THE TWO FACES OF ALAN GREENSPAN

October 19, 1987, is known as Black Monday, the day the New York Stock Exchange suffered the worst crash in history, with a bang that echoed around the world. The Dow Jones Index (the Dow in short) then sank 22.6 percent, almost double the single-day drop in the notorious crash of 1929. From Toronto to Tokyo, London to Sydney, Buenos Aires to Brasilia, share markets shed tears, mourning the demise of the Dow. Wall Street and investors across the globe agonized over a bleak future. They had been caught off guard, because no financial wizard had foreseen the debacle. But in one of financial history's biggest ironies, Black Monday launched the brilliant future of someone named Alan Greenspan. It propelled him into glory and celebrity, giving him unprecedented influence over the global economy.

Barely two months before the disaster of the Dow, with large bipartisan support, Greenspan had been appointed the chairman of the Federal Reserve (the Fed in short), a coterie of 12 regional banks that control the levers of money supply in the United States. He came with no banking experience; his credentials as an economist were considered by some to be mediocre, but he had foresight and business acumen that few can develop from their scholarship alone. He had not done any path-breaking work in economics, at least none that was commonly cited. Yet he was savvy enough to know when to open and shut the money pump that lubricates financial markets. He had made his mark through business forecasting, which had brought him close to big firms on Wall Street.

Actually, Wall Street's first choice in 1987 was not Greenspan but Paul Volcker, who had been selected as the Fed chairman by President Jimmy Carter in 1979. Volcker had done such a good job of taming inflation, which had plagued the globe since the early 1970s, that the financial world had come to adore him. But an inflation fighter is rarely popular with politicians, because he tends to keep interest rates high and raise the rate of unemployment. Volcker was not on amicable terms with the reigning president, Ronald Reagan, who preferred his pal and adviser, Wall Street's second choice, Alan Greenspan.

Following his swearing-in ceremony as Fed chairman in the month of August, Greenspan must have disappointed the president, as he raised the interest rates a notch, presumably to display his own credentials as an inflation fighter. This appeared to be a clear attempt to woo Wall Street, which was uneasy with Volcker's departure. Within weeks of Greenspan's arrival as the head of the Fed, financial brokers felt reassured. But then the stock market, which had been soaring since 1982, roared into a frenzied crash, shaking investors around the planet. Everyone wondered: Would the new chairman be up to the Herculean task of stabilizing the markets?

With the shareholder world in shambles, Greenspan swung into action to prevent the kind of economic collapse that had followed the much leaner 1929 crash. As Fed chairman, he had enormous power over interest rates and commercial banks. He flooded the financial world with money, made loans cheaply available to investors, and persuaded bankers across continents to follow his lead. The rest is history. Share prices stabilized around the globe in a matter of weeks, and economic calamity was averted. In fact, the Dow, along with global stock indexes, ended the year with a gain, mocking the October Massacre.

Black Monday presented one of the stiffest challenges to Chairman Greenspan, but he rose to the occasion, becoming a celebrity in the process. Henceforth, he became the darling of Wall Street and investors all over the planet. Greenspan had remained calm amidst financial jitters. Alan Murray of The Wall Street Journal commended Greenspan for "Passing a Test." Later, Forbes and other influential magazines described his handling of the crisis as "Greenspan's Finest Hour. He got on the horn and told the banks they had to lend money to Wall Street. Then he dropped money market rates and long-term rates fell sympathetically." Still later, the Associated Press recalled: "The 1987 crash occurred only two months after Greenspan was sworn in as Fed chairman. He received a large amount of praise for his handling of that financial crisis."

However, for Greenspan this was just the beginning of his climb to stardom on the global stage. Countless articles were written about his personality and life, heads of central banks envied him, politicians kowtowed to him, experts and economists, including Nobel laureates, lauded him.

Greenspan became a kind of cult figure. The world was infatuated with him, as the international media credited him with steering the globe through one economic disaster after another—the Mexican crisis, the Asian crisis, the Russian default, Brazil's crippling debt burden, and so on. His words became gospel to millions of people involved with share markets. With the world shaken by Russia's default on foreign debt in late 1998, The Economist headlined: "All eyes on Al," assuming that everyone knew "Al" meant Alan Greenspan. On May 4, 1999, The New York Times enquired: "Who needs gold when we have Greenspan?"

In March 2000, Time Europe posed a silly question: "How many Federal Reserve chairmen does it take to change a light bulb?" Then it offered a tongue-in-cheek answer: "One. Greenspan holds the bulb, and the rest of the world revolves around him." The same year, France decorated Greenspan with its highest award, the French Legion of Honor. Two years later, Queen Elizabeth II knighted him "in recognition of his outstanding contribution to global economic stability and the benefit that the UK has received from the wisdom and skill with which he has led the US Federal Reserve Board." Like heads of state, kings, and princes, he received the red-carpet treatment wherever he went.

People called him maestro, a visionary, the best economist ever. But who was this person who had catapulted into the spotlight from virtually nowhere? Did the world really know Alan Greenspan? Was there another side to his life and accomplishments, one that was not so pretty? In looking at his early influences, could you find a pattern of beliefs that lay underneath his choices? What were the hidden motivations behind his actions? Behind the soft outward face was there another, the face of a charmer, an opportunist, a social climber? It could explain how he had advanced so far without sufficient credentials; how his extraordinary career appeared to derive crucially not from merit but from favoritism and connections.

Greenspan first came into the national limelight when President Gerald Ford appointed him as the...