Greenspan Maps a Territory

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There’s very little use in mapping a territory that has already been mapped, but there are times when it is done for other reasons. Maybe this time where the mapping of territory is going on it’s a question of atoning of one’s sins, making amends for offenses and errors in the mapping (or not, as we shall see). Just a few days ago Alan Greenspan’s latest piece of work was published (October 20th 2013). It’s entitled The Map and the Territory: Risk, Human Nature, and the Future of Forecasting. Although, that’s nothing new either. Greenspan steals the title of the French author Michel Houellebecq’s book The Map and the Territory, published in 2010 (translated into English in2012) that won the prestigious Prix Goncourt. The Goncourt is the prize for literature in France that is awarded to “the best and most imaginative prose of the year” by the Académie Goncourt. Perhaps Greenspan is in the running for themost imaginative prose of the year with his story of risk management and the irrationality of man.

Greenspan’s Mapping

Greenspan maps the territory of the lead-up to the financial crisis. He contemplates on the forming of bubbles and he explains just how and why he never actually saw the housing bubble coming; despite the fact that many had already warned him. Obviously the maxim about being forewarned and forearmed doesn’t hold with Mr. Greenspan; that fundamental principle was thrown to the wind long ago when he set up the foundations for the subprime crisis.

Wasn’t it Greenspan that suggested in a speech in 2004 that more people should take out adjustable-rate mortgages (ARMs) taking advantage of the historically low interest rates (1%) that he would then hike to over 5% within a couple of years, bringing many into sheer ruin? He (famously) stated “where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately”. Obviously they weren’t able to do it appropriately enough. Who paid the price? No comment needed, Mr. Greenspan.

In Greenspan’s map he says the major mistake of those that didn’t see the crisis coming were because those people had considered society as being made up of rational decision makers. He says that people got it all wrong. Man is irrational. But, he adds that we are saved since we are irrational in predictable ways. That’s a contradiction in itself; wherefore the title of his work.

The Polish-American scientist Alfred Korzybski stated that a “map is not a territory”, meaning that we confuse maps with territories. In other words, we describe something (through drawing a map) but it is only a representation of reality and not the territory itself. It’s a shame that Greenspan has not realized that his own description, his own mapping of the territory of the subprime crisis in the book, is not going to take it away and it certainly won’t be anything more than his own cartographic charting of waters that have already been charted. Greenspan has confused the model of reality with reality itself; he has mapped the territory that he shouldn’t be mapping.

Now, Greenspan believes that it is possible to predict the irrational (unpredictable) behavior of investors and man in general. This is despite the fact that in a recent television interview Greenspan admitted that he knew of the subprime crisis in 2008. Wasn’t that when it had actually hit the real-estate fan big time? Greenspan refuses to apologize for believing that a “bubble in and of itself doesn’t give you a crisis”. Doesn’t it?

Greenspan obviously has very little to say on the subject and spends a single chapter on the predictable nature of irrationality. The rest is just economic history and story-telling; Mr. Greenspan’s representation of reality. Greenspan’s mapping blames (at least at first) the holder of the territory land title, the US government, for allowing the sub-primes to come into existence. He exonerates the Federal Reserve and absolves them of all guilt and condemnation in the prognosis of his personal version of the narrative.

Who’s to Blame

But, while he doesn’t openly admit the role that was played by the Federal Reserve he does state that the Fed played a major role in allowing capital levels to be set by the commercial banks themselves. The predictable nature of that irrational decision was largely obvious, wasn’t it, Mr. Greenspan?

“The accompanying dangers were not fully appreciated, even in the commercial banking sector”, he explains. But, it seems that he was turning a deaf ear (and so were the banks) to the worries that were being expressed by many at the time.

But, the real problem is not the Federal Reserve and it isn’t even the US government. The real problem for Greenspan is the overabundance of investment from foreign countries. The US saved less because they were getting money thrown at them from all over the world. It’s those foreign investors that are the problem. That at least tops it all and shows just to what extent Mr. Greenspan is entirely irrational and unpredictable. He has disproved his own theory, entirely plagiarized from others, but the territory that he maps does not describe the reality of the situation.

Alan Greenspan served as Chairman of the Federal Reserve of the US between 1987 and 2006 and he was appointed by President Ronald Reagan. When he retired in 2006 he had been the 2nd longest serving chairman of the Federal Reserve. On leaving the Fed he became a consultant and private advisor through Greenspan Associates LLC.

Originally posted: Greenspan Maps a Territory