Inside the book

On Wednesday I discussed the dust jacket of Alan Greenspan's new book THE AGE OF TURBULENCE: ADVENTURES IN A NEW WORLD.

It's half memoir and half treatise, and today I'd like to go inside the covers, to discuss a bit of history that Greenspan treats of rather briefly in the memoiristic portion.

As you may remember, the "savings and loan" system, which once upon a time was treated as an entity distinct from actual "banking" for regulatory purposes, blew apart in rather spectacular fashion in the mid 1980s. IMHO, there's a sense in which it all worked out for the best, because there was no logic to that compartmentalization anyway. Still, the blow up was messy, and people got hurt.

Some of them got hurt by virtue of trusting Charles Keating, who ran the Lincoln Savings & Loan association, of California. In a classic bubble-burst scenario, Lincoln's assets under management quintupled in the four years when Keating was in charge of it (1984-88), then evaporated virtually overnight.

Some of that phenomenal increase was the result of making risky investments that, for a time, paid off. But some of it was a result of finangling with the books.

Fairly early on in the expansion of this bubble, in 1985, Alan Greenspan (who was then in the private sector as a consultant, though he had numerous informal ties with the Reagan economic team) had been employed by Keating's lawyers to write a study evaluating whether Lincoln was financially healthy enough to be allowed to invest directly in real estate. The study was to be presented to the Federal Home Loan Bank Board, which had to give its approval for such investments.

In his book, Greenspan writes (p. 115) that he concluded "that with its then highly liquid balance sheet, it could do so safely. This was before Keating undertook dangerous increases in the leveraging of his balance sheet and long before he was exposed as a scoundrel. To this day I don't know whether he'd started committing crimes by the time I began my research."

The FHLBB, unpersuaded, denied the Keating request, but of course Keating found ways to waste his depositors' money anyway.

Greenspan's involvement wasn't central. He helped Keating apply for a permission he didn't get. Still, one would like to know more about this than the brief mention it gets here. He mentions it chiefly to say that it embarrassed him later, after his appointment as Fed chief when the buble finally did burst. It also caused difficulties at work for a woman with whom he was romantically involved, newscaster Andrea Mitchell. They didn't marry until 1997.

At any rate, Greenspan's big regret about the clean bill of health he gave to Lincoln seems to be that Ms Mitchell wasn't allowed to cover the Keating hearings on Capitol Hill as a result.

Personally, I would like to have learned more about this from him. And I would like him to have beenmore curious, too. "To this day I don't know whether...?" So on his own account Keating either (a) went over to the dark side later or (b) was already on the dark side when Greenspan checked him out, but tricked him.

Has Greenspan tried very hard to figure out whether it was (a) or (b)? So far as we can tell here, not at all. Those who do not study the history of bubbles, are doomed to help blow new ones.