Book Review: The Age of Turbulence: Adventures in a New World

One of the things various people have said over the years about Alan Greenspan is that he tends to underestimate his own influence. Reading his book, I think I'm seeing that too. For example, in the introduction, he relates how after 9/11 he made a speech that put a brave face on things, saying that the economy had become resiliant to shocks, but he didn't fully believe it and didn't expect he was fooling anyone. Then he turned out to be right: the economy recovered relatively quickly. It's obvious to me that at least part of the reason the economy recovered so quickly is because Greenspan suggested that it would. People believed (correctly, in my opinion) that he was the leading economics expert in the world, and so when he made positive statements, that gave people confidence, which generally has a lifting effect on the economy. Another example: barely a page later, he relates that after a meeting with lawmakers, he went home thinking all he'd done was reinforce what the lawmakers were already thinking, but the press acted like it was his agreement that made the whole thing happen. Well, it probably was. Apparently the lawmakers in question actually believe that the Chairman of the Fed is some kind of expert on economics, and if he agrees with what they're thinking, that gives them the confidence to go forward with it, and if he has reservations (as at the previous meeting) they hesitate (as they did). So now when out of retirement he comes out with a book saying that we are now living in a world with a "global capitalist economy that is more flexible, resilient, open, self-correcting, and fast-changing than it was even a quarter of a century earlier", people are going to believe that, too, and they're going to behave accordingly. I wouldn't have been very surprised if in the wake of the book's publication the economy surged up a bit: Greenspan just said a bunch of positive things about the economy, so let's all go out and do stuff with money. (It didn't work out that way because there were other forces at work, some of which I mention below...)

The historical narrative in the first half of the book is fascinating, not because I wasn't familiar with the basic events (I lived through and remember most of chapters 5-11), but because the perspective of an economist lights things up just differently enough to show up some things (trends, causes, and generalities) that I'd not been aware of before. Greenspan is a much better writer than I would have expected, and his story is compelling.

After going through the economic history of the last several decades, the author goes on to explore the economic issues that are currently facing various parts of the world, and the cultural and political issues that have important implications for economic policy and development. This is interesting material, as well, though of course much remains to be seen regarding how history will bear out his predictions.

Reading this book has raised in my mind some questions.

First, why is the short-term federal funds rate the only lever that the central bank in the US has to effect monetary policy? (I'm not saying, necessarily, that there should be other levers; I'm asking the question because I don't know the answer.) Greenspan indicates that the Fed was aware of the risk to the economy posed by the "irrational exuberance" of the dot-com bubble but was unable to do anything about it. Indeed, they briefly attempted to control the rising stock prices but found their measures ineffective and possibly counterproductive over the long term, so they left off trying. We can't fight market forces, they concluded. So then we had the dot-com bust and several years of pretty hard times for the IT industry, which had an impact on the entire economy. Not much later the Fed again saw a sudden inflation in another market they cannot effectively oversee, the real-estate market. There was nothing they could do about it, and when the bubble popped the housing market deteriorated quite significantly. The results include a credit crunch and the bankruptcy or collapse of a number of major lenders, especially in the subprime market (i.e., creditors that lend to normal people who don't have the 20% downpayment and other resources needed to get the best interest rates). A lot of first-time home buyers have been foreclosed, as I understand it not so much because of wrong that they've done as merely because the market now cannot support the loans they were offered during the real-estate boom. The home (which is the collateral) is not worth the outstanding loan amount, so if they can't make a payment they're stuck: there's no basis for an extension, and they can't sell their way out. This sort of thing is obviously not good for the overall long-term health of the economy, but what could be done about it? Are there additional levers that could (if Congress were so inclined) be granted to the Fed to assist them in more effectively smoothing out short-term economic forces and promoting the long-term health of the economy? And if so, what would be the other consequences of giving the central bank these additional powers?

Price controls obviously are NOT the answer. Just about all modern economists take it as an axiom that if the markets get too far out of touch with reality they will eventually correct themselves, and it is these market corrections that cause all the problems. The sorts of controls that characterize central planning (socialism and especially marxism) are only good for forcing markets further out of touch with reality, which invariably causes more problems than it solves, as Eastern Europe discovered.

However, the role of the central bank, primarily, is to control macroeconomic forces, most especially the value of money. (This is why we call it monetary policy, after all.) Controlling inflation (and deflation, if that becomes an issue) is very clearly within their mandate. But if the inflation occurs because of a situation in a market over which they have little or no influence, how can they control that inflation and keep the value of the currency stable? Besides the stock market and real estate, what other markets are there that the Fed cannot readily influence? What dangers does our economy face in the future? Just for instance (and purely *cough* hypothetically, ahem), what if labor becomes significantly overvalued? What kinds of havoc would the resulting market correction wreak?