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The Map and the Territory: Risk, Human Nature, and the Future of Forecasting [Hardcover]

Alan Greenspan
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Book Description

Oct. 22 2013

Like all of us, though few so visibly, Alan Greenspan was forced by the financial crisis of 2008 to question some fundamental assumptions about risk management and economic forecasting. No one with any meaningful role in economic decision making in the world saw beforehand the storm for what it was. How had our models so utterly failed us?

To answer this question, Alan Greenspan embarked on a rigorous and far-reaching multiyear examination of how Homo economicus predicts the economic future, and how it can predict it better. Economic risk is a fact of life in every realm, from home to business to government at all levels. Whether we’re conscious of it or not, we make wagers on the future virtually every day, one way or another. Very often, however, we’re steering by out-of-date maps, when we’re not driven by factors entirely beyond our conscious control.

The Map and the Territory is nothing less than an effort to update our forecasting conceptual grid. It integrates the history of economic prediction, the new work of behavioral economists, and the fruits of the author’s own remarkable career to offer a thrillingly lucid and empirically based grounding in what we can
know about economic forecasting and what we can’t.The book explores how culture is and isn't destiny and probes what we can predict about the world's biggest looming challenges, from debt and the reform of the welfare state to natural disasters in an age of global warming.

No map is the territory, but Greenspan’s approach, grounded in his trademark rigor, wisdom, and unprecedented context, ensures that this particular map will assist in safe journeys down many different roads, traveled by individuals, businesses, and the state.

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Larry Summers, Financial Times:
"No other American economic policy maker in the past half-century could have written so thoughtfully about the implications of the Enlightenment for economic policy or have attempted, as Greenspan did while in office and does again here, to compute the physical weight of all the goods that comprise American gross domestic product. The range of topics and arguments makes this book a very important statement, whether one ultimately agrees or disagrees with the author…..Greenspan’s range, vision and boldness is especially important at a time like the present, when Washington is preoccupied with the political and petty….Greenspan has written a major work ….[A] splendid book.”

Burton Malkiel, The Wall Street Journal:
The Map and the Territory is a model of expositional clarity, with complex and recondite matters made accessible to the lay reader. The book should be must reading for anyone interested in the way our financial markets work—and sometimes fail to do so."

“Compelling and hugely enlightening…This exposition of a lifetime as a practicing economist is full of insights and lessons for financiers, security analysts, business students and public policy makers, especially Presidents, congressmen, central bankers and the FDIC, SEC, CFTC, FHLB. It should be required reading for some of the insights into the way markets perform.”

N. Gregory Mankiw, The New York Times Book Review:
“The book offers much wisdom….[Greenspan] sees the world through a different set of eyes than do many others in his field. He is driven less by theory, more by data and practical experience….Greenspan’s new book lays out his worldview in light of the financial crisis, the deep recession and the meager recovery of the past five years. His critics often condemn him as an ideologue, but the book demonstrates the unfairness of that accusation. On a wide range of topics—from monetary, fiscal and financial policy to productivity, inequality and globalization—he offers readers a thoughtful, nuanced and open-minded perspective, tempered by many years of having seen both business and public policy from the inside….Whether or not you’re an economist, you can’t help coming away from The Map and the Territory with greater insight into many of the crucial issues facing the nation. Greenspan’s path to fame may have been unconventional, but after reading this book, you’ll understand why five American presidents turned to him and made him one of the great economic policy makers of our time.”

About the Author

Alan Greenspan was born in 1926 and reared in the Washington Heights neighborhood of New York City. After studying the clarinet at Juilliard and working as a professional musician, he earned his B.A., M.A., and Ph.D. in economics from New York University. In 1954, he cofounded the economic consulting firm Townsend-Greenspan & Co. From 1974 to 1977, he served as chair of the Council of Economic Advisors under President Gerald Ford. In 1987, President Ronald Reagan appointed him chairman of the Federal Reserve Board, a position he held until his retirement in 2006. He is the author of the number one New York Times bestseller The Age of Turbulence.

