Excerpts from The Age of Turbulence

Markets have opened up the new week in edgy fashion this morning, spurred on by weekend scenes of the UK's first bank run in more than a generation. The news makes fairly grim reading, with some £2 billion of Northern Rock's £12 billion deposit base withdrawn since Friday morning. London dealers are asking themselves this morning whose fortunes have collapsed more swiftly: those of Northern Rock or the England rugby team?

Regardless, the chart of Northen Rock is beginning to resmble that of another mortgage lender that suddenly found it difficult to obtain market financing for their loan book. Although many expect a white knight buyer to emerge for Northern Rock, would it really come as much of a surprise if they went the way of New Century?
This week should prove to be very tumultuous indeed, what with the Fed announcement tomorrow and Lehman, Morgan Stanley, Goldman, and Bear all reporting Q3 earnings. There is clearly scope for plenty of volatility, particularly with the S&P 500 perched just a few points from its high since the "crisis" began. Macro Man would not be suprised to see fairly quiet trade today as markets wait nervously for the newsflow to begin in earnest tomorrow.

Those tempted to do a bit of reading in the meantime may turn to Alan Greenspan's new book, The Age of Turbulence, which is published today. The Maestro's legacy has become a bit tarnished recently, with many laying the blame for the subprime debacle squarely on his shoulders. There has been some suggestion that The Age of Turbulence was prompted by Greenspan's desire to engage in a little historical revisionism to preserve his legacy as the Maestro.

Is this in fact the case? Judge for yourself. Macro Man 's contacts in the publishing industry have provided him with access to an initial version of the galleys, reprinted here on an EXCLUSIVE* basis. Enjoy!

Greenspan on....

the housing crisis: In the spring of 2003, it started to become clear to me that the US housing market could begin to start suffering significant distress in 2006, with a concomitant decline in the price of mortgage derivative securities in 2007. I therefore acted promptly, authorizing a 0.25% cut in the Fed funds target rate to 1%. While many on the Committee did not agree with this move, my argument in favour of pre-emptive action against an economic downturn in four years' time eventually carried the day.

irrational exuberance: It is a widely-held fallacy that I used the phrase "irrational exuberance" in reference to stock markets in late 1996, just as they were set to register stunning gains for the next three years. In fact, what I said to the American Enterprise Institute that night was "But how do we know when irrational antipathy has unduly depressed asset values, which then become subject to prolonged and justified appreciation over the next several years?"

In March 2000, I determined that equity markets had, at last, become irrationally exuberant, and described them as such in meetings with the Administration and Congress.

fiscal policy: I was occasionally stunned by the inability of politicians from both sides of the aisle to understand the appropriate use of fiscal policy. Although I eventually developed a working relationship with the Clinton and G.W. Bush administrations, it came only after the painstaking effort of lecturing the executive and legislative branches on how to use fiscal policy.

I recall a meeting that I had with Gene Sperling in early 1993. Sperling articulated the new Clinton administration's intended economic program, which included a substantial increase in spending along with targeted tax cuts. Given that the Fed funds rate was set at an already-accomodative 3%, this was a clearly inappropriate setting for fiscal policy.

"Gene," I said, "let me explain to you what the role of fiscal policy is. When monetary policy is easy and I do not wish to be blamed for taking away the punch bowl, it is the job of fiscal policy to begin tightening the strings on the economy. Only after it is clear that the economy is resilient enough to absorb policy tightening is it appropriate for the Fed to adjust its monetary stance.

"By the same token, when it becomes clear the the economy is slowing, it is appropriate for the Fed to slash interest rates quickly so as to provide a needed boost to activity. Only after monetary policy fails to engender an economic recovery (no doubt because the government ovecooked the fiscal tightening previously) is it appropriate to cut taxes or raise spending.

"In a very real sense, monetary and fiscal policy must work together as a 'good cop' and 'bad cop.' Because of the nature of transmission mechanisms, it is imperative that the Federal Reserve, as an unelected agent, fulfll the role of the good cop."

his recommendation that mortgagees take out adjustable-rate mortgages (ARMs) during the early stages of the tightening cycle in2005: In early 2005, the Economic Club of Cheyenne invited me to Wyoming to make a few remarks. Knowing the local predilection for hunting, I made a casual reference to the forthcoming end of deer season and called on the attendees to "go take out arms" to try and bag one last large-antlered buck before the season ended. This was subsequently misinterpreted in the financial press as a recommendation that homebuyers use exotic and dangerous mortgage products. In reality, nothing could be further from the truth.

the stock market crash of 1987: Half an hour after after the opening of the New York Stock Exchange on October 19, 1987, it became clear that the stock market was in significant distress. Two months into my tenure as Chairman of the Federal Reserve, I was about to meet my first great challenge.

At approximately 10.30 a.m., I took a phone call from Treasury Secretary James Baker. The Secretary asked me what I planned to do about the stock market decline.

I replied that I planned to do nothing, as my Objectivist background had taught me that government agencies should not play a role in private markets and in no way should save "looters" from the consequences of their own economic decisions. I told him that I did not wish to grant markets a "put option" to insulate them from price declines.

Mr. Baker was not impressed. In his inimitable Texas drawl, he said, "Boy, I don't know much about them there put options. But if you don't do something quick, I'll give you another kind: you can have the option of whether I put my left boot or my right boot up your be-hind."

After deliberating for a few minutes, I concluded that shoring up confidence in the financial system was, after all, a worthwhile goal, and thus provided liquidity to markets. And that was the genesis of the policy tool that eventually became known and loved as the "Greenspan put."

Bob Woodward's biography, Maestro: A number of friends and colleagues told me that I should be flattered by my portrayal in Woodward's book, but frankly I found it all to be a bit embarrassing. Woodward left out numerous examples of my policy-making genius, and left the reader in doubt as to whether the entirety of world economic growth was down to my decisions, which of course it was.

Macro Man is sure you'll agree that Greenspan has outdone himself....

* these galleys fell off the back of a truck