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>> sebastian maladie discusses the life of the federal former reserve chair alan greenspan in his book "the man wh man who kn. he's interviewed by alice rivlin of the brookings institution and former vice chair of the federal reserve from 1996 to 1999. sebastian, welcome. i'm delighted to be doing this and i think it is a fabulous book. i've known al and greenspa -- an greenspan, it's a complicated man in complicated times and i think you got it right. let's start at the beginning. you wrote about the influence of his parents. can you talk about that on his career choices? >> guest: alan greenspan had

an unusual circumstance in the 1930s he was the child of a single mother. his father left his mother when he was only three and then was a distant figure i think that reinforced the tendency that he had to live inside his own head and be introverted and then that was enforced by two things by his mother. first we are talking about the 30s. she worked in a department store in manhattan so he was left by himself in the house with distant grandparents who were from a different, they felt alienated about shoulder so he basically lived by himself but then when the family gathered at parties and policies and so forth, his mother was a vivacious singer and she would lean over the piano and he felt

she is the center of attention i could never match that so this was then reinforced by the sense of inadequacy. >> but then he became a force for a professional musician. that was to get into the limelight. >> host: about the relationship with ayn rand? >> guest: a huge number are influenced by her and it tends to happen when they are 90-years-old it's kind of a college thing and the idea it's

simplified and bold. he was in his late 20s and it stuck with her so much that at age 50 for the economic advisers and there were guests at the swearing-in. i don't think that it had a profound affect on his development. >> host: key is one that believed and loved railroad builders and things like that and certainly reading ayn rand would reinforce individualism and that sort of thing. >> guest: alan was somebody

that partly because he was withdrawn and living in his own head as a child, he was always in his own past. when he went to college in 1945 he must have been one of the most pro-government generations people ran the g.i. bill paid for by the government. he was going his own way but meeting her reinforced that and drove him to build a whole worldview. he was more concerned with teasing out economic economic numbers and it was from the data to the political economic agen agenda. >> host: tell us about the numbers fascination of it. he loves statistics and numbers. >> guest: as a child he would

be wheeled out in front of a relative to perform complicated addition as a kind of performance art. >> host: that is a thing at the fed. ben bernanke likes baseball. >> guest: said he was part of the baseball tradition of economics. it was more seriously part of what i call the new york school in other words there was a school-based around at the bureau of national research that was focused on just counting the economy and creating the aggregate data that we see the gdp statistics and so the creation of data and the understanding of how you generate the best qualitative data is not modeling are taking the data for granted and then building the complex connections between the data points and this helped him to not just accept the productivity of such and

such has reported now let's just think about the model that we might build with that number. no, he wanted to disaggregate that productivity data and see what's behind it and form the conclusion that it was wrong and that led him to keep interest rates lower and for longer in the late 1990s. >> host: i was there at the time, and that was an interesting incident because the modelers actually wanted the fed to raise interest rates because unemployment was so low and the models were telling them about the interest rates and alan was saying i don't see this inflation. something else is going on. can you say a little bit about that? >> guest: he basically believed that his profits were going up and get productivity was flat. it is a mystery. i mean, normally if you make

more money is probabl it's probd that you are producing more per worker so you want to look into that and he had the staff produced what was going on in the productivity, and it showed that apparently productivity in the service industries were falling and he said it can't be that everybody is getting a new computer and producing less. so he guessed what was going on and he got it right. i think with links to the 2008 crisis, one of the common discussions is that it's all tied up in its model. he was never obsessed with that

particular model and he would stress test the data input so the funny thing is if he were to choose a chairman that was prepared not to be trapped and caught by surprise by the crisis that is the irony. >> host: i remember going into his office and i said are you having any fun and he said just let me show you this and he pulled out a stack of printouts. [laughter] talk about the inconsistencies and this is one of them, but you start with a nice anecdote about the gold standard. can you say a word about that and about the gold standard?

>> guest: he believed in the gold standard and that was an article where she detailed in her book be leaving in the gold standard and alan presented a gold participant of the publication. it was deep in his worldview. >> host: if you believe in the gold standard you don't need the central bank. >> guest: one of the most extraordinary things that i discovered, i knew that he had given speeches under the auspices of the institute and i wanted to find th the transcrips that i knew must exist somewhere so i went to see these and one of them was hidden away in the woods in virginia and had a fantastic filing system and then there was a 300 page transcript of the speeches and 63 and 64 and i came across this quote the

creation of the federal reserve, the creation of the federal reserve was a historical disaster. so talk about the inconsistency. that is a part of the view as you say if you have the gold standard coming you don't need the fed. later committee sai fed currency whewent all the way over to the extreme. >> host: and even argued that you didn't need a monetary rule. you have to play it by ear as if were. >> guest: there would be a fixed amount. and the rules kind of a want of discipline and as you say, he was pretty determined to reject that in favor of discussion. it was his discussion of course.

the reason why ayn rand believed in. >> host: but he was also quite shy and quite unsure of his views. let's move on to the bubbles. you write that early on you saw the crash of 1929 as horrible in the great depression and yet by the 19 '90s he wasn't so worried about this obviously at this time. >> guest: it's amazing. as i said one of the discoveries of the speeches. early on, alan greenspan had written a paper in 1959, which was sort of lost. i think he talked about it with friends a little bit, but the actual paper was in the phd thesis that magically

disappeared from the new york university library after he became the federal chairman and they tried really hard to get ahold of that when he became the chairman because they wanted to see what was in it and they were told we can't find it, we know it's supposed to have all of them a wor afford the can't fin, sorry. anyway, i would ask questions about the development and his eyes would go like this a bit anor thatand he would look up aa while i would look up and i could see the binder on the shelf and i would say it would be great to have your thesis. when he gave it to me and i read it is a 1959 paper which as you say it's all about how the banks must respond to the asset bubbles and it's in the 1920s experience that says compared to the inventory cycles, the asset booms and busts are much more

disruptive to the economic growth so they must deal with bubbles and yet that was the prescription as you say the material greenspan didn't follow it. >> host: talk a little bit about the dot com bubble of the '90s. >> guest: of course you protect me because you were there. what i saw from reconstructing it through the transcripts and interviews with people is that essentially the key moment came in the collapse of long-term capital management, the hedge fund which blew up in the fall of 1988 and after that the fed to cut interest rates to stabilize the market. it cuts the rate three times a.

there was a legitimate concern with the market instability and the fed as i said three interest rate cuts. then in the early 1999 in my view, things have stabilized and they tried to take back the entrance. the cuts were justified with reference to the crisis and once they were passed, the cuts would have been taken back. they were not taken back until late 1999, and this is the crucial period where the evaluation went from very high to absolutely crazy high. >> host: he had worried much earlier about the crazy high, when it wasn't so crazy back in 1996 actually in this speech, and he intended to send a signal with that.

but later, he was less concerned. >> guest: we have a shakespearean tragedy going on. the man who did ... irrational exuberance and understood that the prices could overshoot and knew that could be dangerous as it had been in 1920s, he had all the right intellectual formation to respond to the tech bubble and yet he didn't. >> host: i would argue that we didn't have the right tools. what we would have had to do to the short-term interest rate, which was the tool that we had drove it very high in the time when the real economy was doing fine and there was no inflation and in fact i kept saying in the fomc meetings, it's important to have a tight market. >> guest: this is where i respectfully disagree not just with you, alan greenspan, but

ben bernanke and essentially the consensus. the reason i disagree is that it seems to me knowing what we know now about how they can be very destructive, it's worth reducing it in the short to medium term to have more stable growth on a two or three-year view and i think that is the trade-off, difficult to see at the time but in retrospect. >> host: not all are the same. there is the combination of the housing bubble and the bond market and all the craziness that went on in the next decade. talk about that a bit. >> guest: this is another fascinating argument that i engage with because as you say,

this interview would be the credit bubbles and leverage you have a complete meltdown and it's terrible. if they are not themselves leveraged there won't be a contagion. the reason i am not sanguine about this is that when the fed was confronted with the collapse in 2001 the response is responf lost stimulus. it was appropriate that the consequences that you stimulate the interest rate portion of the economy and when you read a committee transcripts from 2002, 2003, 2004, people knew that

this is what was happening and the real estate starting to take off and it was a fair trade-off. we had this tech bubble blown up and now from the collapse of the bubble by stimulating the real estate investment. >> the short-term interest rate isn't the only tool that was really egregious stuff going on at the level of the originators they were shoveling out mortgages and to people who could likely pay them back. he was very concerned about that, not so much about the bubble but the people that were taking out mortgages that they were not going to be able to afford to take back.

but the fed into the other regulators never really focused on what was happening to these disaster this bindings. >> guest: when my research over five years helped me to challenge the conventional story because in 2001 we can read about this and the freedom of information act disclosures decided to pass new rules on the sub prime mortgages and the rule said that there are dangerous types and we are going to ban them. in particular there was an entrance product that was a ripoff to consumers that wasn't allowed any more and that action, you can read on the frontlinefront line, debating wn greenspan they adopted the rules. at the time they thought maybe one third of the mortgages would

be presented because of the new rules. the problem is when they did a retrospective study a few years earlier instead of stopping one side of the mortgages it stopped 1% because it was easy to just get around it. i think the larger message and method that arises from this is that it organized the system that we have in the united states. it's difficult for one regulator even the fed that is the most powerful to pass the rule and then actually see it enforced. >> host: that's right that there were other regulators and most of the bad stuff wasn't happening on the federal regulated editions that we started out in the beginning. the fed was the center part of the regulators and alan greenspan could have gathered the regulators and his

conference room and and said it looked as bad stuff going on out there. what are we going to do about it. so there was a collective lack of concern among the regulators for the rapid decline and lending standards and the fact that it was being fueled by securitizing these busy bad loans and many of them were bad and throwing them all around the world to very eager buyers into the head high credit ratings and they were good investment. >> there's a lot of truth to what you just said and in my book i do describe the crazy securitization going on and i thought because he had lived through previous derivatives there was orange county in 1995 there was procter and gamble and others with the securitization

before. the message which is maybe underappreciated is that there were instances in which the fed did try on the sub prime mortgages and alan greenspan tried to push back against the gse. >> host: that is a place that he was really worried and testified and made it very clear he was worried about the leverage in the end he didn't

push it very hard. >> guest: the institutions were lending and should be capped and he had an alliance with the bush administration at the time that was on the same page as him and they were pushing i think as hard as they felt they could to get the regulation. what happened was that the day before one of the follow-up congressional hearings on the topic and had appeared on tv and showed a hispanic couple saying to each other we want you to buy a new house but now we hear that congress has been turned on our mortgages and we won't be able to get a new house and that's bad because the politicians are preventing us from having the american dream. so essentially it is a fannie and freddie putting members of congress on the morning that if they kept the portfolio sizes, they would face a barrage of

ads, so it is a limit to what the regulators could do. >> host: i think that is true and they were very powerful lobbyists, fannie and freddie. you make the point that while he was worried about cme and freddie and what might happen when they went bankrupt. they were on the hook in the way that they didn't look at it if they were on the hook for some of the others. now into crisis they would often

regret that and so you are right he should have worried more about the private banks that are engagewere engaged in the mortge industrial complex but i do think that he tried in the subprime mortgage regulation ant the gse and the new york fed tried on the bank leverage a little bit the regulation is hard to do so you would need to be willing to push back against the bubbles. it's what happens if the big institution or very interconnected institution goes bad. that is what no one really anticipated what would happen if it went down.

