• U.S.

10 Questions for Alan Greenspan

3 minute read
Belinda Luscombe

Why is your new book called The Map and the Territory?
The map is supposed to be the conceptual framework of the world. The territory is the real world, and they don’t always square. I’m trying to figure out what has been going on which I didn’t understand.

What is the biggest change of mind you’ve had since 2008?
It changed [when Lehman Brothers collapsed] on Sept. 15. Most basic economics up to that point was based on the presumption that human beings are rational in that they look after their long-term self-interest. My real shock was that what we now call animal spirits has a certain consistency about it — in other words, you can demonstrate that fear is a far more potent emotion than euphoria or greed. That changed the whole way I look at the world. I started from scratch, going from equation to equation. I learned more in the last two years than I did in the previous 10.

So how do you propose we measure something as irrational as fear?
I prefer to call it nonrational. You measure it indirectly by looking at spreads of interest rates, both by credit rating and by the maturity of the bond. Today, 30-year U.S. Treasury bonds yield more than five-year notes by the greatest margin in history. Long-lived assets are very heavily discounted. It should be a normal recovery. But it is not, because of the high degree of uncertainty.

Knowing what you know now, what would you have done differently during your time as chairman of the Fed?
It’s not the type of asset — subprime mortgages or stocks — it’s whether it is leveraged. I always knew debt was important. If I could go back and recalibrate my psyche and fully understand how toxic debt really is, that would have been very helpful.

Is your book suggesting that the way out of the economic malaise is to cut social benefits?
No. Part of the way out is to slow down benefits. Very much to my surprise, benefits are crowding out savings of the society; the data are very clear in this regard.

You’ve served four Presidents. How bad is the discord in D.C.?
I’ve never seen it like this. Clearly the problem is within the Republican Party. If you make every issue uncompromisable, you cannot have laws.

You write that one thing that would have prevented the crisis was expanding the capital banks had to hold in reserve. Do you have a figure in mind?
Yeah — whatever you think of, it’s higher. The critical issue is contagion. You can have a financial system with banks making all sorts of horrible loans, but if they’re well capitalized, all of the losses go to the shareholders.

So you changed your opposition to banking regulation?
Of course. I was wrong. You have to regulate the system. My concern about regulation is that it’s more vindictive than curative.

Do you feel personally responsible for anything?
I was responsible for lots of things! Some good, some bad. But I’m realistic. Given what I knew at the time, could I have done better? Probably. Did I know it at the time? No.

I read that you like dancing. Have a favorite?
The tango. I don’t do it anymore. I just do fox-trot. I drag my wife around the dance floor.

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