The Giant Stumbled

An Interview with Sebastian Mallaby

Alan Greenspan's political abilities rivalled his economic perspicacity, argues Sebastian Mallaby.

Flickr. Alan Greenspan's political abilities rivalled his economic perspicacity, argues Sebastian Mallaby.

Octavian Report: Why a Greenspan biography? Why now?

Sebastian Mallaby: I started out with the idea that I wanted to write a big-sweep history of the making of modern finance. As I thought about it, there is one person whose career maps perfectly onto that story, because the career of Alan Greenspan is basically the story of modern finance. He got into public life in the late 1960’s when he joined Richard Nixon’s campaign. At that time, as you know, the dollar was pegged to gold, interest rates were capped by Regulation Q, there were no financial derivatives. You didn’t have modern finance at all in the sense that we now recognize it.

Over the next four decades, we created the freewheeling system that we know today, and Greenspan was at, or near, the center of that process more than any other individual that we can think of. Chairman of the Fed for almost 19 years. Chief of the Council of Economic Advisors under President Ford in the mid-1970’s. In between that, a very close outside counselor and operative used by Nixon and Reagan. That was the thing that first drew me to the idea, this idea that not only is Greenspan the most important financial statesman of the post-war era, but also his life told us something powerful about the system that blew up in 2008.

OR: What is that?

Mallaby: Going into the project, it was simply that he had been present at the creation and the development of all these financial instruments that later went wrong. All the decisions like the erosion of Glass–Steagall, let’s say. Greenspan was on the board of JP Morgan when JP Morgan started to press for the erosion of the Glass–Steagall division between commercial banks and investment banks. Then, in 1987, Greenspan was installed as Fed Chairman, and he was the person who reversed Paul Volcker’s stance, which had been to resist the erosion of the Glass–Steagall separation. Greenspan was willing to go forward.

All these decisions that created our modern system were things that Greenspan had his fingerprints on. If you wanted to understand the creation of the modern financial system, you’d get into the cockpit with one of its chief pilots, and you’d fly over that terrain and understand why they made the decisions that they did. They weren’t stupid, they had reasons to create the system that went wrong. I wanted to get inside it, and really understand the process by which the financial system was made.

OR: What are, in your opinion, Greenspan’s signal successes and failures?

Mallaby: Greenspan is obviously somebody who went from hero to zero in the most dramatic fashion. While he was in office at the Fed he had really an extraordinary level of prestige and an extraordinary reputation. If you just take one example: Bob Woodward, the journalist who was famous for bringing down the Nixon White House in the Watergate scandal. This big tough reporter, when he came to write a book about Greenspan, called it The Maestro. He went from holding powerful people to account and getting Presidents kicked out of office to being the person who couldn’t find anything bad to say about the Fed Chairman, and called him the maestro — the most unqualified praise you could imagine.

Greenspan’s reputation was totally extraordinary when he was presiding over the world’s financial system as the most powerful economist on the planet. Then after the 2008 crisis, it went to the opposite extreme, and he was blamed for the fact that the world economy had been brought to its knees by the sub-prime bubble. He suffered, I think, the most amazing collapse in a public reputation in modern memory.

OR: To what extent was that justified?

Mallaby: You cannot be presiding over the global financial system, have it blow up, and then say you weren’t guilty. By definition, you were the most powerful person in the world, presiding over this system — the system as it was before the sub-prime crisis. If you’re the most powerful person, with that power comes some responsibility. What’s interesting is that the nature of the responsibility — the nature of the error Greenspan made — is exactly the opposite of what the common narrative would say. The common narrative about Greenspan is that in the 2000’s monetary policy, the setting of interest rates, was pretty good because inflation didn’t go above the two-percent informal target. Therefore, if the outcome on inflation was very stable and very steady, by definition monetary policy was pretty much right.

On the other hand, the conventional story is that on the regulatory side, the Fed messed up, and that’s why all these financial institutions from Fannie and Freddie to Lehman — name your list — went down in 2008. The Fed had been asleep at the switch in terms of its regulatory duties.

