By JIM MCTAGUE
MONDAY, APRIL 28, 2008
SourceWE'VE FOUND IT -- A COPY OF ALAN Greenspan's long-lost Ph.D. thesis! Or, more accurately, a rare copy of the elusive document, in
Lassie-Come-Home-fashion, found us.
The dissertation, written in 1977 when Greenspan received his coveted degree from New York University, had been tucked away on a professor's sagging bookshelf for 31 years.
There are only two known copies: the Maestro's own and the one we viewed. As far as we can tell,
Barron's is the only news organization ever to have seen the thesis since a third and now missing copy was removed from the public shelves of NYU's Bobst library at Greenspan's request in 1987, the year that Ronald Reagan appointed him chairman of the Federal Reserve Board. Glancing at the document, we momentarily felt like Indiana Jones at the dramatic moment in which he discovers the Lost Ark of the Covenant.
Greenspan purportedly was trying to deter news coverage of his personal life when he ordered the thesis into hiding. His anti-paparazzi subterfuge backfired: The stealth thesis became red meat for his critics, who smelled a cover-up. Magazine articles and a new book, Deception and Abuse at the Fed (
reviewed here on March 31), have suggested that his degree was largely honorary and that the thesis was a cut-and-paste job, comprised of previously published, non-academic articles wrapped in a flimsy introduction.
TWO MAGAZINE ARTICLES IN THE late 1990s suggested that the thesis was entirely the work of Greenspan's staff at the Council of Economic Advisers, which he chaired from 1974-1977.
Not true, says Paul Wachtel, an NYU economics professor who was on Greenspan's thesis committee. Though the work is, in fact, a collection of previously published articles, he says that it is hardly unusual, as some critics assert, for a collection of articles to be submitted as a thesis. "There's no requirement that a Ph.D. thesis be a single magnum opus, based on the German 19th-century model," Wachtel maintains, noting that Greenspan also had to vigorously defend his work to earn his degree. (Greenspan wouldn't comment publicly to
Barron's on the matter.)
The thesis, which runs close to 180 pages, isn't for the casual reader. Two chapters that had been published as articles in the American Statistical Association's annual proceedings contain several pages of algebraic equations that, frankly, made our head ache.
We were tickled to find that the work's introduction includes a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble. Writes Greenspan: "There is no perpetual motion machine which generates an ever-rising path for the prices of homes."
Greenspan, however, didn't foresee a housing mania spilling into the general economy, toppling banks and brokerage houses and paralyzing key portions of the credit system. The worst he could anticipate was that a sharp "break in prices of existing homes would pull down the prices of new homes to the level of construction costs or below, inducing a sharp contraction in building." Back then, there were no home-equity lines of credit, derivatives or subprime mortgages. Mortgages were largely concentrated at savings and loans. Credit was harder to come by, too, because conventional mortgage rates were about 8.5% and headed significantly higher. Still, the thesis shows that the former Fed boss was focused on housing very early in his career. Thus, it casts doubt on his recent assertions about being surprised by the Mesozoic-era-size impact of this decade's housing mania.
Greenspan wrote: "This thesis endeavors to develop an area of theory and application which, in recent years of inflation and stagnation, has taken on increasing importance: the factors which govern market prices of assets and the impact they and other key balance sheet variables have on the aggregate investment process. Econometric models have tended generally to give short shrift to such variables, either on the grounds that their impact on effective demand is negligible or that their influence was largely reflected in other macro variables and, hence, an appropriate reduced form would factor them out."
Greenspan anticipated the current generation of five-year college seniors by taking a slow and winding road to a doctorate. He snagged the sheepskin 18 years after starting down the Ph.D. path at another university -- Columbia. His first distraction was Greenspan Associates, a consulting firm he founded in 1959. Launching this enterprise consumed much of his time and energy. Then he went to Washington to chair the Council of Economic Advisers during the Nixon and Ford years.
WHEN HE LEFT THE CEA IN January 1977, he was urged to finish his degree by legendary NYU economics professor Bob Kavesh, a boyhood friend. Wachtel said that Greenspan had to fulfill some course requirements, in addition to completing his thesis. Wachtel, an assistant professor at the time, pleaded to be on the dissertation committee for Greenspan, a glamorous figure in academic circles. He recalls that, following the defense of the thesis, Greenspan had dinner with celebrity reporter Barbara Walters, whom he was then dating. "I was hoping he'd invite us all along," jokes Wachtel.
In his dissertations abstract, Greenspan wrote: "This thesis incorporates a series of articles, written since 1959, which attempt to develop a number of issues relating to balance-sheet effects on economic activity, and, hence, on economic policy."
Sure to draw snickers from snarky critics is chapter five on economic policy and outlook -- part of 1977's unsigned Economic Report of the President. Greenspan claims to have authored it as CEA chairman. The general policy principles discussed in the chapter include the following: "Stimulus should be provided by tax reduction rather than by increases in government spending; tax reduction should be permanent rather than in the form of a temporary rebate; economic initiatives should be balanced between measures to stimulate consumption and those designed to increase business investment."
Other chapters in the thesis previously had appeared in Business Economics, published by the National Association for Business Economics; the annual proceedings of the American Statistical Association; Across the Board (a Conference Board publication) and The Economist.
Wachtel says the chapter written by Greenspan in 1959 on investment risk and stock prices anticipated by 10 years the Q ratio developed in 1969 by the late James Tobin to determine whether a company's shares are overvalued or undervalued, relative to the replacement cost of the company's assets. Tobin became a Nobel laureate.
Greenspan also broke new ground in the introduction to his thesis, where he noted that homeowners were refinancing for larger amounts than their original mortgage, in essence monetizing increases in their home's market value and spending the excess cash on goods and services or putting it into savings. Economic models at the time had missed the trend.
In the late 1990s, Wachtel wrote letters to two magazines that had published critical articles about the hidden thesis. Although he says he told them he had a copy, he maintains that no one contacted him about it. He also says that he wrote to Greenspan about it and that the ex-Fed chief, through a press spokesman, requested that he keep it to himself.
Wachtel came to us after we reviewed Deception and Abuse at the Fed, a book in which Robert Auerbach, a University of Texas professor, asserts that the Greenspan Ph.D. is, de facto, an honorary degree. Wachtel says that the book wrongly impugns New York University's reputation and that Auerbach's accusations are "a flight of fancy."
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The Bottom Line:The ex-Fed chief's Ph.D thesis seems legitimate. And it indicates that he's long underestimated the potential effects of a popped housing bubble.