Maestro Greenspan wasn't conducting all that much

Alan Greenspan was called the second-most-powerful man in America. As chairman of the Federal Reserve from 1987 to 2006, he was the top regulator of the U.S. economy. But in his new book, "The Age of Turbulence," he says the economy mostly ran itself. Under him, it did.

Greenspan has long favored an economy like that: In the 1960s, he was part of the circle around Russian émigré Ayn Rand, an exponent of free capitalism and gold-backed money. But Greenspan was no crusader. He was a numbers man, an analyst of the world that is.

He joined Richard Nixon's campaign in 1968 as an adviser, and when he went to the Fed, he undertook to run the system as it was. He confesses in the book to a nostalgia for the gold standard, but he never campaigned for it.

Greenspan was a hands-on regulator in a few ways. The Fed sets short-term interest rates, and he did that. It is also the lender of last resort in a crisis, and he did that. Rescue cannot be left to the private sector, he says, because shareholders can't be expected to bear the costs of public duties.

But on the core issues of panics, booms and inflation, Greenspan was a minimalist. His syntax was baroque but his actions were few.

He did not anticipate the market crash of Oct. 19, 1987. The Fed eased credit afterward, but that is all it could do.

In the 1990s, his first reaction to the dot-com boom was to warn against "irrational exuberance," but people laughed at him and, anyway, he changed his mind about it. The numbers convinced him there was substance to the Clinton-era boom, and he let it run for three more years. Stopping it, he thought, would do more harm than good.

Under Bush II he worried about a bubble in housing; he also let that run, deciding that "the benefits of broadened home ownership" — including the political benefits to the capitalist order — "are worth the risk."

Greenspan's job was to control inflation, and the numbers suggest he did. For years, it seemed he was running monetary policy as if it were a gold standard, and he confirms it in his book.

Under Greenspan, the yield on10-year Treasury bonds fell for 16 years. Borrowers and bondholders loved falling rates, and they had warm thoughts about the man who had orchestrated them. Bob Woodward called him a maestro.

In the book, the maestro allows that inflation came down mainly on its own. In 1979, Fed Chairman Paul Volcker hadhad to run the economy into a wall. By the 1990s, Greenspan writes, all it took was "a slight tap on the brake" and inflation would subside. It had been suppressed, he says, by the "massive shift of low-cost labor" from China, Eastern Europe and India. (He predicts wages will rise faster in a few years, when most of those workers are absorbed.)

Concerning the corporate sector, the former Fed chairman and bank director says managements should report to shareholders the cost of stock options they grant to themselves, and that shareholders should cut the pay of some public-company CEOs. He says not to expect too much from independent directors; a company has to be run by people who know it, and if that makes for an autocratic CEO, it's probably unavoidable.

He says government should more vigorously prosecute corporate fraud, but expects whistleblowers, not regulators, to uncover it. He sees government as a cop, not a manager.

He declines to regulate hedge funds. At the book's end he declares, "Markets have become too complex for effective human intervention."

This comes from a man whose life work has been finding patterns in numbers. Sometimes there is wisdom in knowing what we can't know, and not messing with a good thing. Sometimes, too, there is intention.

Bruce Ramsey's column appears regularly on editorial pages of The Times. His e-mail address is bramsey@seattletimes.com for a podcast Q&A with the author, go to Opinion at seattletimes.com