Winner of the George S. Eccles Prize in Economic Writing
Former Chairman of the Federal Reserve Alan Greenspan was once hailed as the omnipotent “maestro” of the U.S. economy, but his reputation suffered in the aftermath of the 2008 financial crisis. In The Man Who Knew: The Life and Times of Alan Greenspan, a new biography based on five years of research and unmatched access to Greenspan, Sebastian Mallaby presents a nuanced assessment of one of the most influential economic statesmen of the twentieth century and issues a warning about the future of finance. The story of Greenspan, according to Mallaby, is the story of the making of modern finance, for good and for ill.
Mallaby, the Council on Foreign Relations Paul A. Volcker Senior Fellow for International Economics, is a Washington Post contributing columnist and two-time Pulitzer Prize finalist, as well as the author of several books, including the best-selling More Money Than God. The Man Who Knew won the 2016 Financial Times and McKinsey Business Book of the Year Award. A review by Martin Wolf in the Economist has called the book “superb,” saying that it “throws a sharp light on American policy and policymaking over four decades.”
Born with a talent for crunching statistics and a reverence for the self-made railroad tycoons of the Gilded Age, Greenspan rose from humble origins in the Jewish enclave of Washington Heights, New York, to an influential career in Washington, DC. When Greenspan first entered public service—as an advisor and part-time polling analyst for Nixon—interest rates were regulated, financial derivatives barely existed, and the value of the dollar was pegged to gold. By the time he retired, this relatively regulated system had been replaced by something judged by many to be a freewheeling free-for-all.
As finance changed out of all recognition, Greenspan changed as well. As a young man he came under the influence of the libertarian writer Ayn Rand, and declared that the creation of the Federal Reserve System had been “one of the historic disasters in American history.” But as he worked for Nixon and successive Republican presidents, Greenspan shed his ideology, gradually becoming a more pragmatic figure and even blocking radical supply-side economic policies during the Reagan administration.
“Because Greenspan dominated monetary policy so completely for almost two decades, his impact on history is best viewed through a monetary lens,” writes Mallaby. “On the one hand, he brilliantly limited fluctuations in inflation. . . . On the other hand, Greenspan utterly failed to limit leverage and bubbles, and this failure magnified financial fragility. Because he conducted monetary policy with a view to ensuring price stability, not financial stability, Greenspan allowed this fragility to grow and grow,” Mallaby argues.
Most histories of the 2008 crisis have ascribed blame to Greenspan’s excessive faith in the self-policing efficiency of markets. Drawing on original reporting and documents from Freedom of Information Act requests, Mallaby shows why this is wrong: Greenspan knew that financial instability mattered and even attempted to impose regulatory restraints on unsafe mortgage lending in the lead-up to the housing bubble. But Greenspan ultimately focused on inflation, reflecting the reality that “controlling asset prices and leverage was hard; fighting inflation was easier.” This decision to downplay financial stability was “Greenspan’s most consequential error,” Mallaby asserts. He warns that, “by committing itself more formally to inflation targeting after Greenspan’s retirement, the Fed has unfortunately compounded this problem.”
Because Greenspan understood financial fragility better than most, Mallaby calls him “the man who knew.” The question, according to Mallaby, is why Greenspan did not act, and whether anyone else could or would have.
A Council on Foreign Relations Book