A V Rajwade: The oracle speaks

WORLD MONEY

Greenspan's point that the bonus from globalisation has already been spent is worth pondering over.

As chairman of the US Federal Reserve, Alan Greenspan had cultivated a style of speaking a lot, without communicating what his intentions were "" in fact, interpreting Greenspan's statements had become a minor specialisation amongst Wall Street economists. Incidentally, heads of other central banks have also learnt from Greenspan, as manifest in the following headlines in the Indian press, both reporting on the same speech by Dr Reddy:

"Fed cut to determine RBI policy: Reddy" (Business Standard, September 24); and "Domestic factors to decide RBI moves, says Reddy" (The Indian Express, September 24).

More seriously, post-retirement, Greenspan seems to have become far more transparent in his interviews and writings, particularly in his recently published memoir The Age of Turbulence: Adventures in a New World. In his heyday, Greenspan had attained the status of an oracle, with his every word lapped up by an appreciative audience; media often described him as the second-most powerful man in the world economy. Speaking personally, I was never a great admirer of Greenspan, the man, as distinct from Greenspan, the longtime head of the world's most powerful central bank, mainly because of the company he kept and admired. He was a disciple of Ayn Rand, the high priestess of greed and selfishness. I had read The Fountainhead, one of her more celebrated novels, in my college days. Somewhere in the late 1950s or early 1960s I read her Atlas Shrugged. Neither of the novels impressed me very much as fiction "" but were instrumental in tempting me to read a book of her non-fiction writings and essays I laid my hands on a couple of decades later. Her thoughts were so extreme that I gave up reading the book in disgust half way through, unable to digest the paeans to selfish behaviour, which was the epitome of her philosophy "" she was a "fundamentalist" in every sense. My prejudice against Greenspan became stronger, after reading his praise of Dick Cheney and how "profoundly impressed" he was with Cheney, his "extra-ordinary intelligence" and (interview in The Wall Street Journal). To me, Cheney was and is a sinister (an adjective sometimes used to describe him by the US media) influence on US policy in Iraq, which has inflicted untold miseries on millions of innocents in that hapless country. It is a sign of the times that the only official position this chela of Ayn Rand and an admirer of Dick Cheney now holds is that of adviser to Gordon Brown, UK's Labour prime minister!

From the spate of interviews, articles, book extracts and reviews recently published about Greenspan and his book, several interesting points emerge. For one thing, the invasion of Iraq had everything to do with control of oil and little else. He is critical of the fiscal deficits incurred by the Bush Administration as a proper central banker should be: not for the tax cuts for the rich which led to the deficits, but because of the failure to cut expenditure (read social programmes). (Paul Krugman commented in The New York Times that Greenspan's criticism of the Bush fiscal policy has come "six years late and a trillion dollar short".)

His analysis of the crisis in the sub-prime mortgage market, and the unstable conditions in the credit market following therefrom, seems to be somewhat as follows. The root cause is Chinese surpluses that they invested in US treasuries keeping real bond yields very low, even when the Federal Reserve was raising short-term rates. Investors were demanding higher yielding securities and mortgage brokers were just meeting the demand, with Wall Street saying to the mortgage brokers "We will buy what[ever] you have got"; "it was the suppliers ... giving loans which ... most people couldn't afford" that led to the crisis (interview in Newsweek, September 24).

Another interesting point Greenspan makes is that it was globalisation, and the entry of a billion low paid workers in the world market, that led to low inflation rates the world over. He makes another point: the bonus from globalisation was a one-time effect, has already been spent and that inflation may average 4 per cent plus from now until 2030. The point is well taken and one wonders to what extent our central bank's medium term targets for inflation are realistic.

Greenspan had talked about the "irrational exuberance" in the US equity market in 1996, four years before the bubble burst. However, despite identifying the problem, he did not take any steps to cure the exuberance, and continued the easy monetary policy stance. His defense is that it would have required interest rates in double digits to burst the bubble; that this would have led to a significant slowdown in economic activity; in other words, that the cure would have been costlier than the disease itself. Well argued, sir! In our own recent economic policies, we have several instances of the cure being costlier than the disease. But more on this in a later article.

avrajwade@gmail.com