tv After Words CSPAN November 28, 2016 5:30am-6:31am EST
this is booktv on c-span2. c-span where history unpoteds daily in 1979 c-span was createds a public service by america's cable television companies. and is brought to you today by your cable or satellite provider. sebastian mlby discusses federal reserve chair alan in his book, the man who knew and interviewed
by alice senior fellow of economic studies at the brookings institution, and former vice chair of the federal reserve from 1996 to 1999. >> sebastian, wj, i'm delighted to be doing this and i think it's a fabulous book. i've known alan for many, many years and we worked together closely when i was his chair, and he's a complicated man and i think you got it about right. but let's start at the beginning. you wrote interestingly about the influence of his parents. could you talk a little bit about that on career choices? >> alan had a unusual upbring in sense that raised in 1930s he was the child of a single mom. his father left his mother when he was 33 and then a distant
figure who would say he would see his son and then not show up up. i think that probably reenforce a tendency that he had to live inside of their head to be introverted and then that was further reenforced by two flengs his mother first of all talking living aen working in a department store in manhattan. and so he was left by himself all alone in the house with kind of distant grandparents who were from a different, you know, they were immigrants and felt -- much older so he basicallyily by himself. but then when the family gathered at parties and holidays, so forth, allen's mother was a vivacious singer and sing in a beautiful haunting jazz songs. off nowhere felt she was a center of attention. i could never match that. so this was reforced --
>> so musical interest from her. >> he did from her but ting that musical interest was feud and beam a force of a professional musician for a while after leaving high school and before college. that was in the way of an attempt get into the limelight to be in the spotlight to match his mother through musical ability. >> maybe so but he genuinely loved music and he was good at it. what about his friendship with ann, poem come back to that a lot. how do you think that influenced this thinking and -- >> here's a huge number of american influenced try to read at it. >> tends to happen when they're about 19 years old kind of a college thing. and the idea that libertarian vision or appealing because it is so simplified and bold. interesting thing about alan is that he met late 20s, and then
he stuck with that and when sworn in, age 50 as the chairman under president ford, there were three guests there swearing in that were alan's mother and the husband so this was a very close relationship and i do think it had a profound affect on his development. >> do you think she really changed his mind or did she reenforce his view and he was one who believed in the great man and he loved railroad builders and things like that and certainly -- reenforce individualism and that sort of thing? >> yeah, i mean, with adam is somebody who partly because he was withdrawn and living in his own head as a child there was always, you know, cutting pass when he went to college in 1945. it must have been one of the
most per government and people on g.i. bill paid for by the government e emerged as antigovernment libertarian. so he was going his own way but reenforced that and drove him to build a whole philosophy, world view which is kind of before. you know, he was somebody is in the day and more concerned with economic numbers about than he was about a social vision. and brought him from the data to kind of political economic agenda. >> talk about the numbers fascination a bit. he was a genuine nerd as we would say today that's a more modern phrase. but he just loves statistics and numbers. >> yeah if that was a passion. as a child he would be wheeled out in front of the relative perform you know complicated addition as a kind of performance art. >> yeah that's right he loved that too. >> that said you know, bren
bernanke likes baseball -- [laughter] so part of the baseball tradition of economics. also more seriously part of what i call the new york school, in other words a school based in new york around the national bureau of economic research focused on just counting oing the economy with the gdp statistic hasn't existed in the 30s so the creation of data, understanding how you generated best quality data, how he got his start not modeling, not taking of data for granted and then the complex mathematical connection and this helped him as head chairman to not just accept that, you know, productivity is such and such and reported and now think about the model that we might build with that number. no he wanted to disaggregate the
