Transcripts For CSPAN2 After Words 20161127 : vimarsana.com

Fabulous book. Guest thank you. Host ive known Alan Greenspan for many, many years, and we worked together closely when i was his vice chair, and hes a complicated man, and these were complicated times, and i think you got it about right. But lets start at the beginning. You wrote interestingly about the influence of his parents. Could you talk a little bitt about that on his career choices . Guest yeah. Alan greenspan had an unusual upbringing in the sense that raised in the 1930s, he was the child of a single mom. His father left his mother when alan was only 3 and then was this sort of distant figure, unreliable, who would sometimes say he would come and see his son and then not show up. In and i think that probably reinforced a talent alan had to live inside his own head, and that was further reenforced by his mother. First of all, were talking about the 30s, the depression, so she had to earn a living. Ng wasnt so easy. She worked in a Department Store in manhattan, so he was left by himself all alone in the house with kind of distant grandparents who were from a different, you know, they wereyo immigrants, and they felt alien and much older. So he, basically, was by himself. Hims but then when the family gathered at parties and holidays and so forth, alans mother, rose, was a vivacious singer, and she would lean over the piano and sing in the manner of a torch singer, beautiful,n haunting jazz songs. And be alan always felt she has the center of attention, i could never match that. So this was reinforced by a sense of inadequacy. Host but he got his musicala interests from her. Guest he did, thats right. But i think then the musical interests he per sued es pursued, and he became, of course, a professional musician for a while after leaving high school and before college. That was an attempt to be in the spotlight, to match his mother through musical ability. Host well, maybe so, but he genuinely loved music. Guest of course, yes. Host and he was good at it. What about his friendship with ayn rand . Hi people come back to that a lot. How do you think that influencen his thinking . Guest well, huge numbers of americans read ayn rand and are er host or try to read her. Guest and it tends to happen when theyre about 19 years old. I mean, its a kind of college thing. And the idea of the libertarian vision are appealing because theyre so simplified and bold. The interesting thing about alan is that he met ayn rand when he was older, you know, his late0s 20s, and he stuck with her so much that when he was sworn in, age 50, as the chairman of the council of economic advisers under president ford, there were three guests there at the swearing in. There were alans mother, ayn rand and ayn rands husband. So this was a very close relationship, and i do think it had a profound effect on his development. Host do you think she really changed his mind, or did she reinforce his views . He was one who believed in the great man, and he loved Railroad Builders and things like that. And certainly reading ayn rand would reinforce individualism and that sort of thing. Guest yeah. I mean, you know, alan is minute who partly because is somebody who partly because he was withdrawn and living in hisa own head as a child was always cutting his own path. When he went to college in 1945, it must have been one of the most progovernment generations of american students, people there on the g. I. Bill paid for by the government. Yet he merged as an antigovernment sort of libertarian. So he was going his own way, but meeting ayn rand reinforced that and drove him to build a whole philosophy, a whole world view which was kind of dormant before. He was somebody that was more concerned with teasing out economic numbers than he was about a social vision. And ayn rand brought him from are the data to the kind of Political Economic agenda. Host tell us about the numbers fascination a bit. He was a genuine nerd, as we would say today. Thats a modern phrase, but he just loves statistics and numbers. Guest yeah. I mean, that is a passion. As a child, he would be wheeled out many front of the in front of the relatives to perform complicated addition as kind of a performance act. Host and he would boast of it. Thats a thing at the fed, you know . Ben bernanke likes baseball. [laughter] guest right. So alan was part of the baseball tradition in economics. [laughter] he was also actually more seriously what i call, partlye what i call the new york school. In other words, there was an empire cyst school based in new york around the National Bureau of Economic Research which was focused on just counting the economy, creating the aggregate data which we now see in the gdp statistics which hadnt existed in the 30s. And so the creation of data, the understanding of how you generated the best quality data was how he got his start. Not modeling, not the taking of data for granted and then the building of complex mathematical connections between those data points. And i think this helped him as fed chairman to not just accept that, you know, productivity is doing up is and such, its reported, you know . Now lets just think about the model that we might build with that number. No. He wanted to disaggregate the productivity data, see what was behind it and then actually form a conclusion that the data were wrong, crucially in 1996, and that led him to perhaps his most famous call as fed chairman which allowed him to keep Interest Rates lore for longer in the late 1990s. Host yes, i was there at the time, and that was a very interesting incident because the modelers actually wanted the fed to raise Interest Rates because unemployment was so low, and their models were telling them raise Interest Rates, raise Interest Rates. And alan was saying i dont see this inflation, Something Else is going on. Can you say a little more about that . Guest yeah. I mean, he basically believed if profits were going up and yetgo productivity was flat, there was a mystery. I mean, normally, you know, if youre making more money, its probably because youre producing more per worker, so he wanted