The Age of Turbulence- Alan Greenspan (Book Review)
Alan Greenspan is known throughout as a strict disciplinarian, avid proponent of free markets and arguably one of the most successful Fed chair in modern United States of American history. ‘The age of turbulence’ starts off with a Alan Greenspan travelling back to the United States during the twin towers terrorist attack. Greenspan understood the moment he heard about the attack, that it could not be an attempt to disrupt the financial system (otherwise the terrorists would have launched an attack that attempted to disrupt the dollar system flow). Alan Greenspan understood the potential snowball effect of this event (if investors decided to dump their stocks and the business world backed away from making any trades). This event marked one of the few occasions Greenspan deviated from his normally hawkish stance, lowering interest rates and flooding the market with liquidity (in the form of a hundred or so billion) as an act of reassurance to the market. This calmness in the face of potential chaos marked the 18 year reign of Alan Greenspan’s tenure as the Chairman of the Fed (along with unrivalled economic growth, budget surpluses and a booming stock market).
The Age of Turbulence goes into a non-technical explanation of Alan Greenspan’s decisions in certain crisis situations (such as 9/11), his beliefs in deregulation (and his insistence that government should try by all means not to interfere with the private sector ) and his views on developing economies (Latin America, China, India, Russia) and communism.
Interestingly the Age of Turbulence goes on to explain what happened prior to the dotcom crash. According to Greenspan valuations of tech companies after Netscape’s IPO where off the charts, prior to Netscape it was unheard of for a company that was not cash flow positive to IPO at over a billion dollar valuation. Alan Greenspan notes that it was very difficult at that time to determine whether the tech valuations where justifiable, was this the shift from the old economy valuations to the new economy. Productivity was on the increase, courtesy of these tech companies, but it was not clear whether productivity had reason to the extent that the valuations where justifiable. This was according to Alan Greenspan ‘irrational exuberance’ (he used his term 4 years prior to the dotcom crash).
Investors where too excitable and too optimistic about the potential value of the tech companies they were investing in. It seemed as though the art of careful due diligence before investing (understanding the fundamentals and validity of the assumptions of the business model) had been thrown out of the roof and tech companies where getting funded
from Silicon Valley to Wall Street . The economy was booming, the economy under Bill Clinton benefited heavily from this technological boom (as a side note Alan Greenspan found Bill Clinton and Nixon as the two most intelligent United States Presidents he met, but distrusted President Nixon’s paranoia). But all good things must come to an end. The bubble had to burst. Ultimately Greenspan notes that bubbles are necessary as they tend to act as a driver of innovation. Innovative ideas are thrown against the wall quickly to see what sticks.
Regulation
In the Age of Turbulence, Alan Greenspan reveals his belief in the ability of markets to correct themselves without too much government intervention (he did not always hold true to his beliefs). According to this theory the less the government intervened and the less regulated a market was, the better the economy would be.
Alan Greenspan’s argument, particularly with regards to the financial sector was that any area that needed more government involvement was rooted in fraud and fraud was the ultimate destroyer of market processes. According to Greenspan government regulation could never substitute individual integrity, he argued that even deposit protection have costly consequences. However, it has to be noted that Greenspan did believe in rules and safety standards. Greenspan’s never saw his Chairmanship as the job of a regulator (and rightly so). His job was ultimately to set monetary policies as a tool to control inflation.
Alan Greenspan criticises George Bush (junior)’s presidency, noting that his biggest concern about the Bush presidency was Bush’s inability to use his veto power. At no point did George Bush stand up against congress or attempt to curb government spending and this resulted in surpluses that had been growing under the Clinton administration to be wiped away through Bush’s tax cuts (ideally Alan Greenspan would have liked to see the money used to pay off part of the national debt). Alan Greenspan notes that the biggest problem with the Bush administration was that economics was subordinated to populist political policies.
Creative destruction
According to Alan Greenspan, creative destruction is the lifeblood of capitalism, this entails destroying what is old and shifting capital to new economic frontiers. As much as creative destruction often brings along certain negative impacts on society (such as job layoffs) creative destruction sweeps away the inefficient and leads to an increased allocation of resources on sectors that increase the overall productivity of an economy. The truth of the world is not all firms contribute to the progress of the economy, the beauty of market capitalism however is, it always corrects itself, and inefficiencies are normally corrected. One of the reason communism failed dismally was that it was never designed to promote productivity. If an economic system does not promote productivity, competitive companies will never be created and consequently the quality of goods and services produced in a communist country will never be able to compete with similar goods and services on a global scale.
According to Alan Greenspan it is however necessary to have what was coined by Adam Smith as the ‘invisible hand’, guiding the market. Certain principles must always be in place to ensure that market capitalism functions efficiently; one of these principles is the protection of private property.
Dutch Disease
‘Dutch disease strikes when foreign demand for an export drives up the exchange value of the exporting country’s currency. This increase in the currency’s value makes the nation’s other export products less competitive. Analysis often cite this pattern as a reason why relatively resource- poor Hong Kong, Japan, and Western Europe have thrived while oil-rich Nigera and others have not’ (p258)
Alan Greenspan writes about why developing resource rich countries are not performing well economically despite the presence of vast reserves of resources. According to Greenspan this is the ‘dutch disease’, the presence of vast resources encourages a certain level of laziness and unwillingness to innovate or take risks. Economic success can only be attained where people are encouraged to take risks and to innovate in order to create wealth. The presence of resources seems to encourage corruption more than innovation or risk taking.
-Sandton Journal