The Hollow Man

Peeling the layers on Alan Greenspan’s real contribution to the economy.

Americans have a long history of confusing inscrutability with genius. The less you say, the conventional wisdom goes, the smarter people will think you are. Alan Greenspan, the most powerful Fed chairman in history, built his storied career on this simple, if shaky, premise. His memoir, The Age of Turbulence, will be published this month, and it will be interesting to see how he stretches this rhetorical formula across 640 pages. Greenspan’s particular style has always been to offer a short restating of the facts that are obvious to most economic observers, peppered with a few original insights that can be interpreted as black, white, or a blackish-whitish shade of gray, depending on who’s listening. In Greenspanish, two and two may equal four. But it may also equal two discrete sets of two that shall never become four. And that assumes we all agree on how four should be defined. (If you find that analogy impenetrable, just make like a Greenspan acolyte and assume that it’s brilliant.)


His most memorable contribution to pop economics, the phrase “irrational exuberance,” is a perfect example of his status as a living, breathing, linguistic Rorschach test. Fans of Greenspan, of which there are many, herald his uncanny ability to foresee the market’s impending collapse. Critics, of which there are fewer, complain that he failed to put two and two together, get the requisite four, and warn the American public that the dotcom implosion was just on the horizon. Meanwhile, both parties assume that Greenspan made the decisions he did because he actually knew what was going to happen.

Today, 19 months after his departure, we’re still paying for Greenspan’s most significant contribution to the actual economy. Greenspan suggested long ago that perhaps traditional fixed-rate mortgage lending was inappropriate for certain customers and that the industry should offer a wider range of products. This and his lowering of interest rates to a mind-boggling 1% led to the repopularization of the “interest only” loan, which you may remember was popular in the 1920s, just before the most famous Fed-induced bubble in U.S. economic history burst, leading to what we now fondly call the Great Depression. As we head to the bookstore, maybe we’ll have forgotten the subprime collapse that just a few months ago sent Bear Stearns scrambling to find $3 billion–the cost of bailing out its collateralized-debt-obligation-and-mortgage-backed-securities-heavy hedge funds. Maybe not.

To be fair, Greenspan’s oracular status isn’t entirely his doing. Part of the reason why the investing public loves to read endless profundities into any Greenspan utterance–however banal or irrelevant–is that the average person’s understanding of macroeconomics, microeconomics, corporate finance, personal finance, and, in many cases, the laws of space and time is limited at best. Most of us think inflation is useful only for the expansion of swimming-pool accessories and bicycle tires. And insofar as we don’t fully understand what’s going on, we want someone to just tell us what to do. You can’t smoke or eat trans fats. Now go buy a house with money you don’t have. If they can tell us what to do in an ambiguous way that allows us to do whatever we were going to do anyway, then all the better.

We also like the idea of someone being in charge, even if his powers are largely illusory, if only so that we can throw tomatoes at him when our bank balance plummets, or our house gets repossessed. If there were no Fed to blame for economic disasters, we’d be forced to admit that we made bad financial decisions, ignoring the risky disclaimers right in front of us in favor of our greed. And who wants to do that?

Elizabeth Spiers was the founding editor of both Gawker and Her first novel, And They All Die in the End, will be published by Riverhead.