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2.0 out of 5 stars
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1 of 1 people found the following review helpful
2.0 out of 5 stars Fatuous Attempt at Self-Exculpation Dec 31 2013
By Gordon Ritchie TOP 500 REVIEWER
Format:Kindle Edition|Verified Purchase
Having accepted the world's acclaim for his role in "managing" the American economy as Fed chairman during nearly 20 years of relative, if narrowly shared, prosperity, Alan Greenspan now pleads blinding ignorance to excuse his role in the Great Recession. Time and again, he states as if it were true that no one, absolutely no one, saw the crash coming. This is patently false.
Many informed observers at the time flashed red warning signals that the asset bubbles, notably in but not limited to financial instruments linked to sub-prime residential mortgages, were at the point of explosion. Greenspan, apart from occasional mumbles about "irrational exuberance", used his pre-eminent position to decry these warnings and continued to promote the policies that stimulated the bubbles in the first place. The rational self-interest of the bankers, in what is after all a highly efficient largely self-regulating market, would ensure that no serious calamities would occur. That was his mantra.
In this bizarre book seems implicitly to be claiming that he had absolutely no idea what he was doing. He seizes upon "animal spirits" (the phrase popularized by Keynes more than 80 years earlier) to explain why his forecasts so completely failed to identify the "extremely fat negative tail", i.e. the high probability that something horrible would happen (described by other authors, before the crash, as the "black swan" syndrome). It turns out, to his surprise and dismay, that herd instincts of euphoria (on the way up) and fear (on the way down) take over the otherwise rational calculations of financial actors.
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0 of 1 people found the following review helpful
3.0 out of 5 stars digitizing human emotion in the market place. Dec 26 2013
Format:Hardcover|Verified Purchase
Although Mr. Greenspan has added a number of interesting and perhaps measurable peramiters, I think that he needed to take more account of governmet interference in the economy as well as the ever increasing nonproductive parts of GDP such as permits, licenses, never ending environmental submissions, less productive green projects, gov subsidized endeavours, lobbying, and on and on. The bottom ofthe piramid has eroded leaving massive unemployment and welfare not accounted for in his assessment. I doubt that his approach would forecast the next bubble.
Brian W Raymond
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4 of 9 people found the following review helpful
1.0 out of 5 stars Absolute Garbage. Nov. 24 2013
Just because Alan Greenspan chaired the privately owned "Federal" Reserve for two decades does not make him an economist or an expert in anything. From the 25% of this book that I've covered, all I've read is garbage stemming from a flawed premise, which is to say Keynesian "economics" and debt based financial systems.

But hey, at least he did a better job than his kinsman successor, and will likely have done better than his tribal kinswoman who has succeeded him in turn. Save yourself some coin by not purchasing this book and use the money for literally anything else.
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Amazon.com: 3.1 out of 5 stars  69 reviews
52 of 57 people found the following review helpful
2.0 out of 5 stars Disappointing Oct. 26 2013
By Samuel J. Sharp - Published on Amazon.com
"The Map and the Territory" is a string of loosely connected musings about the economy, economic forecasting, and the impact of the financial crisis. If you have read an economics book in the last 10 years, you will not find much new here. The jacket advertises the book as the result of "a rigorous and far-reaching multiyear examination of how Homo economicus predicts the economic future, and how it can predict it better." I am not convinced that is true. The book is simply too generalized and disjointed to be influential in any sense.

Greenspan touches on a number of topics, but there are better books on each subject. For example, his discussion of how growth in government benefits has crowded out private savings is the better handled in Edgar Browning's, "Stealing From Each Other." Acharya and Richardson's "Restoring Financial Stability" and "Regulating Wall Street" are still the best books on the financial crisis and how to prevent another. I expect "The Map and the Territory" to sell wildly, but most readers will find that it does not live up to the hype. Greenspan most likely has very interesting things to write, but sadly he has not produced them here.
229 of 292 people found the following review helpful
1.0 out of 5 stars Mr. Greenspan's inside-out view of the economy Oct. 22 2013
By Alan F. Sewell - Published on Amazon.com
Format:Kindle Edition|Verified Purchase
I read this book from the perspective of an investor who specializes in real estate investment trusts (REITS). I was a REIT investor in 2008 when the economy failed, as I am today. I was near the financial center of the financial collapse of 2008 and able to observe it closely as it unfolded. Earlier in my career I worked as an IT company owner who studied the progress of business in the USA and globally by observing my client companies' businesses through the computer systems I developed.

