BOOK REVIEW

The Man Who Knew: The Life and Times of Alan Greenspan
By Sebastian Mallaby
Bloomsbury Publishing, 2016, 781pp R. Ayyappan Nair

It is not sure how history will remember Alan Greenspan, the former
chairman of the Federal Reserve, who was revered while he headed the
Fed Reserve- President Bill Clinton was asked by a journalist what it was
like to be the most powerful man in the world, he famously pointed to
Andrea Mitchell, NBCs White House correspondent, and said, Ask her.
Shes married to him - and scorned when he left the Fed Reserve.
Sebastian Mallaby, formerly a journalist at The Economist and now a
senior fellow at the Council on Foreign Relations in New York and the
New York Times bestselling author of More Money Than God: Hedge
Funds and the Making of a New Elite, in this well researched and
elegantly written biography, provides a sweeping account of the life and times of Alan Greenspan that
may help in making up ones mind about the legacy of Greenspan. Mallabys book has already been
critically acclaimed and was chosen as the Financial Times and McKinsey Business Book of the Year
and also features in every major list of best business books for 2016.

Alan Greenspan, the man credited with many titles like maestro, the best central banker we have
ever had, remains a paradoxical figure. Born on March 6, 1926, and grew up with a single mother,
Greenspan is a man of many contradictions. As Mallaby writes, He is painted as an Ayn Randloving
libertarian ideologue. Yet one of the many paradoxes of his rich life is that his bond with the
uncompromising Rand coexisted with a malleable pragmatism. He was a Jew who advised the
frequently anti-Semitic Richard Nixon. He was a conservative who could advocate tax hikes. He was a
libertarian who repeatedly supported financial bailouts. He was an economist who often behaved
more like a Washington tactician. A man who embraces the gold standard and then presides over the
financial printing press is surely no simple ideologue.

Mallaby takes the readers through a long journey from Greenspans childhood as a shy boy who was
good with numbers, through his sophomore years where he developed an interest in music - he played
the tenor saxophone and clarinet and became a sideman in a band - as well as baseball, which he
played and analysed, his college life in New York University where his first tryst with economics
happened Mallaby calls him an un-Keynesian despite the influence of Keynesian thinking during
those years and shaped his own economic thinking, his professional life as a data-obsessed
forecaster, his 18 years as Chairman of the Federal Reserve only William McChesney Martin, who
led the Fed from 1951 to 1970, outlasted Greenspan by a few months a period during which he
achieved almost sainthood status as a central banker, and, finally, the financial crisis and the downfall
in his reputation, where the reassuring maestro became popular villain.

A brilliant writer and a careful biographer, Mallaby, spends considerable amount of time in disposing
the widely perceived caricature of Greenspan as a rigid, free-market libertarian who believed in
laissez-faire ideology. The difficulty faced by Mallaby was how to reconcile the libertarian beliefs held
by Greenspan - his following of Ayn Rand, known for her fierce libertarianism, his belief in free markets

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and lesser role of the state, his pronouncement that a laissez-faire economy was the only moral and
practical form of economic organisation- and his actions managing politicians across the aisle over
a long tenure, practicing discretionary monetary policy despite his belief in the gold standard and irony
of ironies leading the Federal Reserve after describing the creation of the it as one of the historic
disasters in American history. In Mallabys account, it was his urgent desire to be at the centre, at the
heart of policy making, to be right, and know he was right that overcame his instincts and beliefs. He
had an innate ability to deal with politics and politicians as he knew which battles he could not win.
His long public service, both pre-Fed years and during his time in the Fed spanning both Republican
and Democratic administration, is a testament to his managerial skill.

