The former Fed chairman tells Dominic Crossley-Holland that, on mature reflection, he doesn’t feel he should be blamed for a financial bubble blown by global economic forces
‘I feel bribed,’ said Dr Alan Greenspan in a soft voice. It had been a bit like a dinner party game. What do you give the world’s greatest living exponent of capitalism? The answer, according to his ever-helpful office: a box of rather swish dark chocolates.
We were seated in the panelled boardroom of the offices that Greenspan Associates share with a hedge fund in Washington DC. It was a rare chance to discuss (for a BBC document-ary) the causes and consequences of the great economic upheaval with the man who oversaw America’s economy for almost two decades. The former chairman of the Federal Reserve, now 83, remains the undisputed architect of the boom, but some believe he is also the man most responsible for the bust.
Summoned to give evidence to a congressional committee as the crisis raged last October, Greenspan was refreshingly honest in admitting to a ‘flaw’ in his thinking, saying he’d always assumed it would be in the self-interest of banks to regulate themselves. However, he told the inquiry, he had not yet fully understood the reasons for the crisis. A year on, he’s ready to go further both in his analysis of the crash and in the defence of his own policies and beliefs.
So does he now feel let down by the banks? ‘They knew that they were involved in an under-pricing of risk and that, at some point, correction would be made,’ Greenspan says. ‘I fear that too many of them thought they would be able to spot the actual trigger point of the crisis and get out. But you cannot, because by definition a financial crisis is a dramatic decline.’
In the early 1950s, the young Alan Greenspan was famously the protégé of Ayn Rand, the novelist, philosopher and champ-ion of laissez-faire capitalism; she called him ‘the undertaker’ because he was so serious. His belief in the virtues of unfettered markets was forged at her New York soirées. ‘Ayn Rand had views that were really quite different to mine,’ he recalls, ‘in the sense that I was largely a mathematician very much involved in numbers and believed that values generally were not significant. She forced me to think through my value preference system, forced me to broaden my world view.’
Six decades later, all the signs are that Greenspan’s value system is shaken but not stirred. He now believes the breakdown of the financial system was an accident waiting to happen. ‘The roots of this crisis are global and geopolitical. The actual trigger was securitised American subprime mortgages [but] if it were not subprime, something else would have triggered it.’
He argues that the origins of the crisis can be traced to 1989, two years after Ronald Reagan appointed him to the Fed. ‘The fall of the Berlin Wall, which brought the Cold War to an end, is obviously one of the most critical geopolitical events of the 20th century. But what very few people realise is how significant an economic fact that was. Because a substantial part of the world had one or another form of centralised planning, and without much fanfare they moved fairly rapidly towards competitive markets.’
A masterclass follows as Greenspan — blinking behind his thick glasses, with pronounced pauses before his long answers — lays out the developments that defined his 18 years at the helm of the Federal Reserve. Among his recurrent themes are the ‘explosive growth’ of the global economy, the rise of China and India, and the shift of power away from central bankers. ‘Since 2002, the global market in bonds, in mortgages and all the various instruments has to a very substantial extent taken a good deal of control away from governments.’
You might argue that this explanation is rather convenient for Greenspan. The charge levelled against him is that the Fed deregulated too far and too fast, allowing financial derivatives to spread unchecked — in particular credit default swaps, a type of insurance instrument for loans and bonds — laying the seeds for the crash. In 1998, when the default swap market was still relatively small, Greenspan opposed moves to regulate derivatives more firmly. By 2007 the market had mushroomed to $62 trillion as they became the security blanket for the entire subprime bonanza, underwriting gigantic volumes of risk as mortgages were bundled and sliced and sold round the world.
While acknowledging some problems, Greenspan is steadfast in his belief that the evolution of products like these was ‘a major advance in the issue of risk stabilisation’ and risk aversion. ‘I was strongly in favour of certain over-the-counter derivatives and I remain so to this day. The evidence does not indicate there was anything wrong with that.’ Most of all, Greenspan is troubled by the notion that governments will now rush to regulate, stifling free markets and the huge improvements they have brought to ‘hundreds of millions of people’. ‘Why not go back to central planning?’ he asks rhetorically. ‘I mean, if a little bit more regulation is good, why not more?’
There follows the response that is the leitmotif of this interview; in short, show me the evidence and I’ll change my mind if I’m convinced. ‘The conversation [about re-regulation] I must say I find rather incomplete,’ he says, with what looks like relish. ‘My view is that you should be required actually to demonstrate why it is to the net benefit of the society and the financial system.’
In 1987, the year Greenspan was appointed to the Fed, markets crashed around the world. From then on he steered the US economy through all manner of crises, but it was the response to 9/11 that some believe was his defining mistake. In order to boost the ailing economy in the months after the attack, the Fed cut rates successively down to 1 per cent, and kept them there until mid-2004. Critics say these years of cheap money encouraged banks to lend recklessly in the search for higher returns, fuelled the property boom and gave birth to subprime, which flourished unchecked in an under-regulated market.
Greenspan outlines why he believes this misses the point: that to concentrate on short-term Fed rates is to ignore the power of global forces (such as the huge amount of money flooding in from China), and their impact on the longer-term cost of money. ‘The proverbial view of the American bubble as though it is indigenous to the US fails to understand the forces that were at play. It’s long-term rates that matter. And that’s basically where the bubble came from, not anything the Fed did. I’m saddened by the failure of people to look at how global this issue is.’
In that case, I ask, what’s his view on why Britain seems more affected by the crisis than other developed nations? ‘As a result of the extraordinary collapse of global trade and global finance, it hit Britain much harder than it hit the US,’ he says carefully. ‘Obviously we’ve both suffered very considerably but Britain is more globally orientated as an economy than we are. And it’s going to take a while for you to work your way through this.’
Patiently, repeatedly, he returns to his point that it’s misguided to place too much emphasis on his personal role in recent history. There’s a story in his autobiography, The Age of Turbulence, relating to the dotcom boom in the late 1990s, when he was becoming the first celebrity central banker. ‘People would stop me on the street and thank me for their 401k (pension),’ he writes. ‘I’d be cordial in response, though I admit I occasionally felt tempted to say, “Madam, I had nothing to do with your 401k.” It’s a very uncomfortable feeling to be complimented for something you didn’t do.’
So Greenspan’s clearly not for turning. Now the worst of the crisis appears to be over, he’s had time to ponder the causes of the crisis in greater depth than when he gave evidence to Congress a year ago. ‘What I’ve learned is indeed that this is a very special case. We will get through it, it’s going to be difficult, it’s not going to happen quickly. I trust that in the process we don’t make [new] forms of protectionism and actually so hobble the world’s economy as we did during the 1930s.’
Greenspan concludes that the system is imperfect but it’s the best system we’ve got, and there will always be storms ahead. ‘Unless someone can find a way to change human nature we will have more crises; none of them will look like this because no two crises have anything in common except human nature… I don’t know whether it’s going to be 50 years or 100 years but it’s in the nature of the way our system is functioning. Regrettably there’s nothing better.’
And after all the sound and fury, what of being singled out as the man most responsible for the crash? Another pause, then a characteristic riposte. ‘My initial response is, what’s your evidence? I’m not saying I’m flawless or that I’ve made no mistakes, that’s ridiculous. But some of the accusations I find frankly without convincing evidence. If you can demonstrate I was wrong by refuting the evidence I am bringing forward, I will change my view. No one has done that yet.’
Dominic Crossley-Holland is executive producer of The Love of Money (BBC2 on Thursdays at 9 pm).
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