50,000 people. Education, smart technology, google is here, uber. People come from all over to the university of carnegie and pittsburgh. Theres lots here to see and pittsburgh. It would take a week to see at all. In 1979 cspan was created as a Public Service by americas Cable Television companies and is brought to you today by your cable or satellite provider. Sebastian maladie discusses the life of the federal former reserve chair Alan Greenspan in his book the man wh man who kn. Hes interviewed by alice rivlin of the Brookings Institution and former vice chair of the Federal Reserve from 1996 to 1999. Sebastian, welcome. Im delighted to be doing this and i think it is a fabulous book. Ive known al and greenspa an greenspan, its a complicated man in complicated times and i think you got it right. Lets start at the beginning. You wrote about the influence of his parents. Can you talk about that on his career choices . Guest Alan Greenspan had an unusual circumstance in the 1930s he was the child of a single mother. His father left his mother when he was only three and then was a distant figure i think that reinforced the tendency that he had to live inside his own head and be introverted and then that was enforced by two things by his mother. First we are talking about the 30s. She worked in a Department Store in manhattan so he was left by himself in the house with distant grandparents who were from a different, they felt alienated about shoulder so he basically lived by himself but then when the family gathered at parties and policies and so forth, his mother was a vivacious singer and she would lean over the piano and he felt she is the center of attention i could never match that so this was then reinforced by the sense of inadequacy. But then he became a force for a professional musician. That was to get into the limelight. Host about the relationship with ayn rand . Guest a huge number are influenced by her and it tends to happen when they are 90yearsold its kind of a College Thing and the idea its simplified and bold. He was in his late 20s and it stuck with her so much that at age 50 for the economic advisers and there were guests at the swearingin. I dont think that it had a profound affect on his development. Host key is one that believed and loved Railroad Builders and things like that and certainly reading ayn rand would reinforce individualism and that sort of thing. Guest alan was somebody that partly because he was withdrawn and living in his own head as a child, he was always in his own past. When he went to college in 1945 he must have been one of the most progovernment generations people ran the g. I. Bill paid for by the government. He was going his own way but meeting her reinforced that and drove him to build a whole worldview. He was more concerned with teasing out Economic Economic numbers and it was from the data to the Political Economic agen agenda. Host tell us about the numbers fascination of it. He loves statistics and numbers. Guest as a child he would be wheeled out in front of a relative to perform complicated addition as a kind of performance art. Host that is a thing at the fed. Ben bernanke likes baseball. Guest said he was part of the baseball tradition of economics. It was more seriously part of what i call the New York School in other words there was a schoolbased around at the bureau of National Research that was focused on just counting the economy and creating the aggregate data that we see the gdp statistics and so the creation of data and the understanding of how you generate the best qualitative data is not modeling are taking the data for granted and then building the complex connections between the data points and this helped him to not just accept the productivity of such and such has reported now lets just think about the model that we might build with that number. No, he wanted to disaggregate that productivity data and see whats behind it and form the conclusion that it was wrong and that led him to keep Interest Rates lower and for longer in the late 1990s. Host i was there at the time, and that was an interesting incident because the modelers actually wanted the fed to raise Interest Rates because unemployment was so low and the models were telling them about the Interest Rates and alan was saying i dont see this inflation. Something else is going on. Can you say a little bit about that . Guest he basically believed that his profits were going up and get productivity was flat. It is a mystery. I mean, normally if you make more money is probabl its probd that you are producing more per worker so you want to look into that and he had the staff produced what was going on in the productivity, and it showed that apparently productivity in the Service Industries were falling and he said it cant be that everybody is getting a new computer and producing less. So he guessed what was going on and he got it right. I think with links to the 2008 crisis, one of the common discussions is that its all tied up in its model. He was never obsessed with that particular model and he would stress test the data input so the funny thing is if he were to choose a chairman that was prepared not to be trapped and caught by surprise by the crisis that is the irony. Host i remember going into his office and i said are you having any fun and he said just let me show you this and he pulled out a stack of printouts. [laughter] talk about the inconsistencies and this is one of them, but you start with a nice anecdote about the Gold Standard. Can you say a word about that and about the Gold Standard . Guest he believed in the Gold Standard and that was an article where she detailed in her book be leaving in the Gold Standard and alan presented