Lunch with the FT

July 30, 2010 5:12 pm

Lunch with the FT: Alan Greenspan

Former Fed chairman talks about his legacy
An illustration of Alan Greenspan

Escaping the latest of a string of steaming hot summer days, I duck gratefully into the cool interior of Tosca, an Italian restaurant in the lobbyist quarter of Washington DC. From the pavement it is not prepossessing, curtains entirely screening off the interior and presenting a blank face to the world. But the busy, clubby interior hums with power. Situated conveniently between Capitol Hill and the White House, and in the neighbourhood of some of Washington’s most powerful political consultancies, it has a reputation as a location for political deals and power-broking at the highest levels. It was here, legend has it, that Tom Daschle spent a five-hour dinner persuading Barack Obama to run for the US presidency. It is very DC.

Entering a second after me is Alan Greenspan, former chairman of the US Federal Reserve. For nearly two decades he was one of the most powerful people in Washington, and indeed the world, and for many he became a symbol of the global economy in the days before it all went wrong. Greenspan is welcomed at the desk with a smooth greeting of “Hello, Mr Chairman,” the restaurant adhering to the reflexive Washington habit of addressing people by the titles of their offices even years after they have left them.

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Lunch with the FT

We are ushered through the buzzy dining room to a relatively secluded table in the corner. The 84-year-old Greenspan, neatly and soberly dressed, speaks softly but rapidly. He chooses a Diet Coke, the default beverage of official Washington. Suppressing a mad urge to call for a large Scotch just to be different, I ask for sparkling water.

I remark on the fame of the restaurant and he looks amused. “My wife suggested it.” He is married to Andrea Mitchell, chief foreign affairs correspondent for NBC television, who by his account is outgoing and sociable and a good foil to his more reserved character. You get the impression that he is very happy to outsource a lot of such decisions to her. He asks if he can pay. I explain that part of the game is for the FT to pick up the bill. He grins. “So there is such a thing as a free lunch.”

It’s not a view you often hear from central bankers. But for much of Greenspan’s tenure at the Fed – he was chairman from just before the 1987 stock market crash until 2006 – it looked as if it were true. The economy grew, the stock market surged, house prices rose and Wall Street kept getting richer. Then, just a year after Greenspan handed over the Fed joystick to Ben Bernanke, a credit crunch began that turned into a global financial crisis, and the entire system of finance capitalism, of which Greenspan had been such a powerful advocate, threatened to eat itself.

Critics who long thought that Greenspan was too enthralled by free enterprise and financial markets have claimed vindication. Typically, he has been ruminating deeply about the implications of what has happened, and synthesising his thoughts into an argument. It is a long habit: before arriving at the Fed he spent three decades running an economic consulting firm in New York, interrupted by a stint as chairman of President Gerald Ford’s council of economic advisers. In preparation for our meeting he sends me a 46-page treatise he has written about the crisis.

. . .

“Do you want to get started?” he says. He means the interview, not lunch. Before we get round to ordering, we’ve gone through the near-impossibility of being able to predict the global financial crisis (which he illustrates by tracing a probability distribution in the air with his finger), the assumptions underlying financial regulation, the parallels with the financial panic of 1907 and the impact of the end of the cold war on global saving rates. I reported on the Federal Reserve early in the 2000s when Greenspan was chairman, and memories of long conversations with him in this professorial style are rapidly coming back to me. He does his research – at one point quoting from a story of mine that appeared in the FT the morning of our lunch – and marshals his arguments.

Though he professes not to speak in complete sentences – unlike his wife, he says, who can talk in perfect paragraphs on any occasion – and enjoins me to clean up the syntax of whatever I quote him saying, it turns out to be unnecessary. His manner is measured, precise and academic, though he makes his points forcefully, gripping the table as he argues. “Remember my premise,” he says, more than once, while going through a logical progression.

He has admitted to having been “30 per cent wrong” in his time as Fed chairman, particularly in assuming that banks and financial institutions would closely monitor the creditworthiness of the people with whom they were doing business. But his present plan for preventing a recurrence of the global financial crisis still shows a predilection for the light touch: make banks hold more capital to back their lending, demand higher collateral that can be seized if financial transactions go wrong, and keep more cash on hand in case of emergencies.

In extremis, he says, banks might have to be broken up by law if they become too big to fail without bringing down the whole financial system. But he makes clear that he regards such an intervention as a last resort. He retains faith in markets and doesn’t even think that US-style finance capitalism will lose ground to the softer, more regulated model of European social democracy, let alone the appeal of a centrally planned economy such as the former Soviet Union. It is a question of making precise technocratic adjustments.

