Book Review: The Age of Turbulence

Finished reading Alan Greenspan's "The Age of Turbulence: Adventures in a New World" during the long (July 4th) weekend. Since I have been interested in macro economic policies, found these 500 page book to be quite an interesting read though I am as usual embarrassed to admit the the time it took to read it end to end. Greenspan has been in the field of economics for half a century, initially as a private consultant and then for several decades as a federal govt appointee. He has served as the Federal Reserve Chairman for more than 18 years spanning Ronald Reagan (who appointed him), George H.W. Bush, Bill Clinton and George W. Bush administrations. So, unquestionably he has the vantage point and experience to write enough about world and specifically US economics. Him being academically inclined helps this cause well. Compared to the first half of the book that is a bit autobiographical, I found the second half chronicling his time at the Fed and discussing his views on various aspects of world economy much more engrossing.

Until he retired in 2006 he was considered a venerable figure with an extremely steady hand that had guided the US economy through a lot of storms. You can find quite a few books like "Maestro" by Woodward, and "Alan Shrugged" by Jerome Tuccile (remember "Atlas Shrugged" by Ayn Rand?) that will illustrate how the media treated him with awe. In his early years he had hung out with Ayn Rand and has been a true believer of market economics and Adam Smith's invisible hand. So, throughout this book, as a stubborn , he is vaxing eloquent about deregulation and how efficient/self-correcting market forces are left to themselves. But the turbulence the world economy has gone through since the book came out in 2007 makes some of his proclamations sound silly. To quote a passage (page 360), "Rising leverage appears to be the result of massive improvements in technology and infrastructure, not significantly more risk-inclined humans. Late 1950s experience with consumer debt burdens has made me reluctant to underestimate the ability of most households and companies to manage their financial affairs." If some talking head on the TV says this, I can give it a pass. But coming from Greenspan it really makes you wonder how much do we even philosophically understand the way economy works..! If this were true we shouldn't have experienced sub-prime mortgage crisis and the evaporation of Lehman Brothers in the last 4 years.

To quote some more (page 490) he says, "Regulation, by its nature, inhibits freedom of market action, and that freedom to act expeditiously is what rebalances markets. Undermine this freedom and the whole market-balancing process is put at risk." He does have some hand waving lines saying that the invisible hand presupposes that market participants are rational and always act in their self-interest and there could be instances where this is not true. But he keeps arguing that the speed at which monetary transactions take place in the 21st century renders any kind of regulation impossible since the corrective mechanisms won't be able to keep up. But such arguments completely ignore the fact that monitoring individual transactions and allowing/blocking them is not the only way to prevent 2009 type disasters. For example, the Frank-Dodd legislation passed last year in US to maintain better vigil on the financial industry has following provisions among others:

- Creation of the consumer protection agency to oversee mortgages, credit cards and other similar products.

- Asking banks to hold more capital and reduce leverage

- A body to scan the overall economy for threats to financial systems

- Curbing CDO (Collateralized Debt Obligation) type financial instruments that are way too exotic for any meaningful management or making sure financial institutions who deal with them are doing it at their own risk (i.e. they won't be bailed out if things go wrong). 

Such ideas can maintain a leash on the system without blocking innovation itself. I do think that there can be reasonable regulation to make sure playing field is level and companies don't become too big to fail. 

He is really impressed by China's growth but is dismissive of India's since India's growth is still not reaching the masses much due to stifling bureaucracy/corruption. I found his views on energy, US education system, immigration, deficit and social obligations of US Govt (i.e. Social Security, Medicare/Medicaid) very meaningful and in line with what I think is common sense. On the whole it provides an insight into his thinking and by implication the way US economy was being managed for the last couple of decades. Though I won't agree with him on everyone of his views and policies, it is certainly a good read.