Alan Greenspan had some explaining to do.
In 2000, The Washington Post’s Bob Woodward published a biography of the chairman of the Federal Reserve Board entitled “Maestro,” with the cover image portraying Greenspan in full oracle mode: testifying before Congress, hands gesturing like a professor explaining some complexity to struggling students.
The cover line conveyed the message: “Greenspan’s Fed and the American Boom.”
But by 2009, the confidence, the gesticulations and the aura were all gone, replaced in the public mind now by a computer generated image in Time magazine of Greenspan posed as if in a police mug shot, hands resting meekly at his side and head hanging slightly.
It was with the two Greenspan images – the maestro and the mug shot – as bookends to his lengthy Washington career that the 82-year old Greenspan took to the stage before the Economic Club of New York Tuesday night to explain himself and the global economy to an increasingly skeptical world.
But if the economic and Wall Street luminaries who crowded the Grand Ballroom of the New York Hilton came to hear a mea culpa, they left sorely disappointed.
Greenspan spoke softly, arms spread wide at the lectern, head down so he could read his speech, and rarely offered any insight into his own role in the global financial disaster.
After his prepared remarks, Greenspan took a question from Jacob Frenkel, the former Israeli central banker and vice chairman of the insurance giant American International Group that was bailed out last year by the federal taxpayers to the tune of more than $100 billion.
With the benefit of hindsight, Frenkel wanted to know, what were the decisions that should have been made to prevent the calamity?
The question was a perfect launching pad for an admission of some degree of personal responsibility. But Greenspan didn’t go there. Instead, he said it was the very success of the Federal Reserve – largely under his tenure – that created the opportunities for “asset bubbles,” like the ones in technology stocks and the housing market. The very effort of creating “balance in the economy,” he said, creates “periods of euphoria.”
“Is there a way to suppress that? I’m not sure,” Greenspan continued. “There has never been to my knowledge any historical evidence that that has happened.”
Translation: Sure, I didn’t stop the market mania and subsequent crash, but no one else did, either. Besides, it’s probably impossible anyway. Before returning to his seat, Greenspan added dryly, “I wish those who think it’s possible well.”
Greenspan has plenty of company in the legacy management business these days.
President Bill Clinton, who reappointed Greenspan to the Federal Reserve shortly after his election in 1992, has gone on something of a PR offensive of his own recently, deflecting questions about his own blame for the economic crisis.
Clinton acknowledged on CNN that he could have put in place more stringent regulation of some of the exotic derivatives that are at the heart of the financial crisis. But he told NBC that he doesn’t belong in the Number 13 slot on Time’s list of people to blame for the meltdown.
“Do any of them seriously believe if I had been president, and my economic team had been in place the last eight years, that this would be happening today?” Clinton asked. “I think they know the answer to that: No.”
Another luminary badly tarnished by the market meltdown has been Clinton’s former Treasury secretary, Robert Rubin. He’s been blamed for pushing deregulation – and particularly for blocking efforts to regulate the exotic derivatives market, which became a key component of the market wipe out. And his post-government career has seen a humbling ebb.
He was forced out of his senior position at Citigroup earlier this year after spectacularly bad results at the company that once aspired to be a “financial supermarket.”
Even Bush Treasury Secretary Henry Paulson, who as recently as last fall was crowned by some in the media as “King Henry,” has seen his reputation unraveled by his zig-zag approach to the Wall Street bailout.
For Greenspan, the high watermark of credibility perhaps came in 2004, when he said that the global economy was strong – and the nation’s financial firms were well positioned.
“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient,” Greenspan said then.
The global economic collapse began in 2007, after Greenspan retired in January of 2006 after nearly 20 years as head of the nation’s monetary policy.
Comments like that are one reason many Greenspan detractors weren’t eager to hear what he had to say Tuesday night.
Generally, his critics argue that Greenspan kept interest rates too low for too long, resisted regulative efforts that could have prevented much of the meltdown and didn’t do enough to stop speculative bubbles in the stock and housing markets before they grew large enough to damage the entire economy.
“If he would just shut up and go away, there would be no need to personalize this,” said hedge fund manager William Fleckenstein, who authored a harshly critical book on the former fed chief in 2008 entitled “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.”
“But he won’t shut up and go away, and he’s trying to play for the history books,” Fleckenstein said. “But he has only one place in the history books, and that is as the author of this chaos that’s nearly vaporized the world’s financial system.”
Still, Greenspan has his defenders. Among them is Carnegie Mellon economist Allan Meltzer, whose history of the Fed came with an introduction penned by Greenspan.
Meltzer argues that the low Greenspan interest rates did spur too much borrowing, but “many of the people who blame Alan Greenspan for the debacle that followed forget to add that it was their decision to buy mortgages and finance housing.”
“That was their error, Meltzer said. “Greenspan did not make them buy assets that defaulted later. They could have bought Treasury bills.”
Another Greenspan backer is John Castellani, president of the Business Roundtable, an association of 160 chief executive officers.
“It’s unfair to go back and look at this in reverse,” Castellani said. “Remember, his judgment was so respected that Democratic and Republican presidents alike felt comfortable with him there. And remember too, it was Alan Greenspan who warned about ‘irrational exuberance.’”
In his speech Tuesday night, Greenspan touched on some of the hottest issues in Washington.
He warned that American debt, which has been dramatically increased by the economic stimulus spending in Washington, can’t increase forever.
He also predicted further U.S. home value declines – citing estimates that housing values might go as much as 10 percent lower than their already deflated current levels – and said federal policy makers must be prepared for a longer housing slump.
Finally, Greenspan said that – despite his career-long preference for low federal regulation of the financial markets, he saw “no alternative to a set of heightened federal regulatory rules for banks and other financial institutions.”
Even before Tuesday night’s address, the former Fed chief had begun to offer a revised take on his legacy, and his analysis has clearly been evolving over the past year.
In a speech to Georgetown University last fall, Greenspan seemed to blame the market wipeout on a failure of honor on Wall Street.
“In a market system based on trust, reputation has a significant economic value,” he said. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”
In late October, he opened the door a bit more in testimony on Capitol Hill. Asked by Rep. Henry A. Waxman (D-Calif.) if he’d been wrong in his faith in the market’s ability to self regulate, Greenspan responded, “Partially.”
He also admitted to being surprised by the ferocity of the downturn, saying: “This crisis has turned out to be much broader than anything I could have imagined.”