to look into that. And he had the fed staff produce sector by sector what was going on with productivity. And it showed that, apparently, productivity in service industries, you know, law firms and whatever, were falling. And he said intuitively it cant be falling, it cant be that everybodys getting a newr personal computer and yet theyre producing less . Maybe flat would be plausible. So by looking under the hood, he guessed what was going on, andoo he got it right. Now, i think this actually links to the postmortem of the 2008 crisis, because after the crisis one of the common obsessions was, well, the economicswo profession was all tied up in its models, and, you know, too m mathematical, too much faith in the Predictive Power of these models. But the interesting thing about Alan Greenspan is that he never had that faith. He was never obsessed with a particular model. He was always willing to question it and test, stress test those data inputs. And so i think the funny thing is if he had wanted to choose the fed chairman who was perfectly intellectually prepared not to be trapped and caught by surprise by the crisis, you might have chosen Alan Greenspan. Thats the irony. Host yes, i think thats right. S i remember once walking into his office just to wish him a happy birthday after id left the fed. I said, alan, are you having any fun . He said, yes, let me show you this. And he pulled out a stack of printouts. [laughter] much of your book you talk about sort of inconsistencies and in a sense this is one of them. But you start with a very nice anecdote about the Gold Standard. Can you say a word about that and about his shifting and rather inconsistent views abouts the Gold Standard . Guest well, you know, as a young person around ayn rand, he believed in the Gold Standard, and that was almost an article of faith with ayn rand, the characters in her books, believe in the Gold Standard. And when atlas shrugged, one of the big novels was published, alan presented ayn rand with a miniature gold bar to celebrate the publication. So this was very deep in his world with view. Host if you believe in the Gold Standard, you dont need a central bank. Guest right. Because you dont need to move Interest Rates around, its all automatic. Ex one of the most extraordinary i things i discovered, i knew that alan had given speeches under the auspices of the ayn rand institute, and i wanted to find the triplets which i knew the transcripts which i knew must exist somewhere. So i went to see all of these followers from that period, and one of them hidden away in the woods of virginia in a cabin had a basement with a fantastic filing system. And there was the 300page transcript of alans speeches in 63 and 64. And reading through these, i came across this quote the creation of the Federal Reserve get this the creation of the Federal Reserve was an historic disaster. [laughter] so thought about inconsistency talk about inconsistency. That was part of his view, as you say, if you have the Gold Standard, you dont need the fed. Later, of course, he became theo embodiment of the fed, the personification of fed currency. So he went all the way to the other extreme. Host yes. And even argued that you didnt need a monetary rule. You had to play it by ear, as it were. Guest right, exactly. There was a middle ground that Milton Friedman espoused which was not gold, but not just money printing. There would be a fixed amount of printing every year, and the friedman rule was kind of quasigold. It was another discipline. And as you say, alan was pretty determined to reject that in favor of discipline i mean, in favor of discretion. It was his discretion, of course. Maybe fits with what you hinted at earlier, you know, the believer in ayn rand, believed in great men including himself. Host yes. But he was also quite shy and and often unsure of his, of his views. And u but lets move on to bubbles, because bubbles are a very interesting part of this history. You write that early on he saw the crash of 1929 as causal in the great depression. Eat de and yet by the 990s by the 1990s, he was not so worried about the stock market bubble that we were obviously having at that time. Guest right. I mean, its amazing. You know, just as i said one exciting discovery was those ayn rand speeches, earlier on Alan Greenspan had written a paper in 1959 which was sort of lost. I think he talked about it to friends a little bit, but the actual paper was in the ph. D. Thesis which magically disappeared from New York University library after he became fed chairman. I mean, friends of mine who are great reporters really, really tried hard or to get hold of that ph. D. Thesis when he became fed chairman, becausese they wanted to see what was in it, and they were told, oops, its gone, i cant find it. I know were supposed to have all the ph. D. We awarded, cant find it, sorry. Anyway, i would be in alans office, and i would say id ask questions about his development, and alan green. Cspan s eyes would go like this a little bit, and he would look like this. After a wile i looked up and saw this fat binder on the shelf, and i said looking at it, alan, it would be great to have your ph. D. Thesis, guessing what it was. And when he gave it to me and i read it, there was this 1959 paper in which, as you say, its all about how Central Banks must respond to asset bubbles. A and its based on the 1920s experience. You know, look, compared to inventory cycles, these asset booms and busts are much morech disruptive to a stable pattern of economic growth. The Central Banks must deal with bubbles. And yet, you know, that was the young that was the prescription from the young greenspan. As you say, the mature greenspan didnt follow it. Host no. Talk a bit about the dot. Com bubble of the 90s. Guest right. Well host that was when i was at the fed, actually. Guest yes. So ill say what i think but, of course, you will correct me, because you were really there. What i, what i saw from reconstructing it through the triplets and through transcripts and through interviews with people is that essentially a key moment came with the collapse of longterm capital