As a globalized world found itself in a tailspin of malevolence following the unprecedented financial crisis of 2008, economists found themselves being brutally panned for either their inability to predict such a catastrophe or for being the mavens of undying optimism. Accusations of employing mathematical/numerical sophistry to camouflage reality and to view the global economy with rose tinted glasses literally symbolised the ironical title by which the subject of Economics is commonly referred to – The Dismal Science.
One such distinguished economist was Alan Greenspan. Known as the Oracle for his economic wizardry the former Chairman of the Federal Reserve of The United States was caught right in the centre of the eye of the storm. Even the modern day Delphi miserably failed to envisage the cascading financial ruin that brought the global economy to the brink of disaster. In this candid work, Greenspan analyses the cause and consequences of one of the greatest recessions to have visited us. He readily admits that the field of Economics having at its edifice macro and micro forecasting models totally fails to factor into its analysis the famous “animal spirits” of John Maynard Keynes. The animal spirits which inform the behaviour, both rational and irrational of the market participants plays a huge role in setting the directions of an economy. Such a behaviour animates fear and euphoria, herd behaviour, time preference and accumulation of status goods (elucidated in great detail by Thorstein Vebler in 1899). Even though most of the ailments as well as the prescriptions in this book are “America specific”, Greenspan dwells upon the challenges posed by the integrated Euro markets and the contradicting behaviour of its various participants.
Of especial interest (at least to me) in the book is the solution offered by Greenspan for obviating the moral hazard created by the “Too Big To Fail (TBTF)” behemoths. These entities with their inextricable link to the global markets and to similar cross border corporations trigger a calamitous collapse in the event of their going bankrupt. Hence the State steps in to do everything possible to prevent such a disastrous outcome. Classic cases in point being the bail outs of AIG, Freddie Mac and Fannie May. Greenspan argues that such state intervention would infuse an element of callousness and recklessness in the behaviour of these huge corporations. As an alternative he proposes measures such as an issuance of Contingent and Collateral Bonds (CoCo) which would ensure that upon a financial risk event being triggered, the debts represented by these bonds automatically get converted into equity. He also envisages the preparation of “living wills” whereby an expeditious means of liquidation is already in place even when a TBTF institution is alive and functioning. He views with a measure of skepticism the provision in the Frank-Dodd legislation which identifies a whopping seventeen institutions as coming within the category of TBTF. Greenspan also bemoans the burgeoning increase in social spending or benefits spending which has a material impact on the gross total savings of an economy.
For the curious who harbour an inquisitiveness to understand the cause behind the near collapse of the Global economic and financial system between 2007 and 2009, “The Map and The Territory” provides an invaluable lesson.