come to a different subject if you could. the bush tax cut of 2001. that was the curious incident can you talk about that a little bit? >> guest: his emergence into the political acceptance in washington was crystallized in 1993 when he endorsed the clinton budget package that raised taxes to reduce the deficit. >> host: and he'd always been anti-deficit parks >> guest: he was there at the state of the union speech when bill clinton gave the speech invested clapping as bill clinton promised to reduce the deficit, so he was known as a deficit hawk and then along comes george w. bush in 2001 was

an enormous tax cut and greenspan sort of endorses it with a caveat that he wants a sunset clause such that if it is evaporated the tax cut should automatically go away but this is a very savvy political operator who knows that it would be thrown out in the sausage make o her this congress and so essentially you need a compromise between what he thought the white house wanted in his conscience saying there should be a sunset clause but he delivered the bush administration wanted. >> host: he also worried publicly about the large surplus and about what the fed would do to execute monetary policy if we

didn't have a national debt. i thought i was fanciful because the magnitude wasn't going to materially but this was a concern that we might pay off the debt and then where would the fed be when they needed to do the open market. >> guest: then perhaps they would have to start buying corporate entitie entities and y government intervention in the private market, so he raised all sorts of concerns that they were radical because the rest of a very big national debt and has one member of the senate said to him if we reach the point there is no national debt than muc ths have a discussion about it.

>> host: so about what the audience is probably forgotten some of the great moments of y2k. just go there was a considerable fear that when the computer systems reset from 99 through 200 there'll be a software glitch when computer memory was expensive and scarce. >> host: they didn't put in the four digit date.

it's to the big banks and so forth and in some way the model example it is to safeguard integrity of the payment system. that is a great example of something which we didn't remember so much. >> host: and i remember in that period pointing out and making y2k he was a programmer that knew how to program in the language of early computers.

you might say a word about his role in the 9/11 incident because it was such a big thing for above wall street and he wasn't even part of it. >> guest: at the time of the attacks he was on the flight coming back to the u.s. so he was out of touch. then the next day to get to the headquarters by the time that he got there, the team was putting much in control of the crisis response and i think what is revealing about his personality, he didn't march in and demand the control. he was quite happy running the

others do the crisis response because blood interested him was to think about the right interest rate policy in response to all of this. he didn't have to go back to his office. he's put in a special office and he said to me in the interviews individuals retreat to their natural comfort zone and for me it was to go back and just look at the data. >> host: after the crash of 2008, he was no longer the fed chairman but had to come to terms with the role of could he have done things differently and

was he responsible as many people were holding him. can you talk about how he came to terms with that? >> guest: this is something that he said when he was testifying in front of congress and being cross examined and shouldn't he say sorry therefo therefore. he did say i found a fall and what he meant is he had thought financial companies, banks and non- banks and so forth would be looking after their own health protecting their risk exposures and not there for being so crazy as to not blow themselves up and take the whole financial system down with them and this is the fault in the end of thes these e did take way too much risk and did pull themselves up. now, that stuck and i think it gave rise to the unfortunate presumption in the public domain that the reason we have the

crisis is that we have a believer in the self policing efficiency market control and if only we'd gotten rid of that, we would have a safer financial system because if we understand the markets overshoot and we won't make the same mistake again. it's a mistake that alan greenspan, too and i know from reading his early writings and i know because he bought a seat on the exchange to make the money for the market efficiencies he never believed in efficient markets. he always understood markets could overshoot and banks could blow themselves up. he'd studied a the 1920s and 1930s so when i read the transcript of that, i found an interchange to try to change the

subject. he knew that finance is unstab unstable. i think the world had learned the wrong lesson from his legacy. they think we have a crisis because of their but in reality it was with the regulators can do and if we look at the current political season i think it would be foolish to presume that we are any safer now. >> host: we had a crisis for a lot of reasons became together i don't know if it was the perfect storm that interest rates were too low for too long but there

was a widespread phase that somehow large financial institutions were managed risks which was very complicated and so why did we all believe that do you think? >> guest: i think that it was arrived at. people understood that finance could go wrong. anybody like alan greenspan who lived through the failure in the 1970s and the collapse and had come the first thing that happens is the stock market collapsed between 3% and then the commercial property crisis.

there is one crisis after another. why was that appearance nonetheless the financial institutions that manage the risk it's because the alternative phase that they could look over the shoulder of the bankers and the smarter about the risk. that was even less believable. what are the chances that somebody who is supervising different institutions from the government comes and visits jpmorgan is better than the people that work there all the time it has a direct financial interest to manage it properly i think that it wasn't the belief that markets for efficient and perfect it's just that the government was also imperfect.

>> host: come back to the housing bubble. he's made some statements about the housing markets that are actually naïve and said we couldn't have a national housing bubble and people buy houses to live in them, not to sell them for profit. what do you make of that? >> guest: he came out and said just what you described. that is a strange one and it's hard to explain except i think what happened was in the transcripts you see him privately debating in the markets. they debated at the fomc this might be creating instability in

2004. >> host: he was very worried. >> host: part of that concerned with the overall reach of why did he go out and say don't worry there won't be a national bubble i think that in his role he filled he had to reassure the news. in my book you talk about becoming reassuring to the american public as prozac. we talked about uncle alan has our back. once he became that almost despite himself it was hard to go out and bring the negative

news and maybe that shy personality raised by a single mother didn't like to confront society with bad news. if he'd been more naturally confident and less moody of affirmations in some way maybe he would have done it differently. >> host: could it have anything to do with his admiration of the railroad tycoon van now talking more about the nature financial institutions, but these smart people that for creating and running a majo the major financl institutions couldn't get it wrong? >> guest: i think there is a strand in his mental history which had to do with jpmorgan

that he would be reading economic history including the story in the early 20th century he had a reverence that only grew when he was appointed to the director of the company and sat on the board in the 70s and 80s and jpmorgan was the perfect example of this and i think that image did a fact that less than he must have learned at the time from watching the derivatives. >> host: it was jpmorgan that

said we need a lender of last resort and it can't be me. come back to the derivatives for a minute because these fancy financial instruments that most of us struggle to understand for exploding and though we have had derivatives before, there were all kind of financial instruments that nobody understood and yet he resisted any attempt to regulate the derivatives. >> guest: one of the things that drew me to write this book is dot alan greenspan's public life from the time he joined the campaign until the crisis is the four decades of modern finance was created at the start there were no financial derivatives as

well as an exchange rate and so the systems were created in this period that alan greenspan was at or near the center so i think this is the key question, why not do more of the derivatives especially since they had caused trouble in 1995 and there had been a debate about trying to push them from over-the-counter transactions to one bank and one company and pushing them to an exchange where they could be better monitored. so why didn't more of that happened. there was a famous moment when the chair of the commodities commission advocated that there should be better regulation and iwas shot down by all of the

others including alan greenspan and i think when you look at that story why didn't they do more, there's a couple of points. one is that they approached this with the mentality she was a tough person on the production of policy but she wasn't a good politician in terms of building alliances around town so she sort of blew it by demanding action for her agency. so the secretary at the time for the derivatives became because of the issues and the way that she'd made a political errors and the other thing that we have to remember that comes back to the discussion is there would have been massive lobbying by

the derivatives business against this reform and you only have to look at the way that the financial modernization passed in 1999 but after it had failed, passing new financial rules that were extremely different and i think that bob rubin and greenspan, there was a political economy point of view that said we might want to regulate these things more. if we tried that people get killed by the lobby, we won't get anywhere and we should have used our energy for something else. >> host: there's one more example though of people making a huge amount of money on the status quo.

no one stood up against that. i thought you didn't mention enough to end the element of greed and profiteering not alan greenspan that all of the financial sector from the mortgage originators on the was profiting so enormously an in te financial sector grew out of old of this. does that mean we have to live with all of that? >> guest: you are probably right that is the whole story of

the power of the extremely profitable that i could have played up more. i think i get into that in the example where there's a profitable pair of companies that use it to run tv ads to perpetuate the regulations that give it the prophets so the regulation creates a sort of rent for these companies and they use that to perpetuate the regulation. it's a terrible feedback. >> host: they were also gics not just government-sponsored enterprises with a business model that couldn't work. they were being pressured on the one hand it toake money and then on the other to foster more homeownership and that meant you couldn't be too cautious.