I came to a very different conclusion. Through Freedom of Information Act requests and other disclosures and a lot of my own interviews with people who were in and around the Fed at the time, I show in my book that the conventional story is wrong.

First of all, Greenspan and the Fed did try to regulate sub-prime mortgages. You can read the transcript, released thanks to the Freedom of Information Act. It’s very clear: they adopted in 2001 new rules to limit dangerous mortgages. The point is that these rules didn’t do much. Why didn’t they do much? They could be circumvented by just tweaking the mortgage products so they escaped the new rules. And the enforcement of these rules was not just the Fed’s job, it was mostly the alphabet soup of other regulatory agencies. When you think about the financial system in the U.S., you’ve got the SEC, CFTC, the FDIC. You’ve got the FTC, the Fair Trade Commission. All of these different federal agencies have responsibility for different bits of the system. That’s why the Fed tried, but failed, to regulate excess risk-taking. It wasn’t that they were asleep at the switch, it’s that our political system in the U.S. created such a Balkanized financial regulatory system that it was not possible then, and I don’t believe it’s possible now, to restrain excess leverage through regulation.

I’ve told you that the conventional story is wrong on the regulatory side, because they tried, but it wasn’t possible. I’ll finish the story by saying therefore on the monetary side, in my view, because regulation wasn’t going to work, they should have raised interest rates to discourage excess leverage. They should also have been less clear in their forward guidance, because the forward guidance massively encouraged Wall Street to borrow short and lend long. That carry trade, which Lehman et cetera were doing, was incentivized by monetary policy that was not only too loose, but also too predictable, too transparent.

That’s a debate, of course, that’s relevant to the world today, because we’re back in an environment where the central bank has been running policy very loose for a long time — justified, supposedly, by inflation that’s below target. Yet bubbles, I think, are emerging. So we’re back to where we were in the 2000’s.

Can we imagine a reconfigured American politics that would allow the Fed to do a better job of regulation? Let me come at this a couple of different ways. One is that we ran the experiment after 2008 with the Dodd–Frank financial reform. If ever there was a moment when the U.S. political system was going to rethink financial oversight, that was it. What we got was some attempt to create some more joined-up financial regulatory machinery — namely the creation of the Financial Stability Oversight Council, the FSOC, which is chaired by the Fed and which convenes representatives from different regulatory agencies. It’s supposed to address this problem that if financial risk is like a big balloon, and you squeeze one end of the balloon and the air just moves to a different part, you’re not achieving anything. You’ve got to have all the people and supervise all the bits of the balloon so they act together.

Nobody that I know thinks the FSOC is effective. I think we’ve run the experiment of having the U.S. political system try to reform itself and produce a more unified regulatory structure. It failed. I don’t see that there’ll be another political moment equivalent to post-2008 in which we could address this.

Keep in mind we live in an era now where experts are out of favor, where elites are being attacked. This is true not just in the United States, as witnessed by the election campaign of 2016 — it’s also true in Britain, where experts were denounced in the Brexit referendum, and other advanced countries where the elites are generally out of favor.

People thought they had solutions in the 1990’s and the 2000’s. Now populism is on the rise because people do not believe elites anymore. I think one of the fascinating things to come out of Greenspan’s life, if you really study his career, is that he shows how experts can fight back. If populist politicians are coming after you, there are ways that you can take the fight to them and establish expert authority that has to be listened to. In many ways, Greenspan was a master of that. When he came into power at the Fed in 1987, it was routine for Presidents and for Congress to attack the Fed in public. In about five years they’d stopped doing that, because attacking Greenspan was something that backfired on you: he was better at hitting you than you were at hitting him.

OR: How does Ben Bernanke stack up against Greenspan? Did he continue Greenspan’s project?

Mallaby: Bernanke appears in my biography of Greenspan at various points, and I think it sheds light on what he did later in his tenure. After the 2008 crisis, Bernanke acted with courage and speed to underpin liquidity and contain the crisis. I think he deserves a lot of respect for that. That was really not just a national service, that was a global service. The stabilization of markets extended way beyond the borders of the United States. Having said that, Bernanke is the chief author of two doctrines in central banking which I believe were taken too far.

The first is inflation targeting. I think anyone who believes that inflation is the key threat to stable growth must still be living in the 1970’s. It was the key threat to stable growth back then, but 40 years later financial bubbles, financial instabilities, dysfunction in banks, and so forth have emerged as far more present and clear dangers to stable growth.

Bernanke persuaded the Fed, notably through a speech he gave in 1999 at the Fed’s annual conference at Jackson Hole, to embrace inflation targeting. That led the Fed to prioritize inflation at a time when it should have been looking at bubbles. Hence it allowed the sub-prime bubble to inflate. I think he continued that beyond Greenspan’s era. The fact that the Fed today is still running policy with interest rates below one percent shows you that they’re more focused on where inflation is, because inflation is very low, than they are on the fact that there’s all kinds of signs of bubbles emerging. Whether it’s the fact that bond spreads are low, that term premia in bond markets are low. Or that real estate is almost back up to where it was in 2006.

So I think Bernanke got the Fed excessively focused on inflation. The other thing he did was to push the idea of forward guidance. The idea that you reduce long-term interest rates by telling markets what your short-term policy would be. Therefore influencing not just the policy rate, which the Fed has always controlled, but influencing longer term rates as well. Again, this is a useful tool sometimes, but when it’s overdone and used for too long, I think it creates too much certainty in the financial markets. It becomes too safe for Wall Street to borrow a lot in the knowledge that interest rates won’t surprise them. When you take away risk by having too much certainty about what interest rates will do, Wall Street will compensate by taking other kinds of risk through greater leverage.

OR: Have we learned the correct lessons from 2008?

Mallaby: I think that there have been some lessons learned. If you look at U.S. banks, capital ratios have improved; liquidity ratios have improved as well. There’s been some reduction in proprietary trading, which has been hived off into hedge funds partly prompted by the Volcker Rule. I think that’s a healthy thing, because I believe that the more financial risk you can put in small-enough-to-fail hedge funds, the less it has to be in too-big-to-fail banks. I approve of that development of pushing proprietary trading out of banks.

In other words, I’m saying that there’ve been some crucial improvements and lessons learned. My central conclusion, after more than five years of studying the Greenspan Fed, is that in the end it went wrong not because of a lack of understanding of the dangers of bubbles. It went wrong because of political constraints and what Greenspan felt he could do. Those political constraints have gotten worse, not better. You just have to look at the attacks on the Fed that have emerged in the 2016 Presidential race. With, on the one hand, Donald Trump directly attacking Fed Chair Janet Yellen the way that we haven’t heard from somebody at that level since the early 1990’s, when George H.W. Bush went after the Fed Chairman in public.

On the other hand, you’ve got Hillary Clinton not attacking Janet Yellen but endorsing probably the biggest reorganization of the Fed structure that we’ve seen at any time in its 100-year history. The Fed is under more political pressure now than it used to be, and I think it follows that the constraints that really were at the root of the crisis in 2008 have gotten worse, and not better.

OR: What are the biggest economic risks you see looming on the horizon?

Mallaby: I think that the risks around the world are centrally to do with this extended period of very loose monetary policy that we’ve had. Loose monetary policy either shifts demand from another country, so one country cuts interest rates, its currency falls, and that borrows demand from its trading partners. Or you can shift demand from the future into the present: lower interest rates will cause people to borrow more. They’ll spend more now, but less in the future. They have to pay that borrowing back. Either way, monetary policy is not creating fundamental growth, it’s just shifting when and where the growth will take place.

As a temporary measure, that can be a smart thing to do. As a sustained policy that’s now been going on since 2008, it’s not such a smart thing to do. It creates distortions. I think that the big risk in macro terms has to do with the fact that we can’t carry on stimulating forever with super-low interest rates that are causing huge problems for pension funds that can’t earn anything on their assets and huge problems for banks that can’t make anything on their lending.