management, the hedge fund, which blew up in the fall of 1998. And after that the fed cut Interest Rates to stabilize the markets from the fallout. It cut it, it cut rates three times. Host yes. We had a world crisis going on. Guest there was, ofri course yes host asian. And russia as well. So there was legitimate concern with Financial Market instability. Ns and the fed, as i say, did these three Interest Rate cuts. Then in early 1999, in my view, things had stabilized, and it was time to take back that insurance. The cuts had been justified with reference to the crises. Once those crises had passed, i would have thought that the cuts would be taken back. They were not taken back fully until late in 1999. And in my view, this is the crucial period when tech valuations went from very high to absolutely crazy high. Host and he had learned much earlier about the crazy high guest right. Host when it wasnt so crazy. Guest right. Host back in 1996, actually. Guest correct. Host he made this famous speech about irrational exuberance, and he intended to send a signal with that. And and he did. But later he was less concerned. Guest this is another obsession where you have an almost shakespearean tragedy going on. The man who knew, the man who did talk about irrational exuberance, who understood that asset prices could overshoot, who i knew that could be very dangerous. He had all the righting intellectual formation to respond to the tech bubble, and yet he didnt. Host well, i would argue we didnt have the right tool. What we would have had to do to the shortterm Interest Rate which was the tool we had was raise it very, very high at a time when the real economy was doing fine, and there was no inflation. And, in fact, i kept saying in fomc meetings its really important to have very tight labor markets if you dont have inflation. This was doing a lot of good. Guest i mean, this is where i respectfully disagree, and im aware im disagreeing not just with you, not just with Alan Greenspan, but with ben bernanke and, essentially, the consensus. The reason i disagree is it seems to me knowing what we know now about how bubbles can be very destructive, its worth reducing growth a bit in the short to medium term with an Interest Rate hike in order to have more stable growth on a sort of twoyear or threeyear view. And i think that was the tradeoff that was confronting the fed in 1999. Difficult to see at the time, but in retrospect, i would say that, you know, weve learned that bubbles matter. Host yeah. But all bubbles arent the same. The stock market bubble turned out not to have such devastating consequences. E d the housing bubble did. The combination of housing bubble and bond market bubble and all the craziness that went on in the next decade. Talk about that a bit. Guest i mean, this is another tremendously fascinating argument that i engage with in my book. Because, as you say, the standard view would be, look, credit bubbles fueled by a lot of borrowing, a lot of leverage, when they blow up, you have a complete meltdown, and its terrible. On the other hand, if its just stocks, stocks rise, stocks fall. If the holders or of the stocks are not themselves leveraged, there wont be a contagion, knockon effect, and so its not so bad. The reason i mean, i think this is included, clearly, bubbles are much worse. But the reason im not sanguine about unleveraged stock bubbles is that when the fed was confronted with the collapse of the tech bubble in 2000 and 2001, the response was a lot of monetary stimulus. And it was appropriate. I mean, you needed to do the stimulus. Was ap but the consequence of the stimulus is that you stimulate, what do you do, you stimulate the Interest Rate sensitive portions of the economy; ie, real estate. And when you read the federal open Market Committee transcripts from 2002, 2003, 2004, people knew that this was what was happening. Real estate was starting to take off. And it was accepted as a fair tradeoff, you know . We want growth to be back up. Weve had this tech bubble that blew up, now we have to compensate for the fall in Corporate Investment from the collapse of that bubble by stimulating real estate investment. So one bubble i think slightly led to the next. Host thats, thats i think that part is true. But the shortterm Interest Rate isnt the only tool. The fed was a regulator. There were other regulators. There was really egregious stuff going on at the level of the Mortgage Originators. They were shoveling out mortgages to people who couldnt likely pay them back. Ned gram lick was very concerned about that. He wasnt concerned so much about the bubble, he was concerned about those people who were taking out mortgages that they werent going to be able to afford to take back. But the fed and the other regulators, it wasnt just the fed, never really focused on what was happening to these disastrously declining lending standards. Guest well, i think this is another area where my research over five years helped me to challenge the conventional story. Because in 2001 and one can read about this through freedom of information act disclosures you know, the fed did pass new rules on subprime mortgages. And the rules said there areyp particularly dangerous types of subprime mortgage, and werein going to ban them. In particular, there was ane insurance product which was just a ripoff of consumers, and that was not allowed anymore. An and that action, you know, you can read ned gramlick, the fed governor on the front line, debating with Alan Greenspan about it. At the time, the fed staff thought maybe onethird of new subprime mortgages would be prevented because of the new rules. The problem was when the fed staff then did the retrospective study a few years later, instead of stopping onethird of new subprime mortgages, it stopped 1 because it was too easy to get around it. I think the larger message andme lesson that arises from this is that in a balkanized regulatory system like we have in the united states, its extremely difficult for one regulator even the if fed which is thea most powerful to pass a rule and actually see it enforced. Host oh, i think thats right. But there were other regulators. And although most of the bad stuff wasnt happening on, in fedregulated institutions, certainly not at the beginning, the fed was the center of regulators. W Alan Greenspan could have gathered the regulators in his Conference Room and said, look, theres bad stuff going on out there. Er what are we going to do about it. There was a collective lack of concern among the regulators fof the rapid decline in lending d standards and the fact that it was being fueled by securitizing the, these bad loans. Many of them were bad loans. And selling them all around the world to very eager buyers who thought that they had high credit ratings, and they were good investments. Guest i mean, i want to stipulate that, you know, of course theres a lot of truth to what you just said. Ut and in my book i do describe the crazy securitization that was going on. And i fault Alan Greenspan, because he had lived through previous derivatives blowups. I mean, you know, there was Orange County which went wrong in 1995, there was procter gamble, gibson greeting cards, there were other problems with securitization before, and he should have done more. I agree with you, but host well, they all should have. Its easy to focus on Alan Greenspan because he was so prominent and such of an apparent superhero at the time. Guest but i think the message, one more thing on this, the message which is maybe underappreciated and which i hope my book will slightly correct is that there were instances in which the fed did try. So it tried, as i just said, on subprime mortgages. Alan greenspan tried to push back against the gses, fannie and freddie host yeah. Lets talk about that, actually. Guest okay, yeah. Host because that was a place where he was really worried. Testified and talked and made very clear he was worried about the capital and the high leverage at fannie mae and freddie mac. In the end, he didnt push it very hard. Di guest well, he testified in congress i think more than once, and he said that these institutions were lending too much, that they should be capped from the size of the portfolio. He had an alliance with the Bush Administration at the time which was on the same page as him. And they were pushing, i think as hard as they felt they could, to get regulation on the gses. Now, what happened was that the day before one of the followup congressional hearings on this topic, an ad appeared on tv, and the ad showed a hispanic couple saying to each other, oh, we wanted to buy a new house, but now i hear that congress is going to clamp down on mortgages, and we wont be ablen to get our new house. And thats bad, because the politicians are preventing us from having the american dream. So, essentially, this was fannie and freddie be putting members of congress on warning that if they voted to cap portfolio sizes, they would face a barrage of ads in their district. So it shows the political limits to what the regulators could do. Host yes. I think thats true. And they were very powerful lobbyists, fannie and freddie. But you make the point that while Alan Greenspan was very worried about frank and freddiee and what fannie and freddie and what might happen if theyed went bankrupt or seemed to be going down, he wasnt worried about big financial and private Financial Institutions. Guest yeah. I mean, thats true. I think he had a reason to be more worried about fannie and freddie, because there was a government, implicit government subsidy in their borrowing costs, and they were growing very, very fast. And it looked more obvious that the markets were expecting them to be bailed out. So the taxpayers were on the hook for fannie and freddie in the way that it didnt look asey if they were on the hook for some of the others. Now, in the crisis host it turned out they were. Guest it turned out they were. How th there was also lehman, but then they regretted that. For aig, they clearly were. So youre right. He should have worried more about the private banks thatwr were engaged in the mortgagee industrial complex. But i do think that, you know, he tried on subprime mortgage regulation, he tried on gse size, tim geithner, the new york fed, tried on Bank Leverage a bit. The message to me from all of this is that regulation is politically hard to do, so you have to consider Interest Rates as what as a way to push back bubbles. Host i would view it more to Systemic Risk than what happens if a big institution or a very interconnected institution goes down. That was what no one really anticipated, what would happen if a lehman went down. Come to a different subject for just a minute though, then well come back. The bush tax cut of 2001. I was personally really mad at alan for espousing that, but and he knows that. But that was a curious incident. Can you talk about it a bit . Guest sure. It was a curious incident because in some ways, you know, Alan Greenspans emergence into his political acceptance in washington was crystallized in 1993 when he endorsed the clinton budget package which raised taxes to reduce the deficit. Host and hed always been antideficit. Guest hed always been antideficit. And he was there to the the state of the union speech when bill clinton gave a speech, he was next sitting by Hillary Clinton 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 with an enormous tax cut, and greenspan sort of endorses it. Now, he endorses it with a caveat which is that he wants as sunset clause such that if the Budget Surplus evaporated, the tax cut should automatically go away. But this is a very savvy political operator, Alan Greenspan, who knows that that sunset clause will be thrown out in the Sausage Maker that is congress. So i think, essentially, he made a compromise between what he thought the white house wanted and his conscience. He gave his conscience somee cover by saying there should be a sunset clause. A but really he delivered what the Bush Administration wanted. A host i think thats right. 