Greenspans skills, which made him an instinctive bureaucrat who excelled at compromise and
manipulation, was honed while being part of the Nixon administration in different capacities.
Greenspan had a love-hate relationship with the then President Nixon. Part of the problem was they
believed in different ideology Greenspan in laissez-faire while Nixon in active intervention.
Greenspan performed metamorphosis with lan: from loyal Nixon campaign aide to unrelenting Nixon
critic to top economic advisor to Nixon. In the process, he was also party to some of Nixons dirty
tricks. Mallaby provides a vivid account of the disgraceful ploy of the Nixon administration to curb the
authority of the then Fed chairman, Arthur Burns, and Greenspans involvement in it. Burns had been
urging the president to take a stand against inflationary wage increases. To bring Burns in line, the
Nixon team planted a deceitful story in the press that Burns had simultaneously been lobbying behind
the scenes for a personal pay raise. Coupling this charge of hypocrisy with crude intimidation, they
would also inform reporters that Nixon was contemplating a reorganization of the Federal Reserve to
curb the chairmans authority. To complete their subjugation of the central bank, Nixons operatives
recruited Greenspan. They knew that he was close to Burns, and they viewed him as a loyal messenger.
Though Greenspan insisted that he refused to do what was asked of him, Mallaby provides credible
evidence to the contrary from Charles Colsons notes, a key member of the trio of Nixon advisors and
who would later serve jail time for organizing Nixons dirty tricks, as well as White house tapes.

Greenspan was welcomed with a blast of sceptical commentary when he took charge as the Fed
Chairman as he was taking over from Paul Volcker who by breaking the back of the inflation and
wielding his authority has built an impeccable reputation. The Markets Wonder Whether Alan Can
Fill Pauls Shoes, a headline in the Economist proclaimed. Greenspan would be unable to dominate
the Federal Reserve Board the way Volcker had, the Fed-watching journalist William Greider
predicted; he would be unable to intimidate the politicians. Where Volcker had exuded a stern sense
of public duty, having come to the chairmanship after a career spent mainly at the Treasury and the
New York Fed, Greenspan was a networker, a shape-shifter, a man of multiple relationships and lives.
He seemed more likely to bend to the will of the White House. Greenspan knew that he had to use all
his skills to survive at the Fed. He did this with aplomb and over the 18 years as Fed Chairman, he used
his prowess over data to manipulate the opinions among members of the Feds interest rate-setting
body, the Federal Open Market Committee, tied opposing members of FOMC to frivolous committees
while carefully manoeuvring FOMC meetings to undermine their influence, and he picked his fights
with care and avoided confrontation by relying on others to make his case aggressively. One may find
it easy to caricature Greenspan as a power-hungry bureaucrat. But to survive long in the high-stakes
world of economic decision-making, Greenspan had to be on top of his game, which at times deviated
from the moral courage one may expect from people in positions of authority.

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As Mallaby documents, Greenspans earlier stints in the worlds of business and politics made him
increasingly pragmatic and empirical. On several occasions this came in handy as his empiricist training
helped him to better decipher data and cement his belief that economic relationships are not static.
There were several instances during his long tenure where Greenspan did not agree with the staff
forecasts and relied on his interpretation of the data and instinct, which ultimately proved to be right.
A case in point was in 1996 when nobody could explain for the contradiction between rising profits on
the one hand and the apparently flat rate of productivity growth on the other. This mattered because
if productivity was truly flat, inflation was looming and the Fed ought to raise interest rates. But if
productivity was accelerating, it followed that there was no pressing need to head off inflation.
Greenspan had a hunch that that productivity was rising faster than the aggregate numbers indicated
and instructed the researchers to break down the productivity data by business sector. During this
period, eight of the twelve regional Fed presidents were petitioning for higher interest rates and
whats more, the position of these Fed presidents was reported by Reuters, much to Greenspans fury.

The Fed staff researchers duly assembled detailed statistics for productivity across 155 separate
categories of firm, going back to 1960. In this prodigious trove of data, Greenspan found what he was
looking for. While the productivity in manufacturing had been rising robustly, according to the detailed
data, productivity in services had actually fallen. This did not jell well with the actual experience and
seemed implausible, given the enormous investments in information technology made by law firms,
business consultancies, and other service outfits. This meant that they had every incentive to extract
new efficiencies from their workers and they could scarcely getting less out of them. This proved that
the data was flawed. By showing that productivity was growing faster than the official data revealed,
Greenspan was able to defeat the monetary hawks on the FOMC and save the economy from a
premature interest rate hike.

Greenspan also excelled in the art of communication, or the lack of it. He was a master of evasion.
Mallaby quotes the Nobel laureate Robert Solow, who once compared him to a bespectacled sea
squid: sensing danger, Greenspan would flood his surroundings with black ink and then move away,
silently. He famously told the Congress during a testimony that If I seem unduly clear to you, you
must have misunderstood what I said.