Thus, I have a close up view of the financial collapse AND a broad-based view of the real world economy that underpins it. This perspective has made me a successful investor. But I do confess to having been blindsided by the 2008 collapse, as Mr. Greenspan and most professional economists were. This book explains Mr. Greenspan's opinion of WHY so many professional economists were caught napping during the Great Recession that began in 2008 and casts its long shadow over the economy today and for years to come.

Mr. Greenspan gets right to the heart of the question:

On the face of it, the financial crisis also represented an existential crisis for economic forecasting. I began my postcrisis investigations, culminating in this book, in an effort to understand how we all got it so wrong, and what we can learn from the fact that we did..... What went wrong? Why was virtually every economist and policy maker of note so off about so large an issue?

Having phrased the question in precisely the right words, Mr. Greenspan then proceeds to obscure the answer by giving the literary equivalent of the verbal "mumble" he made famous in giving indecipherable testimony to Congress while Chairman of the Fed.

The book begins with an essay on investor psychology, popularly known as "animal spirits" that delves into the psychological reasons why investors may commit or withhold their capital from the economy. That is followed by a chapter on banking regulation. Then there is a discussion on statistical analysis followed by a rambling chapter on THE ROOTS OF THE ECONOMIC CRISIS:

The toxic securitized U.S. subprime mortgages were the immediate trigger of the financial crisis, but the origins of the crisis reach back to the aftermath of the Cold War. The fall of the Berlin Wall in 1989 exposed the economic ruin produced by the Soviet bloc's economic system.

I did not find Mr. Greenspan's insight to be meaningful. I'm not unsophisticated about business, real estate, or the financial markets. I just did not find anything in this book that told me anything that a person with "101" experience in any of these fields would not already know. The macro-economics history lessons that Mr. Greenspan relates have been covered much more lucidly in Paul Samuelson's economics books of the last few decades.

Having avoided answering (at least to my satisfaction) the question of WHY the economy failed in 2008, Mr. Greenspan proceeds to explain his theory of why the recovery remains so tepid five years later. Economic Conservatives will find this chapter UNCERTAINTY UNDERMINDS INVESTMENT to be in synch with their economic philosophy:

That business had become markedly averse to investment in fixed long-term assets appears indisputable. The critical question is why? Although most in the business community attribute the massive rise in their fear and uncertainty to the collapse of economic activity, many judge its continuance since the recovery took hold in early 2009 largely to be the result of widespread government activism in its all-embracing attempt to accelerate the path of economic recovery and regulate finance. The evidence tends to largely support the latter judgments.

And yet it's curious why the stock market crashed and the economy failed in 2008 during an era of business-friendly governments (i.e. the Clinton Administration and the Conservative Republican Congress followed by President Bush whom I voted for twice).

During the 11.5 years between August 5, 1997 (the date of the first tax cut) to January 1, 2009 --- while taxes were cut to 80-year lows and numerous free trade agreements were enacted --- the S&P500 fell from 952 to 825, losing 13% of its value in non-inflation adjusted terms and 34% when adjusted for inflation.

Yet as soon as the "anti-business" President Obama was inaugurated in January, 2009 the stock market began a sustained rise that has GAINED 112% to date as the S&P500 has risen from 825 to 1750. And the gain did not come just because "the Fed is printing money." It came because corporations ARE MAKING RECORD PROFITS.

I would postulate that the economy failed in 1998 through 2008 for reasons unknown to ivory tower economists like Mr. Greenspan who have never operated in the real world economy of factories, offices, stores, and property:

1. Beginning in the late 1980s companies began stunting the consumption side of the economy with massive dis-employment of the American workforce. Millions of American jobs were shipped to Mexico, India, and China. Millions of Americans were put out of work by excessive importation of foreigners on H1-B visas. Millions were put out of work by mergers and acquisitions and by improvements in machine technology and automation. Millions were let go because company executives discovered that profits increased when they replaced high-paid senior career people with cut-rate hourly contract workers.

2. These millions of Americans were involuntarily removed from the labor force for reasons that might be considered to be good or bad, necessary or unnecessary, depending on one's point of view. An entire vocabulary of euphemistic terms like "rightsizing, downsizing, offshoring, outsourcing, early retirement, work force reductions, reengineering" was invented to explain the dis-employment phenomenon. Labor force participation peaked in 1999. That was the last year when any American who wanted a job could find one.

