The Oracle Reveals All

Having retired, former Federal Reserve chairman Alan Greenspan is no longer required to testify at length before Congress about the state of the global economy, the future direction of interest rates and the health of the stock market. But he was willing to sit down in his low-key Washington office for a two-hour tutorial with NEWSWEEK's Jon Meacham and Daniel Gross. Some highlights:

NEWSWEEK: How should Americans judge your legacy as Fed chairman?
GREENSPAN: I was very fortunate. I emerged on the scene at the beginning of this extraordinary half-generation. And my tenure ended as events began to change. At the Federal Reserve, we created policies that took full advantage of the way the global economy was working, which enabled us to gain what has really been a remarkable rise in American standards of living. I'd like very much for people to say, "Well, he caused all of that." But I don't think the evidence holds up very well for that hypothesis. What I did was create essentially a risk-management-based procedure to implement monetary policy.

When you became Fed chairman in 1987, if someone had said that in the next 20 years we're going to have virtually uninterrupted economic growth, would you have said, "That is a banker's fantasy"?
I would have said it was psychiatric inadequacy. I do realize how extraordinary, how unusual, this period has been. The very nature of its discontinuity from history is what forced me to reach beyond the usual economic variables to seek an explanation of what it's all about. And as you know, I concluded that it was the result of a seminal geopolitical event, the end of the cold war.

That was clearly an important political event, by why was it the most important economic event of our lifetimes?
On one side of the Iron Curtain were essentially centrally planned collectivist societies based on the principle that collective activity is what produces wealth and therefore there are no individual rights to property. On the other side were capitalist societies built around the market system, with free trade and individual-property rights. The classic case was East Germany versus West Germany, which were two economies coming from the same history, culture and language ... The conventional wisdom was that East Germany's economy was three fourths the size of West Germany's, and that the Soviet Union, while having major shortfalls, was a formidable economic power. Then the Berlin wall came down, and the economic ruin behind the Iron Curtain was utterly unexpected and unimaginable. Central planning did not work in the Soviet Union. And the standard of living in East Germany was not 75 percent of West Germany, but somewhere between a third and 40 percent. The impact of that on the rest of the world was dramatic.

How, specifically?
The evidence of the power of the marketplace versus central planning, as exposed so demonstrably in Europe, led to an extraordinary rise in foreign direct investment in these countries. In China, for instance, foreign direct investment, which had been $4 billion in 1991, by 2006 was over $70 billion a year. Deng Xiaoping called the transformation "socialism with Chinese characteristics." What it was was creeping capitalism.

It's common to hear complaints from many quarters about China's rapid rise. Does it worry you?
I am not, as many people are, concerned about China becoming a threat militarily. In my book, I'm essentially forecasting that what happened to the communist parties of Europe is likely what will happen to the Chinese Communist Party ... They are going to be a formidable economic power, which I think is all to the good.