>> guest: there were others watching in the financial institution that understood these issues and in retrospect videthey knew that they didn't t and i get into this political debate about why not. >> host: i would question whether the new that it could be this big of a disaster because a financial crisis in the stock market is not a crisis in that is so widely held that if somebody loses on the stock market the neighbors are not affected.

>> guest: one of the things again talking about the thesis, one of the central things that later became known as the notion when the asset prices rise, two things happened. first individuals field richer but second, the companies that see that you can sell corporate equity for more money are more likely to go out and create more corporate equity and they might find another company, the corporate and investment is likely to go up at the time when the secondary market is evaluating the result more highly so this is central to the thinking in the 1950s and so it followed from that when they were zooming up to astronomical heights it wouldn't be pushing

an investment that went along with that and surely the fiber optic cable was being laid, the huge investment driving it upward. equally, when it collapsed in 2000, 2001, it would cause the drying up of the investment and with me here and say is that leverage bubble was the worst, you know, just pure equity bubbles have an effect through the investment channel and of all people he'd written about it. >> host: and again i come back to the whole economic establishment that failed to pick this up but the effect on the downside was enormous and that certainly took it down further than we might otherwise

have. what about alan greenspan and his achievements and failings? you wrote an interesting chapter the end of the book. >> guest: as an analyst and forecaster, he was good. he was able to say the policies were materialized in the 70s and he was writing opposing the wages and price controls that prove to be true. he was right seeing how the early iteration was creating a kind of conundrum like the one

that came back to bite him so a lot of the things he predicted accurately. as an analyst, he was great. as opposed to a watcher he was less good. he liked being an analyst and that comes down to understanding the man. that's right and then data goes into a question of the political constraints and what he felt he could get away with as a part of it. a very political person that had learned all kinds of tricks working for richard nixon back in the 60s and that's why it's a story not just about economics but also human frailty and

machiavellian politics. >> host: and i think about the collective mindset and greed because one of the reasons it's so hard to make the right call is that some people are making an awful lot of money. >> guest: that's why it remains today extraordinarily difficult for the bank to raise interest rates because people own those assets and don't want you to do it and if yo that andt prove that you needed to do it and you do it operating on the presumption that asset prices may be overvalued but you can't prove it, it's hard to the be te

person that picks the bubble. >> host: but that's why we have an independent central bank. he was quite collective in seeing the interest rates in the face of inflation but he was less comfortable with the asset price bubbles which i would argue would have brought him into the regulatory domain rather than just the interest rates domain. >> guest: that was another interesting part of the story in the administration. he was under immense pressure to cut interest rates to the point of the budget director of the white house was going around washington and whispering the

chairman lives by himself and calls his mother every day isn't that a bit creepy and doesn't it remind you of alfred hitchcock . psycho? in a way it almost created a the independents. towards the end of his tenure, paul volcker, the giant old testament prophet that remember is the giant who played inflation but was surrounded in the last year by the appointees at the fed and then on interest rates and twice on regulation and the authority was diminishing and it was alan greenspan who rebuilt the authority and creative independence and now when experts are under attack from

politicians come it behooves us to study the model of somebody that was the expert who parlayed the expertise. that was alan greenspan. >> host: i think also to figure out the proper role of the central bank now that we have had it proven beyond a reasonable doubt that financial instability is a terrible thing to have happened whether it is a domestic economy or world economy. thank you for a terrific book that i think illuminates not just the career of alan greenspan that the s-sierra that we have been living and operating it will be on the shelves of historians for this time. go to come.

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