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 that was fanciful both because the surplus of that magnitude was not going to materialize and because there were other ways of doing Monetary Policy. But he seemed to really believe that this was a concern, that we might pay off the debt, and then where would the fed be when they needed to do open market operation. Or guest he had that concern. He also floated the concern that, you know, if we paid off the debt, then the government with continued surpluses, what would it do. Perhaps it would have to start buying corporate entities. This would be Government Intervention in the private market. So he raised all sorts of concerns, but they were theoretical because there was still a very big national debt. And be as one member of the senate said, you know, mr. Chairman, if we reach the point, then lets have a discussion about it. But for right now [laughter] host yes. Thats what i thought. Wasnt likely to happen. Still worried about what most of the audience has probably forgotten, the great moment of y2k. Guest yes. Well, in 1999 there was considerable fear that when Computer Systems reset from 99 to 55, there would be a Software Glitch and a kind of programming shortcut adopted in the era where computer memory was expensive and scarce had caused the programmers not to build in resilience around that rollover. Host yes. They didnt put in fourdigit dates, basically. They put in the 19 was assumed, and they didnt put in a 20. Guest yeah. So the fed got ready for this, and there was concern that, you know, people wouldnt be able to get money out of the atm, checking accounts wouldnt makee transfers properly, all kinds of unforeseen computer infrastructure on which the financial Payment System depends might freeze up. So the fed, you know, positioned bank notes in regional depots, and it got ready with offered specially liquidity lines to big banks and so forth. And i think in some ways it was the model example of a central bank acting to safeguard the integrity of the Payment System, because it worked brilliantly. In the end, y2k in technological terms didnt turn out to be i think there was, you know, a couple of cash registers in new york in a chocolate shop host there were some incidents in japan and a few other places i think too. Guest yeah. Host but that was because they fixed it. Guest right. So i think that was a greate ofm example of something which, because it was fixed, we dont remember so much. Host exactly. And i remember Alan Greenspan in that period pointing out frequently in meetings about y2k that he was a programmer who knew how to program in four tran which was the language of early computers. And so if they needed help, they could call on him. [laughter] so you might say a word about his role in the 9 11 incident, because that was the it was such a big thing for wall street and for the country. He wasnt even part of it. Guest its interesting, he was at a meeting inat spiritserland host switzerland host right. Guest at the time of the attack. The flight had to turn around and go back to switzerland, so he was out of touch host he was imprisoned. Guest pretty much. And then he flew in a military transport the next day to get tt the feds headquarters, and by the time he got there, the team led by the vice chairman, Roger Ferguson was pretty much in control of the crisis response. And interesting thing is, ii think this is revealing aboutt alan green. Cspan s personality. He didnt sort of march in and demand to seize back the levers of control. He was quite happy letting the others do the crisis response. Because what really interestedea him was to think about the right Interest Rate policy in response to all of this. Host yes. He was not very interested in Payment Systems. I experienced that personally. Didnt matter to him very much. Guest he was not allowed go back to his office because there was thought to be an assassination threat, so he was put in a special office, and he hid away there by himself, and he said to me in these long interviews, you know, in a time of trauma, individuals retreat to their natural comfort zone, and so for me, it was to go off. By myself and just look at the data. Host so fast forward to after the crash of 2008. He was no longer the fed chairman. But he had to come to terms with his own role. Could he have done things differently, and was he in part responsible as many people were holding him for this. Can you talk a bit about how he came to terms with that . Guest well, the famous line from his postcrisis public statements is i found a flaw. And this is something he said when he was testifying in congress and, you know, being crossexamined about hadnt he got it wrong, wasnt he at fault, shouldnt he say sorry and so forth. He did say i found a flaw, and i what he meant was that he had thought financial companies, banks and nonbanks and so forth would be looking after their own health, protecting their risk exposures and not, therefore, being so crazy as to blowhemsel themselves up and take the whole Financial System down with them. And and this was a flaw that, in the end, these people did take way too much risk and did blow themselves up. Now, that stuck rather, and i think it gave rise to the unfortunate presumption in the public debate that, you know,th the reason we had the crisis was that we had a naive believer in the selfpolicing efficient efficiency of markets in control, and if only wed got rid of that believer and rid of that belief, you know, we would have a safer Financial System because if we understand that markets overshoot, then, gee, you know, we wont make the same mistake again. Mi now, in my view host weve known that for several hundred years. Guest yeah. It was a complacent mistake, and its a mistake about Alan Greenspan too. I know from reading his early writings, i know because he bought a seat on the Commodities Exchange in new york to make money from market inefficiency, he never believed in efficient markets. He always understood that markets could overshoot, and he understood that banks could blow themselves up. He had studied the 1920s and 1930s. So when i read the transcript carefully of that, i found a flaw, what i saw was he reallyw just threw that away to try and change the subject. He didnt really mean there was a deep flaw in his world view. He