After the financial crisis arrived, nobody took more hits than you. How did you handle it?
Remember, Harry Truman said, “If you can’t stand the heat, get out of the kitchen.” Well, I found that proposition very useful. And I’m acutely aware of what I’m dealing with. Look, I got a lot of praise during the 18½ years I was [Fed chairman], which I didn’t deserve. And I got a lot of criticism. Many people used to come up to me and say, “Thank you for my 401(k).” I didn’t know how to handle that, and I would basically say, “I appreciate that, but I had very little to do with your 401(k).
Your new book is called The Map and the Territory. What did you learn in the process of writing it?
What I first started on is an extraordinary event. The very difficult issue for forecasting is how can you pinpoint when the bubble breaks. And more importantly, what are the consequences of that? As far as I’m concerned, there’s one critical issue.
And what is it?
The major problem we deal with is that fear is the most prominent factor in people’s decision-making process. And you can actually measure it as several multiples greater than euphoria or greed. I was quite surprised by how much I learned in the process. I think I made very significant progress.
“If you don’t have growth, you cannot have entitlement programs. You can’t finance them”
Larry Summers, who aspired to sit in your old chair, has made the argument that debt is important, but growth is more important.
We have got to grow now. I agree with that. If you don’t have growth, you cannot have entitlement programs. You can’t finance them. And the type of growth we’re talking about will occur when and if a huge uncertainty is removed. In other words, housing is coming back, but remember that single-family housing starts are only one-third where they were at the peak in 2007.
When you look at spending, at budgets, what do you recommend as a basis for resolving the debt standoff?
I think that the president should have embraced Simpson-Bowles the day it came out. In fact, I was on Meet the Press when the initial Simpson-Bowles recommendations came out and I said, not correctly of course, that they would be passed at some point. I still believe that. I think they have a very clever solution to the current problem.
So the recovery comes back to the housing market?
We have a fundamental problem, namely that the reason we’ve had such a sluggish recovery is that the part of the economy represented by investments in assets of 20 years or more, in mainly buildings, has essentially collapsed, and I’m including residential and nonresidential buildings. That’s why we’ve been soggy during all of this period. That’s caused by a huge degree of uncertainty. But there is some evidence that it is being lifted. The stock market is behaving well. If it continues to do so, that can bring the economy up with it.
Tell me about Janet Yellen.
I find she’s a highly skilled economist. We get along very well. Let me just say one thing about her: I learned a lot from her when she was on the board [of governors of the Fed] and I was chairman because there were often a number of academic arguments and papers I hadn’t had a chance to read, or if I did, I didn’t understand.