Alan Greenspan considers himself to be the luckiest economist in the world. "I was very fortunate," Greenspan told NEWSWEEK of his lengthy and eventful tenure as chairman of the Federal Reserve, which lasted from August 1987 to January 2006. "I emerged on the scene at the beginning of this extraordinary half-generation."
The end of the cold war, globalization, the rise of China and the rampant spread of information technology set the stage for a long spell of economic growth, high productivity, low inflation and booming markets. Having served four presidents, and having overseen two decades of nearly uninterrupted growth—the U.S. economy suffered just two brief recessions under his watch—Greenspan has arguably been the most successful American public official of the past three decades. "In terms of supporting economic growth and preventing inflation, Greenspan is the best, bar none," says Mark Zandi, chief economist at Moody's Economy.com. He was, in Bob Woodward's assessment, The Maestro, conducting an international symphony of investors, markets and politicians. Greenspan spoke in a dense, endlessly parsed lingo of "Fedspeak," and his words defined whole eras. (No recollection of the 1990s tech bubble is complete without an allusion to the Greenspan phrase "irrational exuberance.")
It has been a long and unlikely ride for the skinny kid from Manhattan's Washington Heights who played jazz saxophone professionally before turning to economics. The former Ayn Rand acolyte eagerly joined the system—establishing his own economic-consulting firm, and becoming the go-to economist for Republicans.
He received a rude introduction as Fed chief in 1987; just two months after he was confirmed by the Senate, the stock market crashed. He managed through the recession of the early 1990s, earning the enmity of the elder President Bush for not cutting rates faster. "I reappointed him," George H.W. Bush said. "And he disappointed me."
Greenspan's reputation for always seeking to improve his knowledge of the markets rose along with the Dow in the 1990s. But theoretical economics was never far from his mind. In his new memoir, "The Age of Turbulence," which NEWSWEEK excerpts this week, the 81-year-old recalls going to Venice with his wife, NBC News correspondent Andrea Mitchell. Gazing at the lovingly preserved palazzos, he wondered what economic goods Venice produces these days: "What's the value-added here?"
This single-mindedness led to one of Greenspan's signature breakthroughs. The prevailing view held that an unemployment rate's falling below 6 percent would cause inflation. Greenspan believed that the New Economy rendered that assumption moot. In 1995 and 1996 he persuaded his colleagues on the Federal Open Market Committee to leave rates low despite falling unemployment. "I didn't find the arguments he was making that convincing at the time," says Alan Blinder, a former vice chairman of the Fed. "But his hunches were often right when statistical models were wrong." The unemployment rate fell below 4 percent in the 1990s without triggering inflation.
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."