Charlie Rose Talks to Sebastian Mallaby
If you ask the smartest people, how do they rate Greenspan’s Fed tenure?
The standard line is that his inflation policy—his interest rates—was great, because inflation was very stable. But the way he messed up was on financial regulations, and that’s why we had the subprime crisis. Because I’ve looked into the politics of that regulation, I actually think regulation in Washington is almost impossible to get right. So I’m less critical of Greenspan on the regulatory side, but I’m therefore more critical on the monetary side. If regulation isn’t going to stop the bubble, then you need to use interest rates, too.
Did he relish his position in Washington?
He essentially established central bank status and independence by fighting back against the politicians. I think he did relish it, though sometimes he disguised that because he was shy. He’d go to a party, and he’d seem ill at ease. People would say, “Why did he come?” In the ’70s, they’d go to earnest conferences and discuss productivity. At the end, all the economists would go to the bar except for one, because there’d be a limousine outside with Barbara Walters inside, waiting for him to go to dinner.
You’ve made the argument that Greenspan’s personality affected his decisions at the Fed, an idea Ben Bernanke has taken issue with.
The notion that his psychological makeup has no relationship to his policy decisions isn’t very plausible. There was a paradox that Greenspan was extremely persuasive when it comes to one-on-one situations but was shy and diffident in groups. He was frightened of going directly at people with a disagreement. But to prick a bubble, you had to be able to take on public opinion. You had to say, “Your 401(k) is worth more than it should be.” He didn’t want to do that. His reputation imprisoned him. He was the maestro. The crisis was baked in by the time he left.
There are other Greenspan books. What prompted you to do this one?
I wanted to write a big sweep history of modern finance. He joined the Nixon campaign in the late ’60s, when the dollar didn’t fluctuate because it was tied to gold. Interest rates didn’t move much because they were capped. There were no derivatives. Over the next four decades, we created the modern system, and the person closest to the center of it was Greenspan.
Why did he join Nixon?
He was brought in by an Ayn Rand friend, a Libertarian who said, “We want to persuade Nixon to abolish the draft.” That was his first political document, not economics at all. And he got into the campaign. I found all the memos he wrote to Nixon in ’67, ’68. They were in Pat Buchanan’s basement. He was Nixon’s speechwriter. When I read them, you see the man going from giving advice on economic policy. ... By the end, he’s talking about messaging, spin, polling analysis. He was the guy who aggregated all the local polls, put them through his computer at work, and came back with advice on how you tweak the Nixon message. He later joined the Ford White House, and he would have these fights with Henry Kissinger, master of bureaucratic intrigue, but he lost when he was up against Greenspan. Greenspan would leak stuff to the press to discredit adversaries. He’d sneak in at the weekend to rewrite the president’s speech because some adversary had written it. He learned all the dark arts of politics pretty early on.
What did you learn about his ties to Ayn Rand as you wrote The Man Who Knew?
A lot of people read books like Atlas Shrugged when they’re 19 or 20. Greenspan was doing this in his 30s and 40s, and he gave this long series of speeches when he basically was Ayn Rand’s chief economist. I found them in the basement of a Rand fanatic living in the woods in Virginia. He had the 300-page transcript of Greenspan’s speeches. And in those speeches it says, “The creation of the Federal Reserve was an historic disaster.” You couldn’t make up the irony.
Will Donald Trump and Janet Yellen be able to coexist?
Trump’s economic program, insofar as we have details, is very inflationary. He wants to expand demand by having a tax cut, spending on infrastructure. And he wants to restrict supply by having zero immigrants, by disrupting trade deals. And all of this at a time when the economy is pretty hot, 2.9 percent growth in the last quarter. The Fed was going to raise rates before the election. It’s going to have to raise extra because of Trump. The president-elect won’t like that, and he’ll come after the Fed. Yellen will have to learn to defend her institution in the way Greenspan did in the early ’90s.
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