Alan Greenspan Gets an “A-”

Alan Greenspan is leaving the Federal Reserve tomorrow, and Ben Bernanke takes over. During his tenure at the Fed, Mr. Greenspan has been a steady voice, often at odds with other actors in the macroeconomic world, and a man who speaks a version of the English language that is opaque squared. He leaves with great respect in the world, and his successor has big shoes to fill. His performance over the last 18 ˝ years gets an “A-”.

Mr. Greenspan’s greatest contribution to the central banking game was increasing the Fed’s transparency -- ironic given his own ability to speak to Congress for hours and say nothing. When he entered the field, the Fed didn’t even tell the markets when it had changed interest rates. Traders just suddenly discovered prices were slightly different, and they deduced the change. Now, the markets know what day and what time to expect a change, if any. Moreover, the Fed’s minutes are available after a few weeks’ delay; investors and speculators can read the thinking at the Fed and surmise whether there’s to be a change and what direction it will take.

Mr. Greenspan also gets credit for recognizing a paradigm shift that occurred in the 1990s. The sudden growth of the US economy at that time had a great many calling for higher interest rates to cool things off before inflation took wing. Mr. Greenspan saw that the growth was fueled by greater productivity, largely computer driven (that is, a technological change that didn’t fit any quantitative model, but which was qualitatively significant). So, he stayed his hand, and from 1995-1999, the US economy added 3 million jobs a year and the economy went on a non-inflationary tear.

The Fed chairman, however, isn’t an economic dictator, and when the markets choose not to listen, there is little he can do to prevent bubbles from popping. The dot-com experience was just such a situation. The current housing bloat could well be another, but not necessarily. His 1996 statement that the stock market suffered from “irrational exuberance” sums this up.

That is not to say he has been perfect. He is dead wrong about the need to keep inflation low at a time of global terrorism; an economy that is a bit hot is more likely to avoid deflation (which no central banker seems to know how to cure, e.g., Japan) than one that has stable prices in the event of a major attack. He has failed to act on the point that rising asset prices are inflationary just as surely as rising wages. Moreover, he hