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Unformatted text preview: REVIEW The Risks of Being Chairman in the Age of Turbulence Paul De Grauwe University of Leuven. Alan Greenspan, The Age of Turbulence: Adventures in a New World . London: Penguin Books, 2007, 531 p. This is an extraordinary book written by an extraordinary man. It reads well. In fact it is a real treat . . . and a big surprise. Was not Greenspan known for his Delphic pronouncements that, by being incomprehensible, created a perception of superior wisdom? No such creative ambiguities in this book. Everything is very clear and enjoyable. It strikes the right balance between analysis and anecdote; the secret of enjoyably serious books. What is most impressive in this book is that the author, who can claim superior achievements, remains remarkably modest. In contrast to most autobiographies which bulge with self-righteousness, this one does not want to show how good the author was. For many observers, there is little doubt that Alan Greenspan was an extraordinarily successful chairman of the most important central bank in the world. His first major challenge was to deal with the stock market crash of October 1987. He passed the exam with flying colours: his trick was to provide markets with ample liquidity so that the crash was prevented from degenerating into a full-fledged liquidity crisis, bringing down the whole economy. He would repeat such interventions several times, when crises r 2008 The Author. Journal compilation r 2008 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA International Finance 11:1, 2008: pp. 109115 DOI: 10.1111/j.1468-2362.2008.00213.x erupted, leading to the idea of a Greenspan put; that is, an implicit guarantee that liquidity would be available in times of crises, allowing financial institutions and investors to disregard liquidity risks altogether. I will come back to this issue in a moment. The main reason why so many consider Alan Greenspan to be a monetary hero is that he presided over the period of the Great Moderation: a period of low inflation and high productivity growth. After two decades of economic soul-searching, the US started in the early 1990s a sustained episode of rapid economic growth and low inflation. Many saw the hand of the Maestro in this economic miracle. How much of this Great Moderation was due to central banks in general and the Fed in particular? Was it due to stability-oriented monetary policies of the 1990s, or were the external shocks benign? The question has been debated intensely. My perception is that the shocks were relatively benign (although that is not even certain) but that a significant factor was the return of no-nonsense central banking focused on keeping inflation low. Whether this was done in the form of explicit inflation targeting or in a less formalized way does not seem to matter a great deal. It is interesting to note that Greenspan comes down on the side of those who claim that a large part of the Great Moderation is the result of globalization, which tended to lower...
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