3. In order to fight rising unemployment Alan Greenspan lowered interest rates, believing that lower rates would boost corporate cash flows by allowing corporations to refinance their debt. The increased cash flows were supposed to encourage American companies to invest in expanding their businesses and hiring more American workers. President Bush also asked Congress to cut income taxes on capital gains and dividends to further boost business cash flow under the theory that it would be reinvested in growing the business.

4. Lowering interest rates and cutting taxes FAILED to grow the economy (in contrast to the success of these policies in reviving the economy during Reagan's years) because:

----- A) By 2000 many American companies were moving overseas and hiring foreign labor to replace Americans. Lowering interest rates and cutting taxes ACCELERATED the process of dis-employing Americans.

----- B) The increased profits that resulted from replacing Americans with Third World labor went exclusively into the pockets of the business owners. The incomes of the 1% soared while the 99% were afflicted with job losses and falling wages.

5. Consumer demand slackened due to the falling incomes of those put out of work or afflicted with falling wages.

6. With consumer demand falling, investors could not profit by investing in expanding production of goods and services. So, instead of creating real wealth by building factories that hire employees to produce goods and services, the 1% poured their money into real estate and leveraged real estate derivatives like collateralized debt obligations (CDOs) and credit default swaps (CDS). For a few years these paper "investments" soared even while American corporations hollowed out the economy by moving production overseas.

7. By the summer of 2007 the accumulation of job losses from layoffs and involuntary retirements made it impossible for large numbers of people to pay the mortgages on their homes.

8. When homeowners defaulted on their mortgages due to job losses, the leveraged CDO and CDS derivatives became defunct. The CDO's and CDS's had puffed up the asset ledgers of the banks. When they became worthless the banks discovered that they had only liabilities on their ledgers and no assets to offset them. The banks became insolvent.

9. The banks became insolvent and the stock market crashed. Business stopped dead in its tracks. The injection of several trillion dollars of printed/borrowed paper money by the government resuscitated the economy. Without that infusion every bank and business in the country would have failed and unemployment would have reached 100%. It would have been back to the Stone Age barter economy.

10. Five years later the jobs-creating side of the economy remains sluggish even though corporate profits are soaring to all-time record highs as are their publicly traded stocks. Is employment sluggish because:

----- A) Business won't invest in creating jobs because it is afraid of the allegedly "anti-business" policies of President Obama.

----- B) Business isn't creating enough jobs for the same reasons it hasn't been creating enough jobs since 1998 --- offshoring of American jobs to Mexico and China, excessive immigration of low paid foreigners on H10-B visas, downsizing, rightsizing, work force reductions, redundancies created by mergers and acquisitions, and early retirements.

Conservatives believe A) because it jives with their belief that free market capitalism cannot fail unless it is debilitated by a "Liberal" Democrat President. I would suggest that Greenspan doesn't understand why the economy failed because he can't get past his political lens to understand that B) is the correct answer.

If B) is the correct answer then cutting interest rates will have no effect in boosting employment. And so far, they haven't.

By failing to recognize that B) is the correct answer, Mr. Greenspan has developed an inside-out-view of the economy. He thinks that people aren't working because "entitlements have become too generous." In truth, people aren't working because corporations have shipped their jobs to foreign shores, replaced Americans with foreigners on H1-B visas, replaced fulltime workers with part-time workers, and forced millions into involuntary retirement.

Mr. Greenspan thus advocates economic policies that are OPPOSITE to what is required to recover the economy. He wants MORE tax cuts even though the enormous tax cuts of 1998-2008 failed. He wants MORE foreigners imported on H1-B visas at a time when millions of American-born engineers can't find work. He wants MORE free trade agreements even though our economy has been debilitated by ever-rising trade deficits with low-wage countries that suck American jobs out of the economy.