Though Mallabys characterization of Greenspan in general is well balanced and he debunks the
conventional caricature of Greenspan as a free-market ideologue but as someone who evolved over
a period time and who understood how politics and economics work in practice, his laboured
explanation of Greenspans role in the 2007 financial crisis is not convincing. Mallaby argues that The
tragedy of Greenspans tenure is that he did not pursue his fear of finance far enough: he decided that
targeting inflation was seductively easy, whereas targeting asset prices was hard; he did not like to
confront the climate of opinion, which was willing to grant that central banks had a duty to fight
inflation, but not that they should vaporise citizens savings by forcing down asset prices. It was a
tragedy that grew out of the mix of qualities that had defined Greenspan throughout his public life
intellectual honesty on the one hand, a reluctance to act forcefully on the other. In Mallabys opinion,
Greenspan should have used tighter monetary policy to curb build-up of asset price bubbles and
address the build-up of financial risks which were the proximate causes of the financial crises.

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However, Mallabys argument that it was Greenspans personality,
haunted by the absence of a pale father, intimidated by the presence of a vivid mother, he often
lacked the confidence to confront others personally and directly, which prevented him from taking
decisive actions, is weakly supported. Moreover, Mallabys selective quoting of FOMC transcripts to
draw his conclusion is at best a weak attempt at reconciling with his own beliefs about what a central
bank should do when it sees symptoms of financial fragility. It would have been far more convincing
had Mallaby held Greenspan accountable for his failings on the financial regulation aspect as
increasingly post-crisis evidence point to lax regulation and supervision as the principal shortcomings
in central bank policies prior to the crisis.

Mallaby himself paints Greenspan as someone who was willing to entertain the possibility that
financial markets could go seriously off the rails and time and again demonstrated - the 1987 crash,
the 1990s credit crunch, the Asian crisis, the collapse of Long-Term Capital Management, the Russian
default, the tech bubble - that he stood ready to use the Feds lending, supervisory, and monetary
powers as needed to protect the financial system and the broader economy from bouts of financial
instability. Therefore, Mallabys psychological hypothesis that it was Greenspans timid personality
that was responsible for not doing his job because he felt the heat is not credible. As Bernanke
recently wrote in a blog post, people in Greenspans position (I can say, with some authority) put
great weight on their reputation and legacyhow they will be regarded even after they leave office.
Therefore it is more likely that the reason Greenspan took the monetary actions he did is because at
the time he thought they were the best policy. A more plausible explanation is that Greenspan did
not think that the increase in house prices would lead to such a devastating crisis. If he was the man
who knew, it was unlikely that he would not have acted. Be that as it may, this is a minor quibble in
an otherwise excellently written book.

In the introduction to his book, Mallaby says, one of the virtues of biography is that it allows readers
to understand decision making as it really is imperfect, improvised, contingent upon incomplete
information and flawed human nature. But while one task for the historian is to judge past
generations, a second is to show future generations how and why their capable predecessors strayed.
After all, tomorrows financial statesmen will grapple with the same limitations that Greenspan
confronted. They will be expected to forecast crises but will lack the tools to do so. They will be called
upon to eliminate financial risks when such risks are inescapable features of the human condition.
Mallabys overall judgment on Greenspan is mostly positive, though he says Positive or not, I hope
this history is instructive. He credits him with foresight on a range of matters that now tend to be
forgotten in the shadow of the financial crisis. The only serious blemish being, underestimating the
costs of financial instability.

The independence of central banking is always qualified and the politics associated with it often brutal.
We live in a post-truth world, where there is a reliance on assertions that feel true but have no basis
in fact. Mallabys dispassionate account of Greenspans life and time gives us a better perspective of
an individual who financial markets viewed as infallible. It shows that we are all conditioned by our
experiences and the environment in which we operate. The book is a fascinating read and is ----. From
hero to antihero, from maestro to villain, his story is a fable of the land that made him. The message
from the book is loud and clear: Alan Greenspan may be The Man Who Knew. But he was (and is) as
fallible as any human being.