I wonder whether this limited solution is a proportionate response to such an economic cataclysm. Many, including Paul Volcker, his predecessor at the Fed, have urged much tougher constraints on banks. “If you mean is it a proportionate emotional response to the people who have really lost a great deal through no fault of their own, the answer is no,” he says. But in terms of what needs to be done, the solutions can be narrowly focused: revise the likely probability of financial catastrophe in the light of new evidence and make banks behave accordingly. “A necessary condition for my position is that this is a very rare event,” he says. The implosion of the debt bubble that had built up, and the extent to which it almost caused the entire financial system to stop working, was not anticipated by financial regulators.

After 15 minutes we look to our menus. Eschewing elaborate formulations such as black ink tagliatelle with crabmeat ragu, Greenspan opts for a more ascetic dish: grilled swordfish with roasted organic vegetables. Mindful of the difficulties of conducting an interview while slurping pasta, I reluctantly pass up the carrot pappardelle with rabbit and also go for a simple dish: grilled baby octopus with a green salad. The food arrives swiftly and we start eating, Greenspan taking small forkfuls of swordfish dipped in Dijon mustard.

. . .

The other part of his record seized on by critics, especially Democrats, is his support for two rounds of tax cuts. One came in 2001 at the beginning of the administration of President George W Bush and one two years later. The week before we met, with an eye to the US’s huge fiscal deficit, he told an interviewer that he supported reversing those tax cuts, a remark seized on by his detractors to argue that he was irresponsible to have backed them in the first place. Here, too, he has a carefully worked-out response. One, both administration and congressional forecasts back then predicted huge fiscal surpluses, so a tax cut was quite sensible. Two, he argued at the time that a second round of cuts should be made conditional on how the economy and the public finances developed, which they were not. Three, he underestimated how his words would be seized on to justify reducing taxes willy-nilly, and he has already admitted that mistake in his 2007 memoirs, The Age of Turbulence . “Criticisms are wholly deserved when you’ve done something wrong, I grant you,” he says. “But I still prefer when I’m criticised that it be accurate.”

The plates are cleared and we move on to coffee. He orders a cappuccino, I an Americano. The formal business of the symposium having been concluded, I move on to more personal matters. When he was Fed chairman, he had dozens of the smartest economists in the world as a resource and endless conversations with brilliant colleagues and counterparts around the world. For him, personally, how much of a wrench was it to leave it all?

The answer, it turns out, is not a huge one. He does hanker for the regular free-form meetings he used to have with Fed officials, sitting round for hours and talking about whatever interested him that day. Rather wistfully, he says he also misses the regular breakfasts he had with Larry Summers, then in the Treasury under the Clinton administration and now President Barack Obama’s chief economic adviser. Many colleagues regard Summers as abrasive, but Greenspan sounds affectionate. “We had a wonderful time,” he says. “I know the guy has a lot of people thinking he’s a little rough sometimes, but he is smart. Larry is really smart.”

But aside from the odd vacation playing golf or tennis in Aspen or Jackson Hole, Wyoming, where he stays on a ranch owned by longstanding friend and former World Bank president James Wolfensohn, Greenspan has plenty of work to keep him busy. Before joining the Fed, he ran his own economic consultancy and developed a phenomenal knowledge of abstruse data series and statistics. Even when he was Fed chairman, he still spent at least half his day in personal study. Now, with his central banking career over, he has gone straight back to what he did before, running a research operation with a handful of employees. This time he is aided by the power of modern computing and video conferencing, technologies of which he speaks almost reverently.

“People think, ‘How can you go from being a leading figure in an international financial system back to your desk?’” he says. “My answer is, ‘I love it.’ I’m going back to my roots.” His work involves data-mining of the most precise kind.

He speaks excitedly of constructing a data series that will allow him to monitor the month-to-month profitability of US non-financial corporations. “That’s the type of thing I’ve been doing for generations,” he says, and the reference to time served is not hyperbole.

. . .

Recently, for another piece of research, Greenspan was searching for the definition of what constitutes an aircraft wing in the US. He looked out some work he himself had done in his twenties on the aircraft requirements for the Korean war, which was going on at the time. And, he says proudly, the research showed that his style of thinking was the same back then. “It’s the conceptualisation, the statistical detail, the syllogisms, the algebra”.