productivity data and see what was behind it and form a conclusion that data were wrong crucially in 1996 that led him to the most famous chairman that allowed him to keep interest rates lower for longer in the late 1909s. >> i was there and interesting distinct. because the modelers actually wanted the fed to raise interest rates because unemployment was so low, and the models were telling them interest rates and raise interest rates, and alan was saying i don't see this inflation something else is going on. he said more about that? >> yeah, i mean he basically believed that if profits were going up, and yet productivity was flat, there was a mystery. i mean, normally if you're making your money it is probably because you're producing more per worker so you wanted to look into that and you have fed straff produce sector by sector what was going on with
productivity and showed that productive in service industry and lawn mower were flowing and he said it can't be fooling it can't be that everybody is getting new personal computer yet producing less. maybe flat would be possible. so by looking under the hood, he guessed and got it right after the crisis one of the confession was wow, economics profession was all tied up in its models and you too mathematical too muh face in the predicted pair of the models. but interesting thing is that he never had that faith. he was never obsessed with a particular model. he was always questioning it, and test stress test the data input so ting that funny thing is if you wanted to choose the fed chairman, who was perfectly
intellectually prepared not to be trapped and caught by surprise you might have chosen alan that was the irony. >> yes i think so that's right. i remember once walking into this office to wish him a happy birthday after i led the fed. i said al are you having any fun. he said yes an pulled out a stack of printouts. [laughter] in your book you talk about sort of inconsistencies and in a sense this is -- one of them. but you start with a very nice anecdote about the gold standard. but say a word about that and about his shifting and very inconsistent years about the gold standard? >> as a young person around , he believed in the gold standard that was almost ran characters in her book believe in the gold standard and after the strike
one of the big novels was published. alan presented with a military gold bar to celebrate the publication so this was very deep in his world view. >> believe in the gold starngdz you don't need a central bank. >> right. because you don't need to move interest rates are around. one of the most extraordinary things i discussed i knew that alan had had given speeches under the institute. and i wanted to find the transcript which i knew must exist so i saw that and one of them hidden away in virginia in a cabin at a basement with a fantastic filing system and there were 300 page transcript of alan speeches and 63 and 64, and reading through these i came across this quote. the creation of the federal reserve get this -- the creation of the federal reserve was a historic disaster. [laughter] so talk about inconsistent that
was part of the view as you say with the gold starngd you don't need the fed. it became embodiment of the fed that of the currency, so he went all the way to the other extreme. >> even arguing that you didn't need a monetary rule, you had to play it by ear. >> right as. >> a middle ground which was gold, but not just money precincting but a fixed amount of increase in the money every year, and the rule was kind of gold and then it was another discipline. and as you say, alan was determinedded to reject that in favor of discipline. mean favor of discretion his discretion and maybe this hingted at earlier believer in iran, believed in great men, including himself.
also unshy and unsure of his views. let's move on to bubble because bubbles are very interesting, -- you write that early on he sought crash as causal in the great depression. and yet by the 1990s, he was not so worried about the stock market bubble that we were, obviously, having at that time. >> right it's amazing. you know, just as i said one exciting discoveries this iran speesms. alan written a paper in 1959 which was sort of lost i think he talked about it to friends a little bit. but the actual paper was in the phd thesis magically disappeared from new york university library after he became fed chairman. friends are great reporters. really, really tried hard to get hold of that phd when he became
chairman because hetted to see what was in it and told we can't find it. no, i know it's supposed to have phd we award so i would say asks about earlier intervention and eyes go like this a bit and look up like this and after a while i looked up too and i could see this fat binder on the shelf and i said looking into it -- great to have your ph.d. thesis and guessing what he was and when he gave it to me, and i read it there 1959 paper in which as you say it's all about how central banks must respond to asset levels. and it's based on 1920s experience. and it says that you know, look compared to infantry cycles, these asset boom, are are much more interrupt uv to a stable economic growth. so central banks must rebuttal and yet that was the young -- the prescription from the young