a gold participant of the publication. It was deep in his worldview. Host if you believe in the Gold Standard you dont need the central bank. Guest one of the most extraordinary things that i discovered, i knew that he had given speeches under the auspices of the institute and i wanted to find th the transcrips that i knew must exist somewhere so i went to see these and one of them was hidden away in the woods in virginia and had a fantastic filing system and then there was a 300 page transcript of the speeches and 63 and 64 and i came across this quote the creation of the Federal Reserve, the creation of the Federal Reserve was a historical disaster. So talk about the inconsistency. That is a part of the view as you say if you have the Gold Standard coming you dont need the fed. Later committee sai fed currency whewent all the way over to the extreme. Host and even argued that you didnt need a monetary rule. You have to play it by ear as if were. Guest there would be a fixed amount. And the rules kind of a want of discipline and as you say, he was pretty determined to reject that in favor of discussion. It was his discussion of course. The reason why ayn rand believed in. Host but he was also quite shy and quite unsure of his views. Lets move on to the bubbles. You write that early on you saw the crash of 1929 as horrible in the Great Depression and yet by the 19 90s he wasnt so worried about this obviously at this time. Guest its amazing. As i said one of the discoveries of the speeches. Early on, Alan Greenspan had written a paper in 1959, which was sort of lost. I think he talked about it with friends a little bit, but the actual paper was in the phd thesis that magically disappeared from the New York University library after he became the federal chairman and they tried really hard to get ahold of that when he became the chairman because they wanted to see what was in it and they were told we cant find it, we know its supposed to have all of them a wor afford the cant fin, sorry. Anyway, i would ask questions about the development and his eyes would go like this a bit anor thatand he would look up aa while i would look up and i could see the binder on the shelf and i would say it would be great to have your thesis. When he gave it to me and i read it is a 1959 paper which as you say its all about how the banks must respond to the asset bubbles and its in the 1920s experience that says compared to the inventory cycles, the asset booms and busts are much more disruptive to the Economic Growth so they must deal with bubbles and yet that was the prescription as you say the material greenspan didnt follow it. Host talk a little bit about the dot com bubble of the 90s. Guest of course you protect me because you were there. What i saw from reconstructing it through the transcripts and interviews with people is that essentially the key moment came in the collapse of longterm capital management, the hedge fund which blew up in the fall of 1988 and after that the fed to cut Interest Rates to stabilize the market. It cuts the rate three times a. There was a legitimate concern with the market instability and the fed as i said three Interest Rate cuts. Then in the early 1999 in my view, things have stabilized and they tried to take back the entrance. The cuts were justified with reference to the crisis and once they were passed, the cuts would have been taken back. They were not taken back until late 1999, and this is the crucial period where the evaluation went from very high to absolutely crazy high. Host he had worried much earlier about the crazy high, when it wasnt so crazy back in 1996 actually in this speech, and he intended to send a signal with that. But later, he was less concerned. Guest we have a shakespearean tragedy going on. The man who did. Irrational exuberance and understood that the prices could overshoot and knew that could be dangerous as it had been in 1920s, he had all the right intellectual formation to respond to the tech bubble and yet he didnt. Host i would argue that we didnt have the right tools. What we would have had to do to the shortterm Interest Rate, which was the tool that we had drove it very high in the time when the real economy was doing fine and there was no inflation and in fact i kept saying in the fomc meetings, its important to have a tight market. Guest this is where i respectfully disagree not just with you, Alan Greenspan, but ben bernanke and essentially the consensus. The reason i disagree is that it seems to me knowing what we know now about how they can be very destructive, its worth reducing it in the short to medium term to have more stable growth on a two or threeyear view and i think that is the tradeoff, difficult to see at the time but in retrospect. Host not all are the same. There is the combination of the housing bubble and the bond market and all the craziness that went on in the next decade. Talk about that a bit. Guest this is another fascinating argument that i engage with because as you say, this interview would be the credit bubbles and leverage you have a complete meltdown and its terrible. If they are not themselves leveraged there wont be a contagion. The reason i am not sanguine about this is that when the fed was confronted with the collapse in 2001 the response is responf lost stimulus. It was appropriate that the consequences that you stimulate the Interest Rate portion of the economy and when you read a Committee Transcripts from 2002, 2003, 2004, people knew that this is what was happening and the real estate starting to take off and it was a fair tradeoff. We had this tech bubble blown up and now from the collapse of the bubble by stimulating the real estate investment. The shortterm Interest Rate