This book review was written by Eugene Kernes
Genre = Economics, Finance
Intriguing Connections = 1) Monetary Policy, A Leaver of the Economy,
2) Learning Economics: Basic to Advanced, 3) What Goes Into An Economic Crisis?,
4) Capitalism, Socialism, their Alternatives and Critiques,
Alan Greenspan served as the Chair of the Federal Reserve from 1987 to 2006. This book covers Greenspan’s early life, becoming an economist, intellectual influences, personal life, presidential advisor, and time during the Fed. Along with views on policies and economic ideas. Being challenged and learning how to improve an understanding of economics and of human beings. Greenspan was an analyst but tasked with policies which had political aspects. During the Fed, Greenspan was involved with trying to calm the markets after many crises occurs such as the Mexican peso crisis, Russian debt crisis, and the trouble with Long-Term Capital Management. While trying to prevent other crises such as inflationary pressures, U.S. debt size, the tech bubble, and the housing bubble. With Fed independence in question, Greenspan defended Fed independence from political maneuverings. To Greenspan, world affairs seem to have to have gotten much more turbulent.
From trying to understand Greenspan’s father’s book, to working at Townsend-Greenspan, Greenspan was an analyst. Seeking how the abstract models were tied to the real world. Filtering through various observations and facts to understand what has happened. Seeking as much detail to facilitate an understanding of the behavior of a particular segment of the world. Focusing on how the data was produced to create forecasts.
Influenced by Ayn Rand who would consider any idea from anyone, and argue the idea on its merits. Rand is well known for going against Communism, which Rand considered would collapse under its own corruption. Championing capitalism as the ideal form of social organization. Within the group that Ayn Rand hosted, Greenspan’s views were challenged. Ayn Rand taught Greenspan to learn more about human values which broadened the way Greenspan thought about models thereafter. Ayn Rand objectivism philosophy was too strict for Greenspan and created may contradictions.
On The Federal Reserve:
Congress initiated protection of the Fed from political influence, but politics still tries to influence the Fed. While the presidency is subject to a variety of short-term demands, the Fed tries to maintain long-term economic viability. Economic policy from the Fed are very much subject to the political process.
Greenspan dealt with many U.S. presidents, and saw their terrible sides that the public did not normally get to see. The government would enact terrible policies, such as price controls, knowing full well that it would hurt the economy, but enact it anyway because businesses and consumers wanted.
The chair of the FOMC leads discussion about what policies in which everyone can participate and raise claims and concerns. At one point, the recordings of the meetings were asked to be disclosed but that would have changed the content of the meetings. They would become prepared speeches rather unfettered debate.
The Federal Reserve’s policies are made by the FOMC (Federal Open Market Committee.) Which directs the Fed to either buy or sell treasury securities, or alternative financial assets. Buying securities increased the money in the economy and reduces short-term interest rates. While selling securities does the reverse, reduces the money in the economy and increases short-term interest rates. With the FOMC operations, they can tailor how the economy performs, but the reaction of the market to the operations is often uncertain. With inflationary pressures, the Fed slows the economy by making money more expensive to borrow. The Fed tries not to abuse their power by not telling banks what to do, such as to or not to make loans. Such power would damage the functioning of the market.
Monetary policy has changed in response to pressure. From not indicating the direction of interest rates, to being transparent about operations. Not disclosing the targeted interest rate changed kept markets uncertain, which caused them to have a buffer to either direction.
Greenspan favors property rights because they protect against arbitrary seizure. As regulator, there are three rules of thumb that Greenspan has which are: 1) Regulations that comes from a crisis need to be modified afterwards, 2) having several regulators causes them to keep each other in check, 3) regulations need to be revised or removed based on usefulness.
Thoughts on Economics
Before well-developed markets, suppliers would not state the accuracy of their inventory as it would weaken bargaining power. As markets gradually became better, suppliers became very willing to state what they had in their inventory. Division of labor has become sophisticated as to make everyone dependent on interactions and exchange of goods and services. Referencing that the way to cripple an economy is to target its economic infrastructure of payment systems. Removing that would force business to rely on inefficient physical exchanges.
The way people thought of debt has changed over time. There was a time when the U.S. president felt ashamed for a deficit, and even apologized for having a deficit. An argument that Greenspan has made for a very long time was to reduce the debt. Debt limits the response any government can make. During a recession, it limits the ability of a government to address the economic problem. During 1999-2000, the government ran a surplus, as in spent less than it was taking in via taxes. There were questions about Feb operations if Treasury securities could not be used.
Keynesian policies became popular in response to the Great Depression, but declined during the 1970s with the inability to deal stagflation. In an economic contraction, Keynes argued that government could create demand which would enable increased economic activity.
Within a centrally planned economy, production and distribution are determined by instruction. What resources are to be given, what is to be produced, and to whom the product is for are all determined. Along with predetermined wages and employment. The consumer has no option to but to be a passive recipient of whatever is to be produced. There is no impetus to develop the economy.
The Cold War was a contest about different views of economic organization, not just ideologies. For many years the Soviet Union and the U.S. appeared evenly matched. The problem is that Soviet Union did not capture the dynamism of economies, that production shifts faster than could be anticipated.
A natural experiment was done using Germany after WWII. Starting with the same culture, history, and values but after the split between East and West Germany, the regions became vastly different.
The book does not provide much information about most opposing views other than that there were opposing views. Without the reasons for the opposing views, and with the reasons for the views held, the book creates a bias in which the author’s views appears more right than they might actually have been.
As this book follows many major events, the events are not always given a background other than that there was a crisis that needed to be managed. Some of these events had Fed intervention and have become precedents for future actions. There seems to be a lack of recognition that some actions of the past, created forthcoming problems. The Fed seems to be the victim within the crises, and the institution that continued to prevent further escalation.
There is a distinct lack of problems that the Fed has caused. This would have been important to note in the book, as it would have indicated areas of governance that need adjusting, and a guide on how to avoid doing the same mistakes.
Questions to Consider while Reading the Book
Pages to read: 532
1st Edition: 2007
Ratings out of 5: