The Greenspan Gospel

The bull market roared through his December 1996 speech, in which he warned against "irrational exuberance." Investors also took heart from Greenspan's ability to serenely orchestrate bailouts when necessary—from the Mexico crisis in 1994 to 9/11. He acted as a market whisperer, uttering soothing words into investors' ears. "I can remember moments when almost everyone we worked with almost lost it a bit, got angry. I can't actually remember a moment when Alan did," says Lawrence Summers, the Clinton-era Treasury secretary who worked closely with Greenspan.

Greenspan shrewdly navigated the shoals of Washington politics. When Bill Clinton was elected, Greenspan persuaded the new Democratic administration of the necessity of reducing the deficit and backing the North American Free Trade Agreement. "We used to have breakfast once a week," says former Treasury secretary Robert Rubin, "and in four and a half years, nothing ever leaked."

In his memoir, he bashes his erstwhile allies—the Bush administration and congressional Republicans—for abandoning fiscal discipline by simultaneously slashing taxes and increasing spending. Critics say such comments would have more currency if he had done more to halt the fiscal insanity of this decade. "In the early years of the Clinton administration, he constantly reminded us that we had to reduce the budget before he would reduce short-term interest rates," says former Labor secretary Robert Reich. But when George W. Bush proposed tax cuts and a new Medicare prescription-drug benefit—with no offsetting spending cuts—Greenspan didn't object strongly.

Now he's getting grief for the Fed's actions in his final years. The central bank's post-9/11 interest-rate cuts helped unleash a tide of cheap money, much of which wound up in the bubbly real-estate market. "He could have empowered the Fed's oversight function to be more vigilant to help ensure that lenders didn't get carried away," says Zandi of Moody's Economy.com. And in 2004, just as the Fed was about to start raising rates, he suggested that Americans would be better off in adjustable-rate mortgages. But Greenspan believes the mortgage crisis should be blamed less on the Fed's short-term interest-rate policies and more on global savings, muted inflation and low long-term interest rates. This combination, referred to as "the conundrum," created a demand for high-yielding debt, like subprime-mortgage bonds.

The subject of a half-dozen biographies, Greenspan still maintains a certain mystique and reserve. Since leaving the stately Fed office along the Mall in 2005, he has set up shop in an unobtrusive office near Dupont Circle. It contains some potted plants, a few volumes of the Historical Statistics of the United States and a framed copy of the Stamp Act. Greenspan has remained busy—signing on as a consultant to firms like Deutsche Bank, giving talks and drafting his book. The memoir, for which he received an $8.5 million advance, is half autobiography and half economic Baedeker.

As his successor, Ben Bernanke, considers whether to cut interest rates this week, Greenspan is optimistic about the resilient U.S. economy. While he notes that "I've been forecasting for 50 years and I had not seen any improvement in our capability of forecasting," he is still capable of oracular utterances. Competition and turbulence can be traumatic, but they must be embraced. "If you try to preserve the past, you will not be able to produce the future."

With Temma Ehrenfeld in New York and Eleanor Clift in Washington

© 2007