Except that he turned out not to be wise at all. He turned out to be demonstrably, utterly, risibly and catastrophically wrong. Whoops!
Perhaps the thing we will miss most about the Greenspan years was not having to pay attention to any of this complicated stuff. We may have had a little rant when the boorish excesses of a Wall Street trader popped into the newspapers, but we certainly didn't need to try to get our heads round what anyone on Wall Street or in the City of London was doing all day, or what happened to our mortgages after we signed up for them, or what the financial markets are for. We were far too busy booking another overseas holiday on the credit card.
When we have eventually paid down our debts, rebuilt our pensions and settled into our slightly-less-secure jobs, we will still be faced with this: do we want to be able to hold global finance to account, or are we content to leave it shape our world, unshaped by us? There's a great big hole in our democracy where our understanding of finance ought to be. If only working to fill it wasn't so damn daunting.
But what if, the novelist John Lanchester dares to ask, finance were funny? Whoops! is a valiant and genuinely amusing attempt to describe how finance came off the rails. It is a little book with a big sweep; inevitably, many of its explanations are contentious, and some tendentious, but it is written with a good heart and a lively intellectual curiosity.
At least it's fun to argue with some of Lanchester's philosophical musings. Why do the English strive so much more avidly to own their own home than Continental Europeans? Is it really, as he suggests, because the industrial revolution came early to Britain, disrupting the old certainties of rural life and creating a longing for the security of our own four walls? Perhaps.
But surely he's talking out of his hat when he suggests the welfare state in the West grew out of the need to "compete" for public affection against a Communist ideology, and that the collapse of Communism freed up the West for Thatcherite reforms. The chronology is all wrong, and there's no mention of the stagflation of the Seventies that really was the spark for a new kind of economic thinking from the right.
If the historical context is idiosyncratic, the broad outlines of the central narrative are bang on the money, and the moment that finance jumped the tracks can be pinpointed with some accuracy now. Everything changed when the relationship between borrower and lender was cut. Lanchester is very forceful on this point, since his father was an old-fashioned banker for the Hong Kong and Shanghai Bank, a conservative institution flecked with the legacy of empire, but which these days – like the rest of finance – has been taken over by the maths geniuses.
The fundamental change: when it became possible for lenders to sell loans, instead of having to sit on them, they stopped caring very much whether borrowers could make the payments or not.
By the time that the struggling homeowner defaulted, the loan had already been sliced and diced on Wall Street and bundled up into a new breed of derivative, valued using (catastrophically flawed) mathematical models and sold on again around the world.
Some of the chief villains here are mathematical equations, Nobel prize-winning ones, no less. Bankers, getting rich trading these derivatives, had no incentive to check the relevance of the historical data going into the models. But it was a case of garbage in, garbage out. Eager borrowers were being stuffed full of cheap loans "like geese being stuffed to create foie gras". This was like nothing in history.
If the guardians of the mathematical models had no incentive to call time on the party, no one else understood the models enough to question them. Politicians had no incentive to meddle either, since the booming finance industry boosted the economy, and soaring house prices made everyone feel great. And which of us was going to turn down that dream house, that extra holiday or the fancier car, if our banks were happy to finance it?
Greenspan, humiliated, has admitted a "flaw" in his view. He didn't believe in bubbles, because free markets are supposed to be expert at calculating risks and correcting excesses before they got out of hand. The old Fed chairman's reputation was just one of the many things to have gone pop in the past couple of years.
Lanchester, whose previous books have brought us the rich inner lives of a sinister foodie and a bored accountant, uses his novelist's licence to spread metaphors liberally throughout Whoops!. As the Thatcherite and Reaganite craze for free-market reforms spread round the world, "economies were yelling 'Woo-hoo!' and tearing their regulatory clothes off". And this book also has the best description of the 15-year evolution of the credit derivatives, in a single sentence: "It's as if people used the invention of seat belts as an opportunity to take up drunk driving." This, and countless others, put the book immediately above other explainers of the credit crisis.
It's not clear, though, that Whoops! can turn the reader into an "expert within the space of 200 pages". It may be more like other writing on the credit crunch, of which Lanchester says "you can grasp while it is going on, and then as soon as it is over you can no longer remember the difference between a CDO, a CDS, an MBS and a toasted cheese sandwich". We spend a lot of time with the Smiths and the Joneses, on a metaphorical street where all the neighbours are doing credit default swap-style dealings, and by the time Lanchester says "they're promising to pay a good rate of interest, say £1,000 a month to keep the numbers simple", even the most determined reader will be screaming for a priest of finance to intercede.
As if to prove how complicated it all is, Lanchester himself is prone to errors. Morgan Stanley is confused for JP Morgan at one point, and the Goldman Sachs finance chief, David Viniar, is mischaracterised as the firm's CEO. This stuff is hard. It's far too important not to try, but fiendishly hard. Let's get personal finance lessons made mandatory in schools, improve the nation's numeracy skills, replace reality TV with fun documentaries about banks, liberate financial news from its burial ground in the business sections and elevate Robert Peston to the peerage, and then talk again in a generation.
Stephen Foley, associate business editor of 'The Independent', was named Business Journalist of the Year in the 2009 British Press Awards
Alan Greenspan: the guru grounded
Formerly a jazz clarinettist, and friend of libertarian author Ayn Rand, Alan Greenspan in 1954 formed the Townsend-Greenspan economic consulting firm. From 1974 to 1977, he chaired the President's Council of Economic Advisers. He was appointed Federal Reserve chairman by President Ronald Reagan in August 1987, and re-appointed at four-year intervals until retiring in 2006 after the second-longest tenure in the position. He now provides consulting through his company, Greenspan Associates LLC.
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