When he gets on the theme of statistics and research, Greenspan relaxes and becomes almost expansive. I get the sense that, though he loved the Fed job, a more private and introspective life fits his personality rather better. “I’m still introverted,” he says. “By psychology I’m more an aide than a policymaker.” During his short early career as a professional jazz musician, for example, he says: “I was a good sideman, as they call it, but I didn’t like to be a soloist.” Indeed, much though I try, I find it hard to envisage him playing clarinet in the smoky jazz clubs of his native New York in the 1940s. It’s easier to imagine him junking the jazz to go to college and become an economist.

And while he clearly does care about his legacy, there does seem some truth to his protestations that other people spend a lot more time concerning themselves about his record than he does. “I’m so obsessed doing what I’m doing, I don’t think I have time to worry about it,” he says. “Let others worry about it. I’m busy.”

As the restaurant empties, we move on to current events, talking at length about China and his faith that the market economy will prevail there, however weakened its appeal might look right now and however slowly economic reform might be progressing. He worries that the current leadership, Hu Jintao and Wen Jiabao, are less keen on liberalisation than their predecessors Jiang Zemin and Zhu Rongji. But he does not seriously fear the country going into reverse and heading back towards central planning. “When I go to China, I haven’t heard anybody argue in favour of Karl Marx’s Das Kapital and the conceptual framework that it is about in years.”

His approach to everything is the same. Look at the data; calculate the probabilities; make a dispassionate calibrated decision. Just before we leave, he bemoans the calls on “poor Obama” to be seen to be caring more about the oil spill in the Gulf of Mexico. “I complained when people were saying he’s not showing enough empathy,” he says. “I said, ‘That’s not what I want to see.’ I want to see cold, cool, deliberative action. Empathy is not going to solve this problem.”

I settle up and we pick our way back through the dining room, which at 2.30pm is almost deserted. Few people in this town have the time or inclination for leisurely lunches. I decline the polite offer of a ride. Alan Greenspan is driven off through the muggy afternoon, back to descend into the depths of his beloved data mines.

Alan Beattie is the FT’s international economy editor

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Tosca

Table 50, 1112 F St NW, Washington DC

Insalata mista $8.00

Grilled octopus $24.00

Grilled swordfish $24.00

Diet Coke $2.50

Bottle sparkling water $7.00

Americano coffee $3.50

Cappuccino $4.00

Total (including tax) $80.30

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Alan Greenspan: the pre-Fed years

1926: Born March 6 in the Washington Heights area of New York, the only child of a stock market analyst father and music-loving mother. His parents divorce when he is five years old.

1935: His father Herbert publishes Recovery Ahead!, a book about President Roosevelt’s New Deal spending plans. Greenspan Sr’s inscription to his son hopes “that at your maturity you may look back and endeavour to interpret the reasoning behind these logical forecasts and begin a like work of your own.’’

1943: Graduates from George Washington High School, excelling in mathematics and music.

1944: An accomplished clarinet and saxophone player, he joins Henry Jerome’s travelling big band. Also keeps the band’s accounts.

1948: Graduates in economics from New York University. In his memoir The Age of Turbulence (2007), he recalls: “I preferred to focus on technical challenges and did not have a macro view.”

1950: Gains a Masters in economics from New York University. Begins postgraduate studies at Columbia but drops out and accepts job at National Industrial Conference Board.

1952: Marries Joan Mitchell but obtains annulment after 10 months. Mitchell had introduced him to the work of writer and philosopher Ayn Rand: “I was intellectually limited until I met her,” he later wrote.

1954: Partners bond trader William Townsend to become chairman and president of Townsend-Greenspan & Co, a consulting business that makes economic forecasts.

1967: Advises Richard Nixon before 1968 presidential election. Turns down permanent position in Nixon administration but, in his memoirs, describes Clinton and Nixon as “by far the smartest presidents I’ve worked with”.

1974: Works for President Gerald Ford as chairman of Council of Economic Advisers.

1976: Guests at his 50th birthday party include Estée Lauder, Brooke Astor, Oscar de la Renta and Henry Kissinger.

1987: Appointed by Ronald Reagan as Federal Reserve chairman. In 1996 he proposes to Andrea Mitchell, an NBC correspondent he had been seeing for 12 years. Delays honeymoon for two months because of work: “I studied my calendar and suggested adding a honeymoon to the tail-end of an international monetary conference in Switzerland.”

Victoria Maw

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