pick one with the sharpest possible ax.”
“You want it clean,” Biden responded. “If I go, I want a clean knife. Just, ‘Bang.’”
Book III: The Central Banker
“It’s really difficult not to get along with Alan. He doesn’t give off enough emotional content for you to be offended,”
— Barbara Walters, reflecting on her time dating Greenspan
One of Greenspan’s greatest achievements, according to Mallaby, was his successful extrication of the Fed out from under the thumb of the executive branch. Disenchanted bystanders assumed that the Fed would remain impotent so long as it continued to succumb to pressures from the executive branch. Their skepticism was not without cause: in 1964, after Federal Chairman William Martin resisted calls to lower interest rates, he was physically shoved around President Johnson’s living room, who screamed at him, “Boys are dying in Vietnam, and Bill Martin doesn’t care!”
Later presidents were no better. In 1970, when Arthur Burns assumed the Chairmanship, Nixon summoned him to the Oval Office. “My relations with the Fed,” said Nixon, “will be different than they were with Bill Martin there. He was always six months too late doing anything. I’m counting on you, Arthur, to keep us out of a recession.”
“Yes, Mr. President,” Burns said, lighting his pipe. “I don’t like to be late.”
When Burns strayed in his public remarks, inviting criticism of the Nixon administration (“All the things that should go up — the stock market, corporate profits, real spending income, productivity — go down, and all the things that should go down — unemployment, prices, interest rates — go up,” said one Democrat), the president started a smear campaign against him until he lowered interest rates.
Fortunately, Greenspan had spent his entire career courting the press (“I dated news anchors, senators, and beauty queens,” Greenspan told Mallaby) and was not above planting his own stories to subdue enemies. Besides his romantic attachments to Barbara Walters and Andrea Mitchell, Greenspan had close relationships with the financial press and many advocates in the Senate. “I think the way he ran the Fed served his interest and actually the country’s interest,” said Mallaby in an interview discussing the book. “When he first got there, it was by no means normal for the executive branch to respect the Fed.”
One day, after a long-time adversary, Treasury Secretary Nicholas Brady, was slated to testify before Congress, the Journal released an article titled, “Is Brady’s Treasury Secretary Up to Doing Its Job? Many People Doubt It.” While Mallaby admits that he can’t definitively prove Greenspan was behind the hit job, he does know that “the financial press was extremely close to him, and they listened to him, and they liked him, and they went to see him with their stories routinely.”
Greenspan cemented the independence of the Fed by resisting pressure to cut interest rates under Bush. Despite the standoff, Bush nominated Greenspan for a second term, fearful that firing him would cause retribution.
Aftermath
After the initial rubble cleared in 2008, Greenspan embarked on a long and public tour of explanations. In October 2008, before the House committee, he came closest to admitting he was wrong when he admitted to “a flaw” in his ideology to Representative Waxman. The public seized upon this admission (a documentary was even titled The Flaw) and blamed his oversight on the willful blindness of a Randian ideologue.
Yet Mallaby rejects this characterization. In another address to the Council on Foreign Relations in October 2009, Greenspan embraced new mechanisms to minimize damage when breakdowns occurred. “Lenders should be better capitalized, he now said; derivatives should be pushed into central clearinghouses; and megabanks like Citigroup were a mistake — ‘If they’re too big to fail, they’re too big,’ he observed forcefully,” wrote Mallaby.
The next spring, in a paper for the Brookings Institute, Greenspan got more specific and called for the expansion of risk capital. He criticized the “jerry-built regulatory structure that has evolved over the decades in the United States,” and estimated that banks should be required to hold 14% of assets. “Given his long-held position that the right amount of capital defied definition, and that megabanks should be welcomed, these were striking departures,” argues Mallaby. “They were far more relevant to the future of finance than that philosophic quip to Waxman.”
Ultimately, Mallaby regards the rise and fall of Alan Greenspan as a warning sign for modern democracies. “If the life of Alan Greenspan teaches us one thing, it is that democracies must be realistic about what they expect from their leaders. Greenspan was honest, decent, and profoundly wise — he was a model of a public servant. But he was not infallible or omniscient or endowed with magical courage, particularly when it came to confronting powerful adversaries.”
“Precisely because modern American democracy is so gridlocked, there is a tendency to wish for superman saviors,” he concludes. “Systems of public administration that presume the existence of omniscient saviors will inevitably fail — and the cycle will then turn, and the supermen will be condemned bitterly. America’s political culture adores leaders, but it is merciless when they fall short.”
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