You can talk then about specific political situations like what happened with the Brexit negotiations in Britain. I think that’s probably a very big risk for the U.K., not such a risk globally.

OR: Do central banks have the tools available to them to undo years of loose monetary policy, or have they run out of dry powder?

Mallaby: I do think that central banks are scraping the bottom of the barrel. The Bank of Japan has been the most active in pushing the newest and most adventurous techniques. The latest is negative interest rates. The consequence was that people got scared, because when rates are negative banks have a very, very hard time making any money. You start to raise questions about the stability of your banking system, which achieves the opposite of what you wanted. You wanted to boost confidence, you wanted to boost growth, and instead you created lack of confidence in banks.

Negative rates I don’t think take you very far. The next thing is to push quantitative easing beyond the purchase of government bonds and into the purchase of corporate bonds — or even equities. This is something that’s now happening a bit in the U.K. after the Brexit referendum. The Bank of England started to buy corporate bonds to try to support the economy. The problem there is that you have to decide which bonds to buy, and inevitably you buy the ones which are liquid and which you can buy. That means you wind up buying, let’s say, the bonds of retailer A, and not buying the bonds of retailers B and C, because they haven’t issued enough and they’re not liquid enough.

That biases the playing field in favor of one retailer whose bonds happen to be there to be purchased against the others. You build up more distortions the more you play these games. I think the big trick that central banks can still play in some economies — and I think Japan is the obvious one where this might happen — is the explicit monetization of government borrowing. In other words, the government issues a lot of bonds to go off and build infrastructure. The central bank buys the bonds, and rips them into small pieces, and then burns them, and the bonds are never repaid. It’s simply printed money used to pay for infrastructure.

That is such a radical notion. No one has done it quite as explicitly as I’ve just described it. I think that is the end-game in a country like Japan, which has very deep debt and growth problems, and has — crucially — a unified political structure where there is one physical entity, the government, and one central bank. In the euro zone, constitutionally the European Central Bank couldn’t go there: allowing the Italians to build infrastructure with printed money quite that brazenly would just cause a revolution in Germany.

OR: How do you think the ECB is doing in the context of the growing political fragility of the euro?

Mallaby: The ECB in 2012 pretty much rescued the euro zone. Mario Draghi uttered his famous two sentences — “We will do whatever it takes within our mandate to contain the euro zone. And believe me, it will be enough.” This was sort of the equivalent of a macho sheriff appearing in the dusty Wild West town with a curl on his lip and a bazooka instead of a cop pistol. He was saying, essentially: you speculators in the markets think you can attack markets in Greece and Italy, and you think you’re pretty bad, but I’m badder than you are, and I’ll do whatever it takes, and believe me it will be enough. The language was unmistakable.

Amazingly, that tough-guy stance, that demonstration of monetary machismo, caused a reversal in European markets, such that the pressure on the euro and the threat of a breakup of the euro zone went away. Greek debt had been trading at more than 20 percent before Draghi spoke. It was down to 12 percent by the end of the year. That was a remarkable achievement by a central bank acting as the glue holding together a political project.

What’s going to happen next? You can play these games with monetary policy, and it can be very, very effective. In the longer term, the policy is just shifting demand around. You can bring tomorrow’s demand into today, but eventually you get to tomorrow, and that’s what’s happening. Right now, the European Central Bank is busy with its latest round of monetary stimulus. It says it’s going to stop in the spring. It says that because it recognizes that you can’t carry on forever, and you’re going to run out of tools, and eventually get less and less for your stimulus in terms of growth. You’ll get more and more distortions in financial markets, so the cost/benefit becomes negative.

I think it’s going to be a very tough next few years for the euro zone as a result. Without that macho, monetary act from the Central Bank holding the project together, we will have to see whether the euro zone hangs together. I’m not a hundred percent sure it will.

OR: Are we staring into the face of another 2008-style crisis, in your opinion?

Mallaby: The 2008 crisis was a very special and particular thing. It was a freeze-up of the payment system where suddenly, if you were a company and you wanted to make payroll next Friday, you weren’t even sure you could issue commercial paper or roll over your existing commercial paper to raise the funds to meet payroll. The entire money market had frozen up with the breaking of the buck by the Reserve Fund in the days after Lehman Brothers went down. That is an absolutely extreme shock. I don’t see any prospect that the world’s central banks will let that happen again. If it did happen, they would be even faster than they were last time to respond with huge amounts of liquidity to restore confidence.

I don’t think that’s the issue. I think the issue is that every crisis is different from the last one. The trick to forecasting the next one is not to look specifically at the last one and expect it to be the same. Instead, I think you’ve got to think about the stresses, as I said, in pensions and insurance savings funds. These funds have to accumulate assets and make a return on the assets to meet their future obligations to pensioners or to the people who have insurance claims. It’s just extremely difficult to make the returns they need to make when interest rates are around zero, and in fact, negative in the case of many bond instruments out there.

How do you make a return? For some years, after the beginning of QE, you made the return by holding equities, which did very nicely. Now you’ve got sort of utility-type stocks trading at huge multiples, far in excess of anything that the future cash flows are expected to support. I think the upward momentum in equities that came from QE is now exhausted, and the next correction is more likely to be downwards. I think the next crisis will come from the inability of savers to generate returns and therefore their inability to meet promises, whether it’s to pensioners or to insurance claimants.

You’re going to have people on 401(k)plans retiring, and right now if they retire, they’re probably okay. If they held some equities, they’re probably fine. If you retire ten years from now, and there’s been a decade of almost no returns on assets, everything you expected about what retirement would feel like will be disappointed. I think there’s a series of big stressors building up of that sort, in a low-growth, stagnant, low-interest rate, low-asset-return world. That’s what worries me the most.

OR: How do Greenspan and Volcker compare in your eyes? Whose wisdom does the world need more of now?

Mallaby: The conventional story on this is that Volcker, who took office in 1979 when inflation was in double-digits, through sheer force of personality killed inflation and saved Western capitalism in the process. Whereas, according to the conventional story, Greenspan took office in 1987 at a time when things were a lot more stable, and he was lucky to preside over a period of prosperity when there was a secular fall in interest rates over two decades. He reaped the benefit of that. I think there’s a bit of truth to that contrast, but I also think that Greenspan deserves more credit than the standard story gives him.

In some ways, Volcker was lucky to come to office at a time when there was a national crisis, when opinion polls were telling the country that inflation was the central paranoia in the American public’s mind. That paranoia legitimized the Churchillian central bank that went to war with inflation. It’s a bit like a President who takes office in wartime and faces heroic-scale challenges and can make it to the history books more easily than a President who governs in peacetime. The office of the Presidency expands according to the challenges facing it. Equally with the Fed, the office of the Fed Chairman expands if there is a sense of crisis.

Bernanke benefited from that in 2008 when he responded to the sub-prime meltdown, just as Volcker benefited by responding to the inflation challenge of 1979. Greenspan came in between, and I think what’s remarkable is that he built up this phenomenal level of prestige and respect for the institution that he led without there being a crisis of equivalent proportion. He did it through being political as well as clever. When I began my research on my biography of Greenspan, I thought I was writing a book about a financial statesman — the most important financial statesman of the postwar period. It turned out also to be a story about personality and politics. It was about Machiavellian politics and the Shakespearean tragedy of the personalities involved.

It wasn’t just about finance and economics. Through his political Machiavellian skills, Greenspan — who inherited a situation where the Fed was routinely attacked in public by politicians — turned it around to a situation where the Fed’s independence was respected, where he was left to set interest rates as he wanted to, where he did the country, for a long time, a power of good by being an enlightened technocrat who had the political savvy to defend his technocratic decisions. I give Greenspan a lot of credit, and I think in some ways what he achieved, until the mistakes of his final years, was more remarkable than anything that Volcker achieved.

OR: What will the political imperatives in the U.S. look like after the election vis-à-vis the Federal Reserve?

Mallaby: The campaign has showed these two different impulses, which both manifest as attacks on the Fed. One impulse is simply the Donald Trump impulse: to criticize what Yellen is doing and accuse her of being political, accuse her of holding rates lower for longer, because she was trying to be helpful to the Obama administration. That is very significant, because it was the first time you’ve had this public attack from somebody at Trump’s level — either a President or a Presidential nominee of a major party — in years. You really have to go back to George H.W. Bush. Bill Clinton never did it; he never criticized the Fed in public. George W. Bush never did it. Barack Obama never did it. They all understood that attacking the Fed in public is something you just don’t do.

The problem with attacking the Fed in public, as Trump did, is that it raises the suspicion in people’s minds that the Fed might cut interest rates to be nice to the government. Therefore, the Fed actually has to try harder, tighten rates more, to prove itself. If the critic is saying you should raise rates, the Fed has to not raise them to show its independence. If the critic is saying you should cut rates, the Fed has to not cut them, to show its independence. Trump’s attacks are counterproductive, and they make the Fed’s job harder going forward.

Hillary Clinton’s position is more subtle. Her position is this idea that the regional Federal Reserve banks should be restructured so that their boards are reformed. They would no longer have private bankers sitting on the boards and supervising what the Feds do. You can see the logic: you don’t want banks, private banks, which are being supervised by the Fed, at the same time be supervising their supervisors.

One understands the impulse behind the Hillary Clinton position. But I think it’s misguided, because the Fed faces different threats to its independence. One is it should not be beholden to the bankers, for sure. The other is that it should not be beholden to the politicians. Giving the bankers, the private bankers, a little bit of say in the regional Feds — not a dominant say, by the way; it’s only a minority of the positions on the boards of the regional Feds that these bankers hold — means there is a kind of check and balance deliberately baked into the structure of the Fed. By reducing the role of private banks, you would create a void that would be filled by politicians. I don’t think that’s a good trade, I think Hillary Clinton is mistaken in supporting that plan.

OR: How would you assess Janet Yellen’s tenure so far?

Mallaby: I think Janet Yellen has been a sort of continuity Chair. I’d say she has in fact been the least innovative Fed Chair. You’d have to go back to the 1970’s to find somebody who just continued in the path set for her quite as much. She essentially inherited a framework from Bernanke and continued it. I think that she’s a cautious leader and has not changed the Fed’s course, and there are two narratives about how she should have changed it. There’s one that says she should have been, should still be, more explicitly dovish, to try to force inflation higher. The other point of view is that she should now tighten, because other than obsessing about where inflation is, you should think about what the danger of financial sector instability is. I’m in the second camp. Both critiques have been allowed to develop without an especially strong response from Yellen.

OR: What one quality let Alan Greenspan achieve his phenomenal success? What made Greenspan Greenspan?

Mallaby: Greenspan was and is an unusual personality. One little illustration of that is he was not against marriage: he did it twice. He was single between the age of 27 and 71, which is an unusual formula. He did this because, on the one hand, he is a very shy, private, and amazingly self-contained person. I spent more than 70 hours interviewing him. I really got to know him very well directly, as well as interviewing dozens and dozens of people who had interacted with him professionally or personally over his life.

For five years I immersed myself in understanding his personality. He didn’t need to be married to somebody else, because he had his own thoughts, and he lived inside his own head, and he was quite independent. But that independence and autonomy was coupled with an interesting craving for affirmation. He was, on the one hand, aloof from the world. On the other hand, desperate to be recognized by it. That craving for affirmation goes back to his mother, who was a very vivacious character, who would sing beautifully jazz songs at parties, and become the center of attention. Greenspan always felt he was off to the side, and would call himself — in the lexicon of jazz — a sideman.

I think you can understand a lot of what he did in his life by this willingness to act as an independent operator but at the same time, one longing not to be just a sideman, to be recognized by other people. This combination produced somebody whose method of operating in Washington was quite distinctive. He was impressively his own person, he knew what he thought, he had his own views on everything. But at the same time, he was assiduous in accommodating other people, in courting them. If a certain member of Congress or journalist or whoever it was wanted his advice, he would be there for them and give it to them. He went to enormous lengths to show up at A-list parties, to say hello to people, even though he was shy, and he found it cripplingly difficult.

The consequence of all that was at the time he became Fed Chairman, when he was already 61, he had spent more than two decades accumulating relationships and connections and political capital in the nation’s capital. My book is called The Man Who Knew, in the sense mainly that he understood financial fragility, that he knew there was a crisis coming. He was also the man who knew in the sense that he was the man who knew people. He knew everyone. He knew everyone in Washington, and they knew him. He parlayed those relationships in D.C. into an extraordinary amount of political influence.

When Paul Volcker was in the second part of his tenure, the Regan administration appointed people he didn’t like to the Fed’s board. Those people would vote against him sometimes. Indeed, Volcker lost a vote on interest rates and handed in his resignation out of humiliation and fury. It was an unheard of thing to happen. Volcker allowed himself to be surrounded by the President’s people. When the same thing was threatened to Greenspan, Greenspan went to see his friends in the Senate, in the key committee, and said he would prefer that they did not confirm the person that the President wanted. The Senate listened to him, because the Senators had these long relationships with Greenspan. They respected him. He’d advised them on all kinds of things.

Greenspan had the ability to go toe-to-toe with the President and win, and have the President’s preferred candidate for Vice Chairman vetoed. It was a pretty amazing achievement. Other times, somebody would disagree with Greenspan in public, and not only would all the talking heads, the major columnists and TV commentators, take Greenspan’s side and call the other person’s judgement into question, there would also sometimes be negative stories appearing in the press about the other person.

Greenspan’s connections to the media were fantastic. They respected him because they had come to his office and sat there, and he had flattered them, and given them insight and understanding, and enlarged their intellectual scope by being such an intelligent interlocutor. Greenspan was the man who knew, again. He was the man who knew, and all the media thought if anyone is disagreeing with Greenspan, that other person must be wrong.

OR: Other than Greenspan, is there a similarly titanic Fed chair you admire?

Mallaby: There are a few candidates to have the title of the preeminent chairman of Fed’s first century. We’ve talked about Paul Volcker, whose claim to fame was that he overcame the 1970’s inflation, and I think that’s a real achievement. He was a disaster on regulatory policy. He allowed the Latin-American debt crisis, he allowed a too-big-to-fail bank, Continental Illinois, to be rescued. That was the first precedent of bailing out a bank. He didn’t survive more than eight years, and in the last years he was ineffective because he was surrounded by political pressure that he was unable to resist. Hard to say that Volcker was quite the unblemished titan that some people would think.

William McChesney Martin in the 1950’s and 60’s has the distinction of being the longest serving Fed Chairman. He began very well. He came to office in the early 50’s at a time when the Fed was first asserting its independence from the Executive Branch. In the second part of his tenure and in the 60’s, leading up to 1970, he allowed the Johnson administration in the Vietnam era to insist on guns and butter. That created the beginnings of the inflation, which then got out of hand in the 70’s.

There was an incident where Lyndon Johnson called McChesney Martin down to his home in Texas. Martin showed up and was put into this big room, and there was nobody there at all. He was just standing there by himself, and wondering why he was there. Suddenly in comes the President and puts his face right up to his and pushes him around the room, and says “Boys are dying in Vietnam, and William Martin doesn’t care.” He caved to that pressure — so not a flawless figure either.

I think the other figure that people would cite is Ben Bernanke, whose response to the crisis in 2008 was dramatic, energetic, creative, and informed by a deep historical understanding of the 1920’s and 1930’s. All of those three — Volcker, William McChesney Martin, and Ben Bernanke — I think would be in the first position, along with Alan Greenspan. Greenspan, as I said, managed to build up the Fed’s prestige at a time when there was no crisis. Which is an amazing achievement. On the other hand, he made a big mistake, I think, with monetary policy in his last two or three years.