I would conclude that Greenspan's book misses the mark due to Mr. Greenspan's lack of acquaintance with real world economics. He has an inside-out view of the economy based on ivory tower political ideology. And even that viewpoint is not coherently expressed.
8 of 9 people found the following review helpful
1.0 out of 5 stars Greenspan's litany of reasons how the world failed him Dec 21 2013
By Appalachian Son - Published on Amazon.com
The most obvious lesson for aware readers is that Greenspan is among the luckiest apple-polishers in US history. Greenspan claims to be an advocate of global free markets and economic meritocracies driven by minimally regulated private sector enterprise; supporting that belief is widespread agreement that Greenspan's most notable "successes" are saving US finance in 1987, and the Clinton years. As with many political figures, facts on file do not match their memories.

The Crash of '87 was the market response to uncertainties caused by five years of debt-fueled federal binge spending and speculation in high risk securities. Greenspan's response was Keynesian; he pumped as much public money into the market as it took to maintain the facade of integrity in finance. By 1987 politicians had redefined financial services from necessary parasites to the foundation for all that is good about America. By the end of 1988 well-employed Americans lived falsely optimistic lives in a false economy propped up by massive public debt. The people Greenspan needed to please were pleased, and so politicians and the corporate welfare classes tended to grade Greenspan's performance in the range A+++ to A++.

A different parallel reality tended to be unacknowledged. The middle class was shrinking as the quality of jobs declined. Risks to taxpayers increased as the quality of securities declined and government debt exploded. Still, Greenspan apparently felt the transfer of wealth from middle class consumers to parasitic financial services industries needed more accelerant, so The Maestro continued to weaken quality constraints on credit and debt claiming rational markets would check financial avarice.

The direct result was that after 1987 inflation moved from shopping baskets to assets, a class of goods not typically covered in month-to-month inflation measures, and which could therefore be allowed to continue unremarked by most "experts" in the art of economics. Massive asset inflation after 1987 provided the pretend security for the real leverage that fueled the doubtful boom of the 1990s which set the stage for the housing bubble that followed. As happened in the 1980s when the federal debt binge combined with loosened shackles on financial avarice to create a feel-good economy, the 1990s boom was built on private debt, asset inflation and even fewer shackles on financial avarice to create a feel-good economy. 'The 1980s and 1990s economies felt real, our jigged measures show growth, so it was real,' remains the position of most "experts" trained in finance and economics. The 1990s boom is The Maestro's second widely proclaimed triumph.

That The Maestro ignored history and real time lessons of the dot.com bubble didn't surprise sentient Greenspan Watchers. There is an argument for the belief that the lessons of the dot.com bust - speculators can lose money on Wall Street - do not transfer well to the housing bubble and bust. Because of the obviously larger implications to the nation's financial infrastructure, there is no argument supporting Greenspan's failure to address the risks of the speculator-driven housing bubble that put at risk most of the assets of millions of citizens.

The traits that appear to define Greenspan are 'self-serving' and 'hypocrite'. No senior official in US history advocated keeping government out of the economy more frequently, but through the end of his eighteen year tenure at the FED no official in US history intervened in private enterprise to the extent Greenspan did. No senior official in US history survived a similar number of years talking one set of values while practicing a polar opposite set of values to cover the damage caused by their public views. The Maestro's career is a testament to sycophancy to political power regardless of costs to the nation.

But I digress...

Back to the book: buy it if you are a dyed in the wool fake-conservative seeking bathroom reading defending pillar to post thinking and reactionary management. People with math and logic skills sufficient to overcome their worst political instincts can also use this book in their bathrooms, but there are more comfortable and lower cost alternatives.
8 of 9 people found the following review helpful
3.0 out of 5 stars 3 stars for the effort, but I find the book not worth reading Nov. 19 2013
By Jan Fabisiak - Published on Amazon.com
3 stars mainly for the effort, as I found the book largeley disappointing. Mr. Greenspan tries - but fails - to justify his mistakes with the fact that "no-one knew" what was going to happen. Fair enoguh, but that's not an issue worth writing a book about, especially so when the author's primary interest is pointing the finger of blame somewhere else.
5 of 5 people found the following review helpful
3.0 out of 5 stars Lacks cohesion Dec 15 2013
By SHANAN D BENTLEY - Published on Amazon.com
Format:Hardcover|Verified Purchase
I expected Alan Greenspan's years of experience and wisdom to come together in some kind of "ah ha" moment. This is really just a compilation of economics and statistical vignettes. Lots of interesting stuff, but no real message in conclusion.
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