Mullering the Maestro

The US investigative journalist Bob Woodward has written or co-written sixteen books of "instant history", going all the way back to the Watergate expose of the mid-1970s. If he could have one of those books back, I'm guessing it might be "Maestro", his hagiography of the former Fed Chairman Alan Greenspan. The halo Woodward slapped on Greenspan's head a mere decade ago has slipped so far in the last few years that the poor man must now be using it as a truss.

Surprisingly, in the welter of books about the financial crisis, there hadn't been one that attempted to pin the blame squarely on Greenspan. But one recently turned up on the shelves of the good old Hertfordshire county library: "Panderer to Power", by Frederick J. Sheehan, a Boston-based financial consultant. Published by McGraw Hill (though in many respects it feels more like a vanity publication), it's an extraordinary piece of work.

Let's get the bad parts out of the way first. Sheehan is, to put it as politely as possible, no prose stylist. He makes words up ("trancate"), misuses others ("Greenspan spoke in vagaries") and exhibits a jarringly baroque turn of phrase ("the most famous civil servant since Caligula's horse"). More seriously, he doesn't always understand what he's writing about. For example, his description of the workings of the simplest of financial derivatives, a plain-vanilla interest rate swap, is just plain wrong, and as a result he has an exaggerated view of bank counterparty risk.

You gotta say this for the guy, though: he really, REALLY disrespects Alan Greenspan. So much so, in fact, that it threatens to get in the way of the story. Take the first chapter of the book, innocuously titled "Introduction to Part 1: Prelude to Power". A few paragraphs about Greenspan's formative years, right? No way! Sheehan can't restrain himself from hurling the big bombs right from the outset. As early as page 2 we learn that "from the time Greenspan was named Federal Reserve Chairman until he left office, the nation's debt rose from $10.8 trillion to $41.0 trillion". On page 3: "(Greenspan) may not even have understood what (Ayn) Rand was talking about". and on page 6, "His record as an economic forecaster was unimpressive".

The insults and accusations go on for a further 370 pages, with a degree of repetition that can be a seriously wearing. Still, it can't be denied that Sheehan has done a lot of research, which shows up in the form of multitudes of footnotes on almost every page. He has read Fed minutes, FOMC transcripts, speeches by Greenspan and others, Congressional papers and media reports. Longstanding Greenspanophobes such as Jim Grant and Bloomberg's Caroline Baum have clearly influenced Sheehan's thinking, but the anger seems to be all his own.

The case Sheehan seeks to build is that Greenspan was never much of an economist but was always a superb self-promoter. His supposed mentor, Ayn Rand, reportedly asked a mutual acquaintance, "do you think Alan might basically be a social climber?". Sheehan cites evidence that Greenspan's doctorate from NYU was granted in unusual circumstances (he never wrote a dissertation, and the papers he submitted instead have never been published) and argues that his Wall Street consultancy (Townsend Greenspan) had an undistinguished history. This might seem like little more than mudslinging, but for the fact that the target is a man who became the most powerful figure in the global economy.

Sheehan's analysis of Greenspan's record as Fed chairman homes in on something that puzzled many people at the time. Greenspan hardly ever spoke about inflation or the money supply, two of the Fed's key raisons d'etre. In many of his key speeches, those things hardly figured at all. Instead, he was obsessed with technological progress, productivity and share prices. Over time he managed to convince himself, and more importantly almost everyone else, that low US inflation was not the result of cheap imports from China and elsewhere (which was almost certainly the case), but of rapidly rising productivity within the US itself.

Sheehan argues that this rise in productivity was almost entirely an illusion created by "hedonic" adjustments to GDP statistics. Simply put, a $1000 computer bought in 1990 could do much more than a $1000 computer bought in 1980, so the statisticians would make a "hedonic" adjustment to GDP data to reflect the quality improvement. This is not invalid in itself, but it's not hard to accept Sheehan's case that basing monetary policy on such adjustments is an extraordinary stretch.

Sheehan's reading of FOMC transcripts also shows that there was rather more scepticism within the committee than most observers (OK, me) would recall. Greenspan seems to have turned up at each FOMC meeting with the post-meeting press release already written. His usual response to any hint of dissent was to call for a coffee break, leading Sheehan to label him "Mr Coffee".

Sheehan doesn't just dislike Greenspan. He doesn't like his successor Ben Bernanke very much either; or Larry Summers and Robert Rubin; or stock analysts, or economists. While he is unclear as to what remedies he would propose -- he wants to abolish the Fed, but suggests no alternative -- he is very obviously a man for small government. You don't have to agree with that viewpoint to agree that this intemperate and in some ways deeply flawed book has performed a valuable service.

There are surely much better books about the Greenspan years to come, but Sheehan has done a lot of the spadework. And it will be hard for anyone to top some of his insights, for example: "most Americans who listened to Greenspan took him at his word -- even though they did not know what he was saying". Won't get fooled again? Not if Sheehan can help it.