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Book Review: The Map and the Territory

December 16, 2013
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Barel Karsan

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Alan Greenspan was Chairman of the Federal Reserve for 19 years. In his 2013 book,The Map and the Territory, he takes a look at the lessons he has learned from the financial crisis that he failed to foresee.

If you read the writings of hedge fund managers and other media commentators, you have undoubtedly seen a lot of criticism of central bankers like Greenspan and now Bernanke. Policies of easy money led to excess borrowing/lending which eventually couldn't be paid. I don't really share this negative view of the central bankers myself; I expect them to follow their mandate, particularly the one about inflation, and from that viewpoint they have not caused inflation however "easy" monetary policy is perceived to have been.

Greenspan does admit to a number of limitations in forecasting methods that prevented a crisis of the magnitude we experienced from being detected. He has since revised many of his models to take into account what he calls "animal spirits" that can cause liquidity to dry up as asset prices influence behaviour to a much stronger degree than some random walk would predict. But he doesn't see how capitalism can continue to increase our standard of living without these animal spirits, though sometimes it will lead to over-investment and the overhang that is likely to follow it; I'm inclined to agree with this viewpoint.

I expected a book from Greenspan to be heavy on the dry monetary policy stuff, but while there was some of that, there was a whole lot more interesting stuff as well. Greenspan shares his views of how the level of the stock market affects the economy (and hence gives credence to those who argue that the central bank is happy to inflate stock prices at a time of high unemployment), why certain stock market crashes affect the economy more than others (short answer: the amount of leverage involved), the future of productivity (the source for growth of our standard of living) and how he believes we should deal with the moral hazard that has been created thanks to all these "Too Big To Fail" companies.

Some things Greenspan talked about which I did not agree with include how he views the differences in behaviour of savers/spenders in countries around the world. He sees this as cultural differences, implying perhaps that some nationalities are more spendthrift than others, which gets them into trouble. I would suggest that the evidence shows human behaviour is rather similar across culture, and it is instead the institutions of countries (laws and their enforceability), as they happened to be developed through history, that is causing citizenry to behave a certain way. (I highly recommend both Why Nations Fail and The Great Rebalancing if this topic interests you.)

Greenspan also believes the political bickering in America to be at an all-time high. It's something we probably all feel to be true, but I'm not convinced that it is. I wonder if it's something that often feels true even when it isn't; but obviously, when it is true it is difficult to prove. Though Greenspan offers rather weak evidence that this is the case, he does emphasize this as a problem often enough.

I'm no macroeconomist, though I enjoy the topic, so I got a lot out of this book. If this subject matter interests you, I highly recommend you check it out.

About the author:

Barel Karsan
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 5.0/5 (1 vote)

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