The Hindu Business Line : IT as Alan Greenspan sees it

If you were in charge of ‘the electronic payment systems that transfer more than $4 trillion a day in money and securities’ between banks all over the world, how would it be to think of a possible collapse of the edifice? Bizarrely, that was what Alan Greenspan weighed in his mind when the Swissair Flight 128 he was in was being diverted off to Zurich rather than be allowed to fly to the US, on the afternoon of September 11, 2001.

The WTC attack, the first on the US soil since Pearl Harbour, would throw the country into turmoil, he knew. “The question I needed to focus on was whether the economy would be damaged,” he recalls in The Age of Turbulence ( www.penguin.com), a book of memoirs from the former central banker of the world’s most powerful economy.

The iconic Fed knew that the US economy would be crippled if the electronic payment systems collapsed. “Banks would be forced to fall back on inefficient physical transfers of money.

Businesses would resort to barter and IOUs; the level of economic activity across the country could drop like a rock.”

Thankfully, countermeasures were in place. During the cold war, as a precaution against nuclear attack, the Federal Reserve had built a large number of redundancies into the communication and computer facilities on which the money system relies, narrates Greenspan.

“We have all sorts of safeguards so that, for example, the data of one Federal Reserve bank are backed up at another Federal Reserve bank hundreds of miles away or in some remote location. In the event of a nuclear attack, we’d be back, up and running in all non-irradiated areas very quickly…”

While trying ‘to understand the nature of this new world’ through what he calls ‘a detective story’, the 81-year old author finds that a number of global forces have gradually, sometimes almost clandestinely, been at work.

“The most visible to most of us has been the increasing transformation of everyday life by cell-phones, personal computers, e-mail, BlackBerries, and the Internet.”

The revolution in information technology didn’t happen all of a sudden, he discovers. It had been forty years in the making. “It began after World War II with the development of the transistor, which provoked a surge of innovation,” he traces. “The computer, satellites, the microprocessor, and the joining of laser and fibre-optic technologies for communications all helped set the stage for the Internet’s seemingly sudden and rapid emergence.”

The fast-paced high-tech boom is what finally gave broad currency to Schumpeter’s idea of creative destruction, explains Greenspan. “Capital shifted from stagnant or mediocre companies and industries to those at the cutting edge. Silicon Valley venture capital firms with names like Kleiner Perkins and Sequoia and investment banks like Hambrecht & Quist suddenly achieved great wealth and prominence by facilitating this money shift.”

Why should information technology have such a vast transforming effect?

Posing this question rhetorically, the author proceeds to answer thus: “Much of corporate activity is directed at reducing uncertainty. For most of the twentieth century, corporate leaders lacked timely knowledge of customers’ needs. This has always been costly to the bottom line. Decisions were made based on information that was days or even weeks old.”

So, how did companies manage their affairs? They hedged, using stock and bench. “They maintained extra inventory and backup teams of employees ready to respond to the unanticipated and the misjudged.” Though such an approach worked, costs were heavy, since standby inventories and workers do not add to revenue or productivity.

This is where IT made the difference by providing real-time information and markedly reducing ‘uncertainties associated with day-to-day business’ – such as in retail checkout counter, shop floor or shipping. Also, IT has led to “shorter delivery times and fewer hours of work required to provide everything from books to factory gear, from stock quotes to software.

Information technology has released much of the extra inventory and the ranks of backup workers to productive and profitable uses.”

A must-read chapter for techies is ‘Millennium fever’, where Greenspan talks not only about the tech euphoria that caused infectious optimism, invading even elevator rides with stock tip conversations, but also the Y2K moment when he was present at the Fed along with a sizeable team ‘to monitor the transition of the nation’s financial systems’.

The threat, as you may know, was from obsolete software containing the Y2K bug – embedded in computers all over the world. “In order to save precious computer storage capacity, programmers in decades past had routinely used only two digits instead of four to represent the year, so for example ‘1974’ would show up simply as ‘74’,” explains the author.

He confesses to having used this technique himself when he wrote programs using punch cards in the 1970s.

“It had never entered my mind that such programs, extensively patched, might still be in use at the end of the century, and I never bothered to document the work.”

On the eve of Y2K, Greenspan joined the Fed staff in watching the New Year celebrations from the command post, monitoring how Australia, Japan, the rest of Asia, and then Europe transited smoothly, with city lights continuing to be on behind the fireworks!

The UK then entered the year 2000 apparently without problems…

“We were now in the hiatus as midnight crossed the Atlantic. The US would be the last major economy to go, which added to the suspense, because after all our poking and prodding of other nations, it would have been an embarrassment to have our systems fail.”

Was the central bank prepared for the occasion? Extremely well, says Greenspan. “The US financial industry had spent many billions of dollars replacing and updating old systems and programs; crisis-management teams stood ready in every Federal Reserve district and in every major bank.”

And in the event the US’ credit card system or ATM networks broke down, the Fed had even positioned stockpiles of extra cash at ninety locations around the country, he writes reassuringly. Investments in tackling Y2K greatly enhanced the flexibility and resilience of the US’ business and government infrastructure, reminisces the author. “There were no more undocumented ‘black boxes’ to try to puzzle out when something went wrong.”

He even postulates that a good part of the surge in productivity in the years immediately following was owed to those precautionary Y2K investments.

Greenspan predicts we will continue to move away from value produced by manual labour and natural resources, and go toward the intangible value associated with the digital economy.

“Today it takes a lot less physical material to produce a unit of output than it did in generations past.”

For instance, thin fibre-optic cable has replaced huge tonnages of copper wire, he says.

“New architectural, engineering, and materials technologies have enabled the construction of buildings enclosing the same space with far less physical material than was required fifty or one hundred years ago. Mobile phones have not only downsized but also morphed into multipurpose communication devices.”

The author explains how the new economy is different from the old economy in terms of costs.

“In the typical case of a manufactured good, the incremental cost of increasing output by one unit ultimately rises as production expands. In the realm of conceptual output, however, production is often characterised by constant, and often negligible, marginal cost.”

An example he cites is of online medical dictionary; setup cost of creating it may be huge, but the cost of reproduction and distribution over the Internet may be near zero.

“From the development of the textile loom two centuries ago to today’s Internet, output per hour has increased fifty-fold,” he notes.

Almost all of the real-value-added increases in our output, in recent times, reflect the embodiment of ideas, concludes Greenspan.

A book to help you connect the economic dots.

Tailpiece

“My dentist likes his ringtone so much…”

“That he doesn’t pick up the phone?”

“No, he plays the tone over and again in the waiting hall’s music system to make the tooth-job less painful in comparison!”

dmurali@thehindu.co.in