Greenspan Book
Criticizes Bush And Republicans
'They Deserved to
Lose'; Former Fed Chief Defends
Pre-Bubble Rate Cuts
By GREG IP and EMILY
STEEL, WSJ Online, September 15, 2007
In a withering critique of his fellow
Republicans, former Federal Reserve Chairman Alan Greenspan says in his memoir
that the party to which he has belonged all his life deserved to lose power last
year for forsaking its small-government principles.
In "The Age of Turbulence: Adventures in a New World," published by
Penguin Press, Mr. Greenspan criticizes both congressional Republicans and
President George W. Bush for abandoning fiscal discipline.
The book is scheduled for public
release Monday. The Wall Street Journal bought a copy at a bookstore in
the New York area.
Mr. Greenspan, who calls himself a "lifelong libertarian Republican," writes
that he advised the White House to veto some bills to curb "out-of-control"
spending while the Republicans controlled Congress. He says President
Bush's failure to do so "was a major mistake." Republicans in Congress, he
writes, "swapped principle for power. They ended up with neither.
They deserved to lose."
Many economists say the Fed, by cutting short-term interest rates to 1% in
mid-2003 and keeping them there for a year, helped foster a housing bubble that
is now bursting. In his book, which was largely written before much of the
recent turmoil in credit markets, Mr. Greenspan defends the policy. "We
wanted to shut down the possibility of corrosive deflation," he writes.
"We were willing to chance that by cutting rates we might foster a bubble, an
inflationary boom of some sort, which we would subsequently have to address. ...
It was a decision done right."
He attributes the housing boom to the end of communism, which he says unleashed
hundreds of millions of workers on global markets, putting downward pressure on
wages and prices, and thus on long-term interest rates.
Mr. Greenspan retired in early 2006 after 18 years as chairman of the Federal
Reserve. He had served under six presidents as either Fed chairman or
adviser. He now runs a private consulting company; his only formal public
role is adviser to British Prime Minister Gordon Brown.
Penguin paid an advance of more than $8 million last year for Mr. Greenspan's
book, according to people familiar with the matter. Promotion for the book
includes appearances by Mr. Greenspan on CBS's "60 Minutes," NBC's "Today" and
CNBC, interviews with foreign and U.S. media, book signings and speaking
engagements. The book's official release comes a day before the
most-watched Fed meeting of the year. On Tuesday, Mr. Greenspan's
successor, Ben Bernanke, must decide whether to cut interest rates to cushion
the economy from the reversal of the housing boom that began under Mr.
Greenspan's watch.
His book is half memoir and half treatise on the state of the world and its
future. While much of the ground has been covered either in his own
previous public remarks or in other books, Mr. Greenspan sheds new light on many
policy decisions, offers often-trenchant observations of the presidents he has
known and makes some surprising economic forecasts, unmuffled by the often
opaque and complex phraseology he used as Fed chairman. Critics, however,
may seize on his continued defense of decisions they say led to first a stock
bubble and then a housing bubble, and on some assertions that differ from the
historical record.
Mr. Greenspan writes that when President Bush chose Dick Cheney as vice
president and Paul O'Neill as treasury secretary -- both colleagues from the
Gerald Ford administration, during which Mr. Greenspan was chairman of the
Council of Economic Advisers -- he "indulged in a bit of fantasy" that this
would be the government that would have resulted if Mr. Ford hadn't lost to
Jimmy Carter in 1976. But Mr. Greenspan discovered that in the Bush White
House, the "political operation was far more dominant" than in Mr. Ford's.
"Little value was placed on rigorous economic policy debate or the weighing of
long-term consequences," he writes.
From serving under so many presidents, Mr. Greenspan concludes that there's
something abnormal about anyone willing to do what it takes to get the job.
Mr. Ford, he writes, "was as close to normal as you get in a president, but he
was never elected." The Watergate tapes, he says, show Richard Nixon as
"an extremely smart man who is sadly paranoid, misanthropic and cynical."
He recalls telling someone who had accused Nixon of anti-Semitism that he
"wasn't exclusively anti-Semitic. He was anti-Semitic, anti-Italian,
anti-Greek, anti-Slovak. I don't know anybody he was pro."
Ronald Reagan's ability to instantly tap one-liners and anecdotes in support of
a particular policy represented an "odd form of intelligence." He
describes Bill Clinton as "a fellow information hound" with "a consistent,
disciplined focus on long-term economic growth" whose relationship with Monica
Lewinsky "made me feel disappointed and sad."
Mr. Greenspan makes no mention of his successor as Fed chairman, Mr. Bernanke,
other than in a caption accompanying a picture: "I was very comfortable
leaving the post in the hands of such an experienced successor," it reads.
He devotes chapters to each of the major economic challenges facing the U.S. and
the world. On energy, he recommends more use of nuclear power, and he
predicts efforts to reduce global warming with carbon caps or taxes will fail.
Rising income inequality could undo "the cultural ties that bind our society"
and even lead to "large-scale violence." The remedy, he says, is not
higher taxes on the rich but improved education, which can be helped by paying
math teachers more.
Mr. Greenspan returns repeatedly to the far-reaching importance of communism's
collapse. He says it discredited central planning throughout the world and
inspired China and later India to throw off socialist policies. He recalls
meeting a former manager of a produce distribution center in China who says he
once had to labor to allocate produce according to government edict; now the
allocations are made by auction. "Now I don't have to get up at four
a.m.," he quotes the manager as saying. "I can sleep in and let the market
do my job for me." Mr. Greenspan recalls his amazement when an adviser to
Russian President Vladimir Putin asks him to discuss Ayn Rand, the libertarian
philosopher with whom Mr. Greenspan had been friends.
In coming years, as the globalization process winds down, he predicts inflation
will become harder to contain. Recent increases in the price of imports
from China and a rise in long-term interest rates suggest "the turn may be upon
us sooner rather than later."
Left alone, he said, the Fed's policy-making body, the Federal Open Market
Committee, can keep inflation between 1% and 2%, but that could require forcing
interest rates to double-digits, a level "not seen since the days of Paul
Volcker," his predecessor as Fed chairman. "I fear that my successors on
the FOMC, as they strive to maintain price stability in the coming quarter
century, will run into populist resistance from Congress, if not from the White
House," he writes.
If the Fed succumbs to that pressure, inflation could rise from a little over 2%
at present to an average of 4% to 5% by the year 2030, he writes. Ten-year
Treasury yields, now below 5%, will rise to "at least 8%" with the potential to
go "significantly higher for brief periods." This, he says, will lead to
stagnant returns on stocks and bonds and much smaller gains in housing prices.
Mr. Greenspan won plaudits for achieving low inflation and unemployment with
just two mild recessions during his tenure at the Fed. But more recently
his record has taken some knocks. Some critics fault him for not doing
more to restrain the stock bubble of the 1990s, and for responding to its
eventual bursting with such low interest rates that housing prices subsequently
soared.
Mr. Greenspan writes that in early 1997, he told his colleagues the Fed should
raise interest rates as a "preemptive" move against a stock-market bubble.
But transcripts of Fed meetings from that period do not support his book's
version of events: They show Mr. Greenspan argued for a rate increase
principally because of inflation.
Write to Greg Ip at greg.ip@wsj.com
and Emily Steel at
emily.steel@wsj.com
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