Lawrence Summers: Alan Greenspan's "The Map and the Territory": Noted
Larry Summers: The Map and the Territory, by Alan Greenspan:
[Greenspan] acknowledges having changed his mind in some quite fundamental ways, in particular by greatly elevating the significance he attaches to “animal spirits”, especially fear and panic…. Reluctantly but clearly, he sees a stronger warrant for regulation--particularly with respect to the capital and liquidity position of major financial institutions…. He is rightly dismissive of the notion that financial crises can ever be completely avoided, or that governments can totally avoid bailout responsibilities…. One can only agree and hope that rational expectation theorists will take Greenspan on board…. He is very worried about the problem of “too big to fail”…. On this he is surely right… suggesting that “too big to fail” can very easily lead to crony capitalism. “Too big to fail” is surely the besetting challenge for financial regulation in the years ahead. I wish Greenspan had been more specific in his recommendations, although “too big to fail”, like nuclear deterrence, may be an area where ambiguity is essential….
One of the areas where Greenspan has been most extensively criticised is in the failure of the Federal Reserve to do a better job of protecting consumers in the run-up to the financial crisis. He sidesteps the issue by asserting his focus on regulation, rather than fraud…. [But] if, as JK Galbraith observed, “Conscience is the knowledge that someone is watching”, then questions of regulation and fraud are closely related….
Greenspan… marshals data… shows, for example, that much of the rise in the income share of the top one per cent is explainable by a tendency for some wages… of asset managers and chief executives to track stock prices… the tendency towards ever-increasing social and entitlement spending that he deplores has occurred disproportionately under Republican administrations…. Greenspan brings together disturbing data on how the average age of highways, warships and much else has shot upwards.
I found myself disappointed that the events of the past few years had not led Greenspan to any revision of his anti-Keynesian views on macroeconomic policy… he sidesteps monetary policy issues… is dismissive of the role of fiscal policy in helping the economy out of the 2009 trough and the role of fiscal policy contraction in perpetuating slow recovery. Even in retrospect, he regrets the decision to save hundreds of thousands of jobs by having the government provide financing in connection with the GM and Chrysler bankruptcies.
Greenspan regards raising the US saving rate as a central priority. At a time when output appears to be constrained by demand rather than by supply and when even long-term real interest rates are at near-record low levels, it is much less clear to me than Greenspan that raising savings rates is the right growth strategy. And in an economy that is changing rapidly in ways that leave many behind, Greenspan seems much more concerned with the possibility that help for the victims will foster dependency--going so far as to raise questions about tax credits for the working poor put in place by Ronald Reagan--than he is about mitigating inequality, preventing suffering or maintaining demand.
