Page 4 of
4 BOOK
REVIEW Reaping what is
sown The Age of Turbulence
by Alan
Greenspan
Reviewed by Julian
Delasantellis
spending, etc)
deemed by Greenspan to be of such weighty,
gravitas-sodden import that he cannot allow the
human race to spend another day in the blind
ignorance resulting from its lack of knowledge of
his views on these matters.
There's
nothing all that original or imaginative about any
of these
compositions; hey, is there
really anybody on this planet, or, perhaps on any
one of the planets in nearby solar systems where
the human race's radio and television signals now
reach, that does not know that Greenspan thinks we
have to cut back on entitlement spending?
To me, the issue essays are evocative of
something that a graduate student might be tasked
to write by his professor, so the professor will
not have to write his own address to the used-car
dealers and morticians of the local Chamber of
Commerce in return for his $50 honorarium and free
chicken dinner.
On Monday, my Asia Times
Online colleague Spengler addressed the issue of
modern central banking in the Greenspan era (The devil and Alan
Greenspan) not in terms of the dry
dollars and cents ledger counting of the
economist, but rather in the fiery sin, damnation
and hellfire rhetoric of the moralizer. "The world
slid to perdition down the path of least
resistance. Until the subprime scandal blew up in
June, no one thought that he had done anything
wrong ... If the devil is loose in the credit
markets, at least one can say that they had it
coming."
The recent focus on "morality" in
American public life is really just a witch hunt
to try and ascertain where and whose genitals our
public officials have put theirs next to; it is
accepted that you can do just about anything with
that wallet in your back pocket, but as for what
you can do with what's in front, it's "hey, get
that thing outta here before you wake the children
and spook the horses".
Evolutionary
psychologists classify morality as just
long-established rules to ensure group cohesion
and survival, with a god and a devil placed like
bookends on opposite sides of the rule books.
There exists special rules, special obligations of
morality unique to economic regulators such as
central bankers.
Besides not being
supposed to get caught copulating with staff on
the gold vault floor (which probably isn't even
that much a problem if a Frenchman is head of the
European Central Bank), central bank regulators
are supposed to act to ensure the viability of the
system as a whole. In looking after the system as
a whole, the threat emerges if one individual
actor in the system acts in such a way as to
threaten the whole system. Economists have a name
for financial-system-specific immorality; it is
called "moral hazard".
Just as it sets a
rotten example to the rest of the high school
student body to have the most unrepentant
drug-addled unwed mother on prison probation be
named student of the year, in the same way,
central bank regulators are not supposed to reward
individual action that acts to the detriment of
the system as a whole.
The experience of
the Great Depression, when bank runs led to a
cascading series of bank failures, and then to
economic collapse, has illustrated the importance
of bank deposit insurance, to assure depositors
that their money is safe. However, this puts bank
executives in a uniquely perilous situation. Will
they take extra risks with their loans, knowing
that the government will bail them out if their
risky loans go bad?
If this is the case,
it is feared that simple human greed, the
competitive pressures of the marketplace, will
indeed push them into taking more risk; in being
granted a responsibility to be a good shepherd to
the system but using that facility for personal
gain, these bankers are said to be presenting the
system with that "moral hazard".
There is
a standard central bank remedy for this problem.
Although the small individual depositors will
always be bailed out, the risky financiers who
made the imprudent investment and lending
decisions should not be, they would be "allowed to
fail". The example of their bankruptcy and penury
would act as a healthy disciplinary tonic for the
markets, reinforcing the age-old truism that great
reward comes only with great risk, and that the
practical effects of that risk going wrong can
sometimes be very painful.
In practice,
this led to something of an established central
bank double criterion for what do to in financial
crises. If the crisis did not originate from
imprudent financial risk-taking, from moral
hazard, central bank rescue action would be swift
and substantial. If, however, the crisis did
originate from imprudent risk-taking, the
misbehaving actors would not be saved, they would
be allowed to fail, and the system would in the
long run be better off for it.
Time and
time and time again, Greenspan violated this rule;
virtually every time he lowered interest rates in
his 18-year tenure, he was rewarding excessive
risk-taking in the markets.
His first
series of interest rate cuts, from just after the
1987 stock market crash to early 1988, bailed out
the players in the 1980s stock bubble. From
mid-1989 to 1993, the Fed repeatedly cut rates to
bail the economy out of the crisis caused by the
Savings and Loan housing mess, the subprime scheme
of its day. Fed interest rate cuts in 1995 bailed
big US money-center banks out of their imprudent
loans to Mexico, and the sharp cuts of autumn 1998
were clearly designed to save the system from
being sucked down into a liquidity vortex caused
by the collapse of the Long Term Credit Management
(LTCM) hedge fund.
In 2001, the Greenspan
Fed cut rates seven times, even before September
11, to counteract the burgeoning negative effects
of the dot-com crash.
Greenspan addresses
these events by claiming that, in each of them, he
was acting to save the integrity of the system as
a whole, to prevent crises originating in the
financial sector from causing recession or
depression in the real economy.
In most of
these cases he is probably right; there were
significant risks to the system as a whole.
However, all of these rescues acted to reward
those who engaged in moral hazard; in no cases
were the major economic and financial actors who
lent imprudently made to feel the full sting of
their impropriety.
Running a central bank
in this fashion is like the local fire department
subsidizing homeowners keeping gasoline and
explosives in their basements; you shouldn't be
all that surprised at the subsequent recurrent
conflagrations. Just as the fire department can
prohibit storage of dangerous materials and
mandate smoke detectors, economic regulators could
fight moral hazard with enhanced prudent
supervision and regulation; they actually did,
until the conservative laissez-faire revolution of
the late 1970s and 1980s.
Conservative
libertarians such as Greenspan will brook none of
that; it implies mere bureaucrats, collective
human agency, having dominion over his holy free
market. However, by not effectively regulating the
market, and by not allowing those who abuse moral
hazard to suffer the consequences, the market
supremacists such as Greenspan virtually guarantee
more and deeper crises to come. Just in the past
10 years, we've had three, LTCM, the dot-coms and
now the subprimes.
Is the example of
repeatedly rewarding moral hazard causing it to
happen more often, triggering more frequent
banking and financial crises?
Greenspan's
book is called The Age of Turbulence.
Perhaps the subtitle should not be "Adventures in
a New World", it should be, in deference to that
large portion of said turbulence caused by him,
"How I Reaped What I Sowed." If, as Antonio in
The Merchant of Venice says, "The devil can
cite scripture for his purpose," it shouldn't be
all that surprising that the "Infernal One" could
also cite Friedrich Hayek, Ayn Rand, Milton
Friedman and all the other great conservative
economic theorists that so influenced the public
life of Alan Greenspan.
The Age of
Turbulence: Adventures in a New World by Alan
Greenspan. Penguin Press HC, The (September 17,
2007). ISBN-10: 1594201315. Price US$35, 544
pages.
Julian Delasantellis is a
management consultant, private investor and an
educator in international business in the US state
of Washington. He can be reached at
juliandelasantellis@yahoo.com.
(Copyright 2007 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