greens man as you say, the mature group didn't follow it. >> no, talk a bit about the dot come bubble of the 90s. >> right. well that was when i was -- yes. so saying of course you will correct me because you weren't really there. but what i -- saw from reconstructing it through the transcript and through interviews with with people, it was essentially that a key moment came with a collapse of capital management, hedge fund which blew up in fall of 1998. after that fed cut interest is rates to stabilize the markets from the four, it cult rates three trials. >> had had world crisis going on. >> there was a crisis yes. >> asian and russia up as well so a little bit of concern with financial market instability and fed as i say did three interest rates cuts. then in early 1999, in my view,
thing hads have stabilized time to take back that and cuts justified with reference to crises, and so forth, and once those crisis were passed, veiled thought that cuts would be taken back. they were not taken back fully until late in 1999. and then this was the crucial period when -- tech evaluations qent from very high throughout -- crazy high. >> learned much earlier about crazy high when it wasn't so crazy back in 1996 actually. he made this famous speech about irrational it shall intend to signal with that but later less concerned. >> this is another which you have shakespeare tragedy and who
understand that asset prices could oversheet and knew that could be dangerous as it has been with the fed in 1920s and all of the right intellectual formation to respond to the tech leaflet and yet he didn't. >> well i would argue that he didn't have the right tool. but would have had had to do to short-term interest rate which was high at a time when the world economy was doing fine and there was no inflation, and, in fact, i kept saying in meetings it is really important to have tight labor markets you don't have inflation doing it a lot of good. >> there's business where i respectfully disagree and aware that i'm disagreeing not just with you but ben and essentially the consensus. the reason i disagree is that it seems to me that knowing what we know now about how bubbles can
be very destructive. it is worth reducing greet a bit in the short-term medium term with interest rate hike to have member stable growth on two-year or three-year view. and i think that was the tratdoff confronting fed in 1999 difficult to see at the time. but in retrosprect i would say that you know we've led the bubble matter. >> but bubbles are the the same. stock market bubble turned out not to have such devastating consequences. the housing bubble did. the combination of -- housing if bubble and bond market bubble and all of the craziness that went on in the next decade. talk about that a bit. >> as you say the standards you would be -- look credit bubbles, by borrow, leverage when they blow up you have a melt down that is terrible and in the end it is
just stocks, stocks rise, stocious fall if the holder of the stocks are not themselves, leveraged, there won't be a contagion and say it's not that bad. the reason i think leverage bubble are much worse. but reason i'm not saying about unleverage stock bubbles is when the fed was confronted with the collapse of the tech bubble, in 2000, 2001, the response was a lot of military stimulus that was appropriate and needed to do the stimulus but that you emulate what you do. you stimulate interest rate sensitive, portion of the economy. i.e., real estate, and when you read the federal open market committee transcript from 2002, 2003, 2004, people knew that this was what was happening real estate starting to take off and it was accepted of the fair tradeoff, you know we want growth to be back up. we've had this tech bubble that blew up.
now question of to compensate for the full incorporate invest from the the collapse of that bubble. by stimulating real estate investment. so one bubble i think led to the next. >> that -- that's i think that part is true. but the short-term interest rate isn't the only tool it was regulator an other regulators but it was really egregious stuff going on at the level of the mortgage originator they were shoveling out mortgages to people who couldn't likely pay them back. graham was very concerned about that, he wasn't concerned too much about the bubble he was concerned about those people who were taking out mortgages that they wrnght going to be able to afford to take back. the fed and other regulate are tores it wasn't just the fed, never really focused on what was