cant have meant that, because he knew that finance is unstable. That was central to his writings over 40 or 50 years. So i think the world has learned the wrong lesson from Alan Greenspans legacy. They think that we had a crisis because of an intellectual error whereas in reality we had a crisis because of political constraints on what the central bank can do, on what the regulators can do, as weve been discussing. And if we look at the current political season, i think it would be foolish to presume that we are any safer now. Host well, we had a crisis for a lot of reasons that came together. Im of the perfect storm theory rather than the single cause theory of this crisis. It probably was true that Interest Rates were too low for too long and a lot of other things were i true. Were true. But there was a widespread faith that somehow large Financial Institutions would manage risks well. Managing risk was very complicated, and there was a lot of faith they would do it well. They werent fancy new models. Why did we all believe that, do you think . Guest so i think it was a kind of a faith arrived at because the rival belief system was even less compelling. What i mean is that, you know,w, people understood that finance could go wrong. I mean, anybody like alanan greenspan who had lived through the failure of penn central in 1970, the collapse and bankruptcy of new york or near bankruptcy in the 70s who had, you know, watched continental ill be bailed out in 1984, who had come to the fed, the first thing that happens is the stock market corrects by 23 , then the s l crisis, the commercial property crisis, the mexico crisis, theres one crisis after another. I mean, he knew that these Financial Institutions could get it wrong. Why was there that apparent faith that, nonetheless, Financial Institutions would manage their risks . Its because the alternative faith, that the government could look over the shoulder of bankers and be smarter about identifying risk, that government faith seemed even less believable. I mean, what was the chances of that, you know, somebody somebody who is supervising different institutions from the government comes and visits jpmorgan and is better atisit j understanding jpmorgan than the people who work there all the time and who have a direct financial interest in trying to manage it properly . I think that it wasnt so it wasnt the belief that markets were efficient and tacit, its just that government was also implicit and maybe more so. Host come back to the housing bubble, specifically housing rather than the follow on. Alan greenspan made some statements about Housing Markets that seem in retrospect actually naive, that he couldnt have we couldnt have a National Housing bubble and that people buy houses to live in them, not to sell them for profit. What do you make of that . Guest ing it really was not one of his better moments. You know, he came out and said just as what you described. I think, you know, it is thats a very strange one and very hard to explain except that i think what happened was in the transcripts you see him privately debating problems in credit markets, problems also in Housing Markets. You know, they debated at the fomc that this might be creating instability in 2004 host oh, yes. He was very worried about credit cards, for example. Guest rightful. Host there was quite a long guest and perhaps its that concern with overall asset market overreach including the Housing Market. So why did he go out in public and say, dont worry, there wont be a national bubble. I think, you know, if the fed chairman in his role as National Cheer leader, he felt he had to be the bringer of reassuring news. Somebody i quote in my book talks about Alan Greenspan becoming as reassuring to the American Public as prozac. Host yes. You talk about him as uncle alan. Guest uncle alan. Uncle alan has our back. There were tshirts and dolls, and it became the kind of he was the talisman that made you see it was okay to go out and invest whether in housing or stocks. And once he game that, almost despite himself, he was imprisoned by his own reputation. Its hard to go out and be the bringer of negative news. And maybe, you know, its a bet of psychologizing there, but maybe that shy personality, you know, raised by a single mother in the 1930s didnt like to confront society with bad news, didnt want to risk the popularity. If he had been more naturally confident and less needy of affirmation in some ways, maybe he would have done it differently. Host could it have anything to do with his admiration of the Great Railroad tycoons that now talking more about the major Financial Institutions, but these very smart people who were creating and running major Financial Institutions couldnt get it wrong . Guest i think theres a bit of that. I mean, i think theres a strand in his mental history which has to do with jpmorgan that when he was a jazz player and there was a break between sets, he would be reading economic history for fun. Including the story of, youu know, james morgan and the creation of the great bank in the early 20th century. And he had a reverencefor jpmorgan which only grew when he was appointed director of the company and he sat on the boardd in the late 70s and early 80s. And, you know, jpmorgan was the perfect example of the slightly conservative, careful professional, nonflashy kind of bank. And i think that image of how finance had been maybe did offset that lesson that he must have learned at the same time from watching derivatives dealers at Bankers Trust blow themselves up. Ri host it was jpmorgan who basically, after the panic of 07, 1907, said that we need a central bank. We need a lender of last resort, and it cant be me, because he had been playing that role. Come back to derivatives for a minute, because these fancy financial trumpets that most of us struggle to understand werenr explodeing, and though wed had derivatives before, this was a new explosion. All kinds of Financial Instruments that nobody very well understood. And yet he resisted any attempt to regulate derivatives. One that u drew me to writing this bosks that Alan Greenspans