isnt the only tool that was really egregious stuff going on at the level of the originators they were shoveling out mortgages and to people who could likely pay them back. He was very concerned about that, not so much about the bubble but the people that were taking out mortgages that they were not going to be able to afford to take back. But the fed into the other regulators never really focused on what was happening to these disaster this bindings. Guest when my research over five years helped me to challenge the conventional story because in 2001 we can read about this and the freedom of information act disclosures decided to pass new rules on the sub prime mortgages and the rule said that there are dangerous types and we are going to ban them. In particular there was an entrance product that was a ripoff to consumers that wasnt allowed any more and that action, you can read on the frontlinefront line, debating wn greenspan they adopted the rules. At the time they thought maybe one third of the mortgages would be presented because of the new rules. The problem is when they did a retrospective study a few years earlier instead of stopping one side of the mortgages it stopped 1 because it was easy to just get around it. I think the larger message and method that arises from this is that it organized the system that we have in the united states. Its difficult for one regulator even the fed that is the most powerful to pass the rule and then actually see it enforced. Host thats right that there were other regulators and most of the bad stuff wasnt happening on the federal regulated editions that we started out in the beginning. The fed was the center part of the regulators and Alan Greenspan could have gathered the regulators and his Conference Room and and said it looked as bad stuff going on out there. What are we going to do about it. So there was a collective lack of concern among the regulators for the rapid decline and lending standards and the fact that it was being fueled by securitizing these busy bad loans and many of them were bad and throwing them all around the world to very eager buyers into the head high Credit Ratings and they were good investment. Theres a lot of truth to what you just said and in my book i do describe the crazy securitization going on and i thought because he had lived through previous derivatives there was Orange County in 1995 there was procter and gamble and others with the securitization before. The message which is maybe underappreciated is that there were instances in which the fed did try on the sub prime mortgages and Alan Greenspan tried to push back against the gse. Host that is a place that he was really worried and testified and made it very clear he was worried about the leverage in the end he didnt push it very hard. Guest the institutions were lending and should be capped and he had an alliance with the Bush Administration at the time that was on the same page as him and they were pushing i think as hard as they felt they could to get the regulation. What happened was that the day before one of the followup congressional hearings on the topic and had appeared on tv and showed a hispanic couple saying to each other we want you to buy a new house but now we hear that congress has been turned on our mortgages and we wont be able to get a new house and thats bad because the politicians are preventing us from having the american dream. So essentially it is a fannie and freddie putting members of congress on the morning that if they kept the portfolio sizes, they would face a barrage of ads, so it is a limit to what the regulators could do. Host i think that is true and they were very powerful lobbyists, fannie and freddie. You make the point that while he was worried about cme and freddie and what might happen when they went bankrupt. They were on the hook in the way that they didnt look at it if they were on the hook for some of the others. Now into crisis they would often regret that and so you are right he should have worried more about the private banks that are engagewere engaged in the mortge Industrial Complex but i do think that he tried in the subprime mortgage regulation ant the gse and the new york fed tried on the Bank Leverage a little bit the regulation is hard to do so you would need to be willing to push back against the bubbles. Its what happens if the big institution or very interconnected institution goes bad. That is what no one really anticipated what would happen if it went down. Come to a different subject if you could. The bush tax cut of 2001. That was the curious incident can you talk about that a little bit . Guest his emergence into the political acceptance in washington was crystallized in 1993 when he endorsed the clinton budget package that raised taxes to reduce the deficit. Host and hed always been antideficit parks guest he was there at the state of the union speech when bill clinton gave the speech invested clapping as bill clinton promised to reduce the deficit, so he was known as a deficit hawk and then along comes george w. Bush in 2001 was an enormous tax cut and greenspan sort of endorses it with a caveat that he wants a sunset clause such that if it is evaporated the tax cut should automatically go away but this is a very savvy political operator who knows that it would be thrown out in the sausage make o her this congress and so essentially you need a compromise between what he thought the white house wanted in his conscience saying there should be a sunset clause but he delivered the Bush Administration wanted. Host he also worried publicly about the large surplus and about what the fed would do to execute Monetary Policy if we didnt have a National Debt. I thought i was fanciful