Central bankers usually speak in a language that is meant to confuse rather than clarify. Alan Greenspan was the high priest of this black art.
Greenspan was the master of the US’ monetary universe from 1987 to 2004. As chairman of the US Federal Reserve System, he set interest rates in the world’s most powerful economy and his decisions rippled out into our lives in other parts of the world. Through these 17 years, Greenspan communicated with his audience in sentences of stunning circularity. Most who tried to follow what he was saying found themselves tied in his verbal knots.
The Age of Turbulence—his recently released and already controversial memoir—is a pleasant shock to the reader. Greenspan writes with clarity and humour. He admits that the style he adopted at the Fed was unnatural—and takes a few good-natured potshots at it. He tells us about his friend Sanford Parker, an economist who worked with Fortune magazine. “Sandy was a real authority, and he had skills I didn’t have. For one thing, he knew how to write clearly in short, declarative sentences. He tried to teach me to do the same and almost succeeded; it was a skill I had to unlearn as chairman of the Fed.”
A renewed love for plain English is not the only thing that makes The Age of Turbulence a good read. Greenspan was at the helm of US economic policy through an era when capitalism renewed itself, spread across the globe and ignited what could prove to be the longest boom in human history. It was also the era of great upheavals—the stock market crash of 1987, Mexico’s tequila crisis in 1994, the Asian blowout in 1997, Russia’s default in 1998 and the subsequent collapse of hedge fund Long Term Capital Management, the dot-com bubble, the terrorist attack of 9/11 and, above all, the collapse of communism in 1989.
The orator: Criticism of Greenspan has grown since he stepped down as chairman of the US Federal Reserve.
Why above all? Greenspan says the world changed completely once the Berlin Wall came down. This change was not just political (which is obvious), but also economic. The death of communism showed the world the hollowness of central planning. Countries that were in its thrall embraced the market. Deng Xiaoping accelerated market reforms in China. Manmohan Singh used his crowbar to open India’s closed economy. Reformers took charge of the former Soviet bloc as well.
The entry of hundreds of millions of Chinese, Indians and East Europeans into the world economy put huge downward pressure on wages and prices. Inflation and inflation expectations dropped. Meanwhile, the growing economic clout of the relatively more frugal developing world increased the stock of global savings that were available for investment, thus bringing down real interest rates. These ignited the great boom of the 1990s.
The other big change that Greenspan tips his hat to is technology. He is a devotee of the Austrian economist Joseph Schumpeter, who became the patron saint of Silicon Valley because of his identification of creative destruction as the primary driving force of economic change. Usually, a fast-growing economy tends to set off inflation fires. Economists crunch data to identify a sustainable rate of growth beyond which an economy will overheat, forcing the central bank to increase interest rates.
The Age of Turbulence: Penguin, 544 pages, Rs695.
Greenspan quite correctly guessed in the mid-1990s that the use of computers was changing the traditional assumptions of the US’ sustainable rate of growth. The use of real-time information networks linked factory and retail checkout counter like never before. Companies could keep a constant check on the pulse of the consumer, allowing them to produce with fewer inventories and standby labour. The frozen capital that was released could be used productively elsewhere. This was what the famous productivity miracle of the previous decade was all about.
Greenspan held interest rates despite the fact that US growth was soaring and unemployment was dropping below what was assumed to be non-inflationary. What Greenspan is suggesting is interesting. The long boom after the early 1990s was because of events such as the collapse of communism, the rise of China and India, and the spread of information technology. These are changes beyond the control of either politicians or central bankers. Is this the insidious message that Greenspan is sending out?
Despite the growing band of critics who say that Greenspan’s decisions to cut interest rates in 1998 and 2001 created the stock and housing bubbles, there is little doubt he was one of the most remarkable central bankers in history. His memoir give us an interesting inside look at the momentous changes in the world economy over the past two decades.
On the other hand, the second half, where Greenspan wears his oracular gown and tries to tell us how he sees the world in 2030 is, for all the dramatic forecasts about an energy crunch and high interest rates, less impressive.
Greenspan has been a jazz musician, acolyte of libertarian writer Ayn Rand, a private-sector economist, an economic adviser to former US presidents Richard Nixon and Gerald Ford, and head of the US Fed under four presidents. But what comes out most strongly in this book is a classical liberal, disciple of Adam Smith, celebrating the power of market capitalism.
The India story
The author devotes six pages to India and he merely says what is already widely agreed upon
Six pages in a 531-page book don’t amount to much. That is the number of pages Greenspan has reserved for India in his autobiography. China gets an entire 17-page chapter.
Greenspan’s analysis of India’s stagnation and subsequent dynamism is quite ordinary. He trots out what is now widely agreed upon—that India suffered because of its Fabian socialism and how the reforms of 1991 allowed it to break out of the cycle of low economic growth. He writes admiringly about our technology entrepreneurs. What he says India needs to do to grow faster is unoriginal: more reforms, higher agricultural productivity, more flexible labour markets and more openness to FDI. There is, however, nothing on the nuclear deal with the US, the Naxalite problem and the demographic dividend.
It is clear that Greenspan is out of his depth as far as India’s challenges go. He has dealt directly with countries such as China, Japan and Russia—and it shows when he writes about them.
The Age of Turbulence: Penguin, 544 pages, Rs695.