public life from time he joined campaign was four decades in which one finance was create. You have the start of the story. There were no Financial Derivative but no Financial Derivative as well as a Fix Exchange Rate and capped Interest Rate so in the modern system including derivative were created in this period when Alan Greenspan ftion at or near . Efer all of the debates so a key question why do more about derivative especially since they did show sign of being dangerous because they have close trouble in 1995 and debating in late 1990s about maybe trying to tame them pushing them from over countinger transaction by natural swap between one bank and one company, and pushing them on to an exchange to be better monitored. At least you can conceal a and why didnt more of that happen so there was a famous moment when the of the comomty future Trading Commission was born afnghted it that they should be better regulated and should be shot down by all of the other senior regulateing in town including Alan Greenspan. I think when you look at that story why didnt they do more . A couple of points that they approached this with the sort of litigated mentality. He was a tough person. She was not a good politician in term was building alliances around town and so she sort of blew it demanding action as opposed to per her agency a battle as well. Seen as a dirt battle so amazing thing above secretary at time who was sympathetic to the idea of regulating derivative that came opponent because of the task issue and because of the way that she made political errors. Other thing that which we have to remember and cools back to earlier discussion is that, you know, there would have been massive lobbying by the derivatives business against this reform that could have got into that profit and you have to only look at way that financial modernization act which we remember passed in 1 99 but after a dozen whereas it failed passing new financial rules were extremely difficult. And i think ruben and Alan Greenspan and Larry Summers and i dont know where you were, but you can speak to that. There was a reasonable, political economy point of view which said, i did it. We might want to regulate these things more. Practically if we try to for that well get killed by lobby and wont get anywhere and were just energy on something and should have used our energy for Something Else. Thats one more example, though, of very powerful people are making a huge amount of money on this status quo. And then its hard to change the status status quo and no one stood up against that. I thought actually you didnt mention enough in your in your treatment of home [laughter] the the element of greed and profiteering not Alan Greenspan, but all of the Financial Sector that was from the Mortgage Originator on up that was profiting so pee it shall enormously from this that Financial Sector grew out of o proportion. Prevent me to have to look at that. Previous book called more money than god and hedge fund and ive done greed, but youre probably right that the financial profitable institution is something that i could have played out more. I think i do get to it in the fanny and freddie example where the clear instance of the very profitable pair of companies that used the profits to lobby and run tv ads to perpetuate regulation that give it the profits. So regulation creates a sort of rent for these companies and they use a profit from that rent to perpetuate regulation and terrible loop. They were want just companied but Government Sponsored Enterprises with a Business Model that couldnt work and they were pressured on one hand to make money for their shareholders on the others to to foster more Home Ownership and that mengts you couldnt be too cautious. But i think that threat running through all of this is that people knew Alan Greenspan a man who knew. Other os who were watching over Financial System understood a lot of these issues and the retroare speblght was that they knew but they didnt act. That gets them to why not . Our question whether they knew that it could be this big a disaster. Because financial disaster is not of crisis in an asset that ought that is so widely held. And if somebody loses on the stock market, his neighbors are not affected. If your house is foreclosed on, the neighbors suffer one of the things that again talking about the ph. D. Thesis which Alan Greenspan wrote and i discovered it. Is that one of the central thinks this idea which later became known as tobin q, and this is notion that when asset prices rise two things happen, first of all individuals feel rich sore they spend more. A wealth affect that still late the economy. Secondly, companies which see that you can sell corporate equity for more money a more likely to go out to create more corporate equity now there was again to make another factory they might find another company and Corporate Investment is likely to go up. At a time when the secondary market is valuing result of the investment more highly so this was central to Alan Greenspans theg in 1950s. And so it followed from that that when the nasdaq and tech stocks were zooming up to astronomical heights it must be pushing an investment boom that went on with that. Sure enough it was and fiberoptic cable made under ocean. Huge booming investment driving economy upwards equally when nasdaq collapsed in 2000, 2001, it was there to cause a drying up of investment and that would be serious for the microeconomy so although as ebbs before, leverage bubbles it was you know, just pure equity bubble dos have an effect through wealth channel through investment channel and al greenspan of all people written it be. As others have. I come back to the whole establishment failed to pick this up but wealth affect on the downside was enormous when the asset in question was housing. And thats certainly took us down further than we might otherwise have. How would you sell up converter of Alan Greenspan and achievements and his failing . Well, twhiews a good question in a very interesting chapght at chapter at the end of the bock and my view is as a forecaster, he was really sensationally good. You