happening to disastrous climbing. >> where refetch over the five years helped me to challenge the conventional story . because in 2001 and one can read about this through freedom of information act disclosures, you know, the fed did part new rules on sub prime mortgages. and the rule said there are particularly dangerous types of sub prime mortgage and we're going to ban them. and in particular there was an insurance product which was just a ripoff of kiewrls that was not allowed anymore. and that action from front line of this stuff debating with alan about it and they adopted rules and part the rules at the time the feds thought that maybe one-third of the prime mortgages, prevented because of the new rules but problem was that when the feds staff then did retrospective study instead of stopping one-third of the sub
prime mortgage it stopped 1% because it was too -- gets dead around it, and i think that larger message and lesson that arises from this is that in a regulatory system like we have in the united states it is extremely difficult for one regulator even the fed which is most powerful to pass a rule and then actually see it enforced. >> i think that's right. but there were other regulators and all it shall mostly bads stuff wasn't happening on -- in fed regulated institution at the beginning. it was regulators and alan greene fan could have gathered the regulators in his conference room and say look this bad stuff going out there. what are you going to do about it? there was aive lack -- collective lack of concern among
regulators for rapid decline in lending standards and fact that it was being fueled securetizing the love, bad be loan and many of them were bad loans. and showing them all around the world to very eying per buyers who thought that -- high credit ratings. a lot of truth in what you just said, and in my book i do describe the crazy that was going on and i thought al opinion because he lived through previous derivatives blew up, blew yous, you know orange county which went wrong in 1995. there was procter & gamble and other problems of securing before and should have done more. i agree with you but -- >> they all should have. i think it isn't -- it is easy to focus on alan green span because he was so
prominent and such of an apparent superhero at the time. >>but i think the message is normal and message which is maybe underappreciated and which i hope my book will slightly correct is that there were instances in which the fed did try so it tried as i just said on sub prime mortgages al opinion greensburg tried to push back against the gse fanny and freddie. >> talk about that actually. because that was a place where he was really worried. and testified and talked and -- made very clear that he was worried about the capital and the high e leverage at fanny may and fannie mae and freddie fredd didn't push it hard. >> he testified in congress i think more than once, and he said that these institutions were legending too much that
there should be kept on size and had an alliance with the administration at the tile which was on the same page as him, and they were pushing i think as hard as they felt they could so get regulation on the gse. now what happened was that the day before, one of the follow-up congressional hearings on this topic an ad appeared on tv and showed a hispanic couple saying to each other oh, we wanted to boy a new house but now i hear that congress is going to clamp down on mortgages and we won't be able to get a new house and that's bad because politicians are preventing us from having the american dream so essentially fannie and fred ey putting members of congress on warning if they averted to cap portfolio sizes they would face a bash of ads in the district so shows a political limit to what regulators could do. >> yes i think that's true and they were very powerful --
lobbyists fanny and freddie. but you make the point -- that qhiel alan was worried about fannie and freddie what happened if they went bankrupt, or seem to be going down, he was not qoird about bigs financial and private financial institutions. that's true more reason to be worried because there was a government subsidy in borrowing cost and growing very, very fast, and it looked more obvious that the markets were expecting them to be bailed out so the taxpayers were on the hook. for fanny and freddie in way they didn't look like they were on the hook for some of the others. now in the crisis -- how they were. but regretted that for aig they were, so you're right and he should have wrote more about the
private banks that were engaged in mortgage industrial complex. but i do think that, you know, he tried on the prime mortgage regulation and on gse and new york fed tried on bank leverage a bit. the message to me from all of this is that regulation is politically very hard to do. so you have to be willing to consider interest rates as a way to push back against bubbles. >> i would take the conclusion you have to be willing to do regulation better. [laughter] and more view to systemic risk what happens if a big institution or very interconnected institution goes down. that was what no one really anticipated that what would happen if a layman would have -- went down. come to a different subject for just a minute, though -- come back the bush tax cut of 2001.
