BOOKS: IRREPLACEABLE GREENSPAN - The Fed's chairman, rather than Clinton, is considered the architect of the long US boom. James Hanson enjoys a book that explains why - Maestro: Greenspan's Fed and the American Boom, by Bob Woodward - Simon & Schuste

BOOKS: IRREPLACEABLE GREENSPAN - The Fed's chairman, rather than Clinton, is considered the architect of the long US boom. James Hanson enjoys a book that explains why - Maestro: Greenspan's Fed and the American Boom, by Bob Woodward - Simon & Schuste

by LORD HANSON, co-founder of the original Hanson plc
Last Updated: 31 Aug 2010

Bob Woodward's excellent new book Maestro is well-researched and based on one of the most important decisions made by any US government - the appointment in 1987 of Alan Greenspan as chairman of the Federal Reserve System, or Fed.

Early in his reign, the stock market fell 22% in one day, but he weathered that crash. When he started, the Dow Jones stood at 2,500 points and today it's over 10,000, with previous highs of more than 11,500. It is no coincidence that the US economy has enjoyed the longest expansion in its history and one must credit Greenspan's firm hand as one of the main reasons for this long-running success.

How does he do it? The answer appears to be very hard work, enormous attention to detailed research, an individual style that is 'oblique and somewhat veiled' and a great sense of humour. The dictionary defines maestro as 'masterly performer' and Greenspan succeeds by doing something extraordinarily difficult with apparent ease. Yet he describes it as 'the greatest job in the world. Like eating peanuts, you keep doing it, keep doing it and you never get tired.'

He uses constructive ambiguity and can subtly confound his audience. 'The greatest positive force that we could add to this turmoil,' he says, 'is not to be acting, but to be perceived as providing a degree of stability.' In 1997, JK Galbraith said: 'Greenspan's press recalls the Versailles court. No matter what the man does, the newspapers fawn.' In the words of the New York Times, 'who needs gold when we have Greenspan?'

Alice Rivlin, vice-chairman of the Fed from 1996 to 1999, was concerned that if something happened to Greenspan the world would think a calamity had befallen the US economy. She told him: 'It's important for you to reinforce the notion that you do not run the world.'

Central banks around the world have attempted to model themselves on Greenspan; in contrast, Wim Duisenberg, head of the European Central Bank, is blamed for the failure of the euro and it's hard to find anyone to say anything good about him.

It is important to understand what Greenspan is trying to do, as not all central bankers do the same job. The Bank of England, for example, sets interest rates to deliver price stability as defined in the government's inflation target, and where feasible it supports the government's economic policy.

This is both shallower and more political than the Fed's remit: 'To promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.'

The Federal Reserve Act works by influencing the demand for or supply of reserves at banks and other depository institutions. It supplies reserves to the banking system by lending through the Federal Reserve discount window (at the discount interest rate) and by buying government securities.

Woodward makes it clear that although Greenspan does not have total control of the economy - affected by changes in tax, government spending programmes, shifts in consumer and business confidence, natural disasters and disruptions in oil supply - his natural mastery provides him with his own way of handling such problems.

For several years, Fed economists tried to construct computerised models that might offer insights into the stock market. As Woodward writes: 'There is no rational way to determine that you're in a bubble when you're in it.' You need technical knowledge, but also a feel for economics. A classic example is if things go wrong and you have borrowed dollars 1 million, you are in trouble; but if things go wrong and you have borrowed dollars 10 billion, the bank is in trouble.

This is a book about interest rates and economic statistics, a thriller in which the killer moves are percentage interest rate rises. Maestro has no narrative force to make you turn the page, but if you want to know more about the single most powerful banker in the world, this is the book.

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