know, he was able in the 60s to say that the kind of kennedy johnson, policy of pushing gross upwards result u inflation that materialized it in the 70s. He was writing opposing nixon wages and price controls. Proved to be true. He was right in seeing how early iteration was assorting Housing Market in 70s and creating conundrum like that came back to bite in the 2,000 so came back to get back productivity call correct in 19 96 when very few other people saw that. So as that he was great. As a dualer opposed to sort of watcher he was less good, and he sometimes less comfortable but liked being an analyst. In personal turn, and again that comes out to understand the man. So thats right, and then that gets into the question you know, why didnt he act more penalty is part of it. Political constraints and what he thought he could get away with is part of it. This is a very political person who had had learned all kinds of tricks from working with Richard Nixon way back in the 60s and you know, that is why its a story not just about economics. Its also a story about human failty and a story about mr. Speakers. Politics. Collective mind set not just alan. But greed. Because one of the reasons that it is so hard to make the right call is that some people are making an awful lot of money and doesnt see send on with you if you try to take it away. Thats why it remains today extraordinarily difficult for a central bank to raise rates to that level because people own those assets and then they dont want to do it. If you cant prove that you needed to do it which you cant, you do it operating on presumption that asset prices may be overvalue to kind of prove its very hard to be the bubble. It is very hard but that is why we have an independent central bank and alan courageous in raising Interest Rates to nobody likes that. And in the face of inflation, but he was less comfortable with asset price bubbles which i would argue would have brought him into the regulatory do main rather than just the Interest Rate, the main because grad you say that about the current to raise Interest Rates to fight inflation because that really was another interesting part of this story. In s in george h. W. Bush administration from 8992 host oh, yeah. T guest you know, that was early on in greenspans tenure, and we forget about it, but he was under immense pressure to cut Interest Rates there were whispers that the fed chairman is 65 years old, he lives by himself, he calls his motherit every day, isnt that a bit creepy . Doesnt it remind you of Alfred Hitchcocks psycho . [laughter] despite all that pressure, Alan Greenspan stood up for the fed s inagain and i think in a way independence and i thinku in a way created the incompanies. Actually towards the end of his tenure, paul volcker or, the giant, rumpled, eggheaded, Old Testament prophet who we remember as the giant who slayed inflation and he was that but he was outvoted by his own board, once on Interest Rates, twice on regulation, and and his authority was diminishing. It was Alan Greenspan who rebuilt the authority of the fed and created its independence. And i think in a time like now when experts are under attack from politicians, it behooves us to study the model of somebody who is the expert parer excellence, who parlayed that expertise into political influence. I mean, that was Alan Greenspan. Host yes. I think it also behooves us to figure out what is the proper role of a central bank now that weve had it proved beyond a reasonable doubt that financial instability is a terrible thing to have happen to an economy whether its a domestic economy or a world economy. Thank you, sebastian, for a terrific book that i think illuminates not just the career of Alan Greenspan, but this complex era in which we have been living and operating in. I predict it will be on the shelves of historians of in this period for a long time to come. Guest thank you very much. Cspan, where history unfolds daily. In 1979, cspan was created as a Public Service by americas Cable Television companies andpa is brought to you today by your cable or satellite provider. I decided that i missed the 60s. I was born in 1963, and i grew up in new york city on central park west, and my playground was, essentially, the staging ground for the antiwar movement, and i knew a lot, that a lot was going on as a young child, but i wasnt completely aware of the significance of it. You know, my early hometown heroes were shirley chism, and i had photos on my wall, and i was a young feminist at age 7. But all of this really was theater to me, and when i graduated from college in 1985, it was exactly 15 years after the largest student strike in america which you just saw the statistics about. There were 700 colleges closed down, 2. 5 Million Students went on strike after kent state and the invasion of cambodia in 1970. No one went to class, no one took finals, and yet i graduated just 15 years later to the middle of the reagan administration. A few of us went to battle on the streets against apartheid and trying to get harvard to divest. But otherwise, it was very quiet with. All of my friends went off to work at wall street, and i just knew that my life was different because of what had happened in the 60s. I was free to choose any career i wanted and live any sort of life i wanted to lead, but i really wanted to know what it was about this revolution in the late 60s that i had missed and how that activism, that awakened generation had changed my generation and all the generations to follow. I also thought it was a good time to go back, and with history i think youre allowed to go back every decade or so and revisit what had occurred even if it the 60s has been written about enormously. I mean, the library that i just collected in my research was vast. So i did feel like it was a little cheeky of me to decide that i could take on this decade as a kid who wasnt even there. And talk with dressers who are also authors and became the college in michigan today and we are visiting with professor gary wolfram has written a book called a capitalist manifesto understanding the market economy and defending liberty