i was personally really mad with the that, but he knows that. and i was curious distinct can you talk about it a bit. >> it was because in some ways you know alan green emerges into that status and political acceptance in washington with crystallize in 1993 when he endorsed the clinton budget package which raised taxes to reduce the deficit. . always been anti-deficit. >> always be anti-deficit, and he was there at state of union speech when bill clinton gave the speech he was there sitting next to hillary clinton clapping as bill clinton promised to reduce the deficit. so he was made of the deficit hook, and then along comes george w. bush in 2001 with enormous tax can the and green enforces him and enforces it with a caveat had is that he
want hads a sunset clause such that if the surplus evaporated that tax cut should automatically go away. but this is a very savvy, political operator alan greenspan he knows that that is some cause that will be thrown out in the sausage maker that is congress, and so i think that, you know, essentially he made a compromise between what he thought that white house wanted and his conscience, he gave him his conscience cover by saying there should be a sunset clause but really he delivered what bush administration wanted. >> i think that's right. he also worried publicly about the large surplus, and about what the fed would do to execute monetary policy if he didn't have a national threat. i thought that was fanciful both because the surplus of that magnitude ftion not going to
materialize and monetary policy but he seems to be -- that this was a concern that we might pay off the debt and then where would fed be when they needed to do open market or operation. >> had that concern and he had also floated the concern that -- you know if we pay off the debt then government could continue what would it do? perhaps have to start buying corporate equity and government intervention, and the private market so he raised all sense of concern. but they were threat because a big national debt and you know, as one member of the senate said to him, you know mr. chairman, if we reached point when there's no national debt then there's a discussion it be. but for right now -- >> that's what i thought. wasn't leakily to happen. so say a word about what most of the audience is probably forgotten. the great moment of y2k. >> yes, in 1999, there was
considerable fear that when computer systems reset from 199902,000 this would be a software glitch and short cut when computer memory was expensive and scarce caused a program not to build in around that rollover. >> i didn't put in four digit dates basically. they put in 19 -- 19 assume that they didn't put in a 20. >> yes, so feds got ready for this. and there was concern that, you know, people wouldn't be able to get money of the atm checking accounts wouldn't make transfers property all kiewndz of unforeseen computer infrastructure on which the financial payment system depends might freeze up so the fed you know positioned bank notes in regional depo and got ready offeredded special liquidity lines to big banks and so forth. and i think in some way it was
the model example of the central bank acting to safeguard integrity of the payment system because it worked brilliantly in the end y2k didn't turn out to be, you know, a couple of cash registration in new york and a truck shop. >> there was some distance in japan and few other places too. >> yeah. but that was because they fix fixed it. >> right i think that was a great example of something which because it was fixed we don't remember so much. >> exactly. and i remember al greene in that period pointing out frequently meetings about y2k because he was a programmer who knew how to program in four tram language of early computers, and so if they needed help they could call on him. [laughter] so -- might say a word about his role until the 9/11 incident because
that was -- big for country he wasn't for tf it. chghts it was interesting he was at a meeting in swits is is land at time of the attacks and i think actually on the flight coming back to the u.s. and then the flight had to turn around ao go back to switzerland. >> in prison and military transport -- the next day to get to the feds headquarters. by the time he got there, the team pretty much in the control of the response. and interesting thing that is revealing about alan's personality is he didn't march in and demand to see the back of the control he was quite happy letting others do the crisis response. because what really interested him it was to think about the right interest rate policy in response to all of this. >> yep he was not very
interested in payment systems i experienced that personally. didn't matter to him very much. >> so not aloud to go back to his office because of a fashion nation threat and sniper get him through a window and special office and hid away there by himself and loan interviews that you know in a time of trauma, individuals retreat toker that natural emotional comfort zone and for me it was to go off by myself in not my normal office and look at the data. [laughter] >> so fast forward to -- after the crash of 2008, he was no longer the fed chairman. but he had to come to terms with his own role, could he have done things differently and was he in part responsible as many l people were holding him for this. talk a bit about how he came to materials with that. >> well famous line from his first crisis public statements
is i found a flaw. and this is something he said when he was testifying in congress, and you know being cross examined wasn't he at ford and say sorry and so forth, and he did say i found flaw what he meant was that he had thought financial companies banks, and nonbanks so forth would be looking after their own health, protecting their risk exposure, and not therefore being so crazy as to e blow themselves up. and take the whole physical system down with them. and this was a u flaw that in the end these people did take way too much risk and did let themselves down. now that stuck rather and i think it gave rise to the unfortunate presumption in the public debate that you know the reason we have the crisis with that we have a believer in the efficiency of market and control and whole thing this we got rid of that believer and that
belief, you know we would have a safer financial system because if we understand that markets overshoot, then gee, you know we won't make the same mistake again. many my view -- >> known that for several hundred years. market it shall >> -- mistake about alan and i know from reading his writings i know because he bought a seat on the modty exchange to make change and never believed in efficient markets he always understood that markets could overshoot and understood that banks could blow themselves up. studied 1920s and 1930s so when i read that, i found a flaw interchange. what i saw was he really just threw that away to try to change the subject. he didn't really are mean that there was a deep flaw in his world view. he can't have meant that because he knew that finance is unstable. that was central to his writings 40 or 50 years so i think that
world has led the wrong lesson from alan green -- legacy. they think that we had a crisis because of an gleek intellectual error and had a crisis because of political constraint on what the central bank can do and what the regulators can do as we've been discussing and current political season, i think it would be foolish to presume that we are any safer now. >> we had a crisis for a lot of reasons that came together. i don't know if the perfect storm rather than in the single cause of the crisis probably was true that interest is rates were too low for too long and that one of the other things were true. but there was a widespread face that somehow large financial institutions were managed risk
well. managing risk was very complicated, and there was a lot of ways he would do it well. they were fancy new models. why did we all believe that had, do you think? >> so i think it was kind of a face arrived at because the rival was even less compelling. what i mean is that, you know, people understood that -- finance could go wrong. i mean, anybody like alan green span who had lived through failure of pen central in 18970s, collapse of new york and bankruptcy of new york and near bankruptcy in 70s who had gown you know come to the fed first thing that happens is stock market corrects. by 23% -- then the state s&p crisis a commercial property crisis, mexico crisis, ltcm crieses is one after another, he knew that these financial institutions could get it wrong.
why was that apparent faith that nonetheless -- financial institutions would manage their risk? it is because the alternative faith that the government could look over the shoulder of bearntion and be smarter about identifying risk, that faith did even less believable. what was the chance of that -- you know, somebody from the government visit jpmorgan better at understanding him than people who work there all of the time with a direct financial interest trying to manage it properly. i think that it wasn't believed that markets were efficient and fast it. it was that government was also imert and maybe more imperfect. >> come back to the housing bubble. specifically housing rather than the -- made some statements about
housing markets that seem in retrospect actually naive and that he wouldn't have a national housing bubble. and that people buy houses to live in them not to sell them what do you make of that? >> it was not one of the we arer momentses he said this is what you described. i think, you know, it is, that's a very strange one and very hard to explain. except that i think what happened was -- in the tribute you see him attacking problems in credit markets website problems also in housing markets. you know that they debated that will this might be creating instability in early 2004. >> very worried about that, for example -- quite a long -- >> part of that concern with overall asset marketing
overreach and housing market so why keep rising public and say don't there won't be a national bubble. i think it's you know fed chairman and his role as national cheer leader, that he felt he had to be bringer of are reassuring news and there -- somebody i quote in my book talks about alan greenspan becoming reassuring to american public as prozac. >> you talk about him as uncle alan. >> he has our back. you know, there were alan greenspan t-shirt and doll and you know, it bill a kind of tell of man who made you see it was okay to go out whether housing or stock and despite himself he was in prison by then reputation of hard to go out and be the bringer of negative news and maybe, you know, a bit of psychology here. but maybe that shy personality you know raised by a single
mother in the 1930s didn't like to confront society with bad news. didn't want to risk the fop lairty. if been more naturally confident and less moody of afternoon nation in some ways maybe he would have done it differently. >> could it have anything anything to do with his -- admiration of the great railroad tycoon that -- now talking about major financial institution but these very smart people who were creating, running major financial institutions. couldn't get it young? >> i think there's a bit of that. i think there's a trend in his mental history. which has to do with jpmorgan that when he was a jazz player and there was a break between sets he would be reading economic history for fun. including the story of -- you know, moore begun and
creation of the morgan bank in late 20s early 20th century with a reverence that only grew when he was appointed to director of the company and he sat on his board in the 19, late 70s and early 80s and jpmorgan was the perfect example of that slightly conservative careful professional, nonflashy kind of bank i think that that image of her finance had been maybe did upset that lesson that he must have learned at the same time from watching drive tim blow themselves up. >> that was jpmorgan who basically after panic of 1907 -- said with central bank we need a member of last resort and it can't be me because he'd been trying that, that role. come back to derivatives for a minute because --
these fancy financial instruments that must of us struggle to understand were exploding, and they have derivatives before. this was a new explosion all kinds of financial instruments that very well understood. and yet he resisted any regulator. >> one that u drew me to writing this bosks that alan greenspan's public life from time he joined campaign was four decades in which one finance was create. you have the start of the story. there were no financial derivative but no financial derivative as well as a fix exchange rate and capped interest rate so in the modern system including derivative were
created in this period when alan greenspan ftion at or near ?efer all of the debates so a key question why do more about derivative especially since they did show sign of being dangerous because they have close trouble in 1995 and debating in late 1990s about maybe trying to tame them pushing them from -- over countinger transaction by natural swap between one bank and one company, and pushing them on to an exchange to be better monitored. >> at least you can conceal a and why didn't more of that happen so there was a famous moment when the of the comomty future trading commission was born afnghted it that they should be better regulated and should be shot down by all of the other senior regulateing in town including alan greenspan. i think when you look at that story why didn't they do more? a couple of points that they
approached this with the sort of litigated mentality. he was a tough person. she was not a good politician in term was building alliances around town and so she sort of blew it demanding action as opposed to -- per her agency a battle as well. >> seen as a dirt battle so amazing thing above secretary at time who was sympathetic to the idea of regulating derivative that came opponent because of the task issue and because of the way that -- she made political errors. other thing that which we have to remember and cools back to earlier discussion is that, you know, there would have been massive lobbying by the derivatives business against this reform that could have got into that profit and you have to only look at way that financial modernization act which we
remember -- passed in 1 99 but after a dozen whereas it failed passing new financial rules were extremely difficult. and i think -- ruben and alan greenspan and larry summers and i don't know where you were, but you can speak to that. there was a reasonable, political economy point of view which said, i did it. we might want to regulate these things more. practically if we try to for that we'll get killed by lobby and won't get anywhere and we're just energy on something and should have used our energy for something else. >> that's one more example, though, of -- very powerful people are making a huge amount of money on this status quo. and then it's hard to change the status status quo and no one stood up against that. i thought actually you didn't mention enough in your --
in your treatment of home -- [laughter] the -- the element of greed and profiteering not alan greenspan, but all of the financial sector that was from the mortgage originator on up that was profiting so pee it shall enormously from this that financial sector grew out of o proportion. prevent me to have to look at that. >> previous book called more money than god and hedge fund and i've done greed, but -- you're probably right that the financial profitable institution is something that i could have played out more. i think i do get to it in the fanny and freddie example where
the clear instance of the very profitable pair of companies that used the profits to lobby and run tv ads to perpetuate regulation that give it the profits. so regulation creates a sort of rent for these companies and they use a profit from that rent to perpetuate regulation and terrible loop. they were want just companied but government sponsored enterprises with a business model that couldn't work and they were pressured on one hand to make money for their shareholders on the others to -- to foster more home ownership and -- that mengts you couldn't be too cautious. >> but i think that threat running through all of this is that people -- knew alan greenspan a man who knew. other os who were watching over financial system understood a lot of these issues and the
retroare speblght was that they knew but they didn't act. that gets them to why not? >> our question whether they knew that it could be this big a disaster. because financial disaster is not of crisis in an asset that ought -- that is so widely held. and if somebody loses on the stock market, his neighbors are not affected. if your house is foreclosed on, the neighbors suffer -- >> one of the things that again talking about the ph.d. thesis which alan greenspan wrote and i discovered it. is that one of the central
thinks this idea which later became known as tobin q, and this is notion that when asset prices rise two things happen, first of all individuals feel rich sore they spend more. a wealth affect that still late the economy. secondly, companies which see that you can sell corporate equity for more money a more likely to go out to create more corporate equity now there was again to make another factory they might find another company and corporate investment is likely to go up. at a time when the secondary market is valuing result of the investment more highly so this was central to alan greenspan's theg in 1950s. and so it followed from that that -- when the nasdaq and tech stocks were zooming up to astronomical heights it must be pushing an investment boom that went on with that. sure enough it was and fiberoptic cable made under ocean. huge booming investment driving
economy upwards equally when nasdaq collapsed in 2000, 2001, it was there to cause a drying up of investment and that would be serious for the microeconomy so although as ebbs before, leverage bubbles it was -- you know, just pure equity bubble dos have an effect through wealth channel through investment channel and al greenspan of all people -- written it be. as others have. i come back to the whole establishment failed to pick this up but wealth affect on the downside was enormous when the asset in question was housing. and that's certainly took us down further than we might otherwise have. >> how would you sell up converter of alan greenspan and achievements and his failing? >> well, twhiews a good
question -- >> in a very interesting chapght at chapter at the end of the bock and -- my view is as a forecaster, he was really sensationally good. you know, he was able in the 60s to say that the kind of kennedy johnson, policy of pushing gross upwards result u inflation that materialized it in the 70s. he was writing opposing nixon wages and price controls. proved to be true. he was right in seeing how early iteration was assorting housing market in 70s and creating conundrum like that came back to bite in the 2,000 so came back to get back productivity call correct in 19 96 when very few
other people saw that. so as that he was great. as a dualer opposed to sort of watcher -- he was less good, and he sometimes -- >> less comfortable but liked being an analyst. >> in personal turn, and again that comes out to understand the man. so that's right, and then that gets into the question you know, why didn't he act more penalty is part of it. political constraints and what he thought he could get away with is part of it. this is a very political person who had had learned all kinds of tricks from working with richard nixon way back in the 60s and you know, that is why it's a story not just about economics. it's also a story about human failty and a story about mr. speakers.
politics. collective mind set not just alan. but greed. because one of the reasons that it is so hard to make the right call is that some people are making an awful lot of money and doesn't see send on with you if you try to take it away. >> that's why it remains today extraordinarily difficult for a central bank to raise rates to that level because people own those assets and then they don't want to do it. if you can't prove that you needed to do it which you can't, you do it operating on presumption that asset prices may be overvalue to kind of prove it's very hard to be the bubble. >> it is very hard but that is why we have an independent central bank and alan courageous in raising interest rates to nobody likes that.
and in the face of inflation, but he was less comfortable with asset price bubbles which i would argue would have brought him into the regulatory do main rather than just the interest rate, the main because -- >> grad you say that about the current to raise interest rates to fight inflation because that really was another interesting part of this story. in the george h.w. bush administration that was only tenure we forget about it now a bit but he was under mince pressure to cut interest rate to the point that budget director in the white house which -- going around washington whispering that chairman is 65 years old he lives by himself and calls his mother every day isn't that a bit creepy and remind you of alfred hitchcock
that was nasty political tactics. and despite all of that pressure, alan greenspan stood up for feds independents i think either way almost created the feds independents and i mean that sounds like an understatement but actually towards the end his tenure the giants rumbled eggheaded, old testament profit, who we remember as giant who slated inflation and he was that. but he was surrounded in his last years by reagan appointees of the feted and outverted by then board, one from interest rates twice on regulation, and his authority was diminishing alan greene span who rebuilt the authority of fed and created independents and at a time like now when experts are under attack it behooves us to model study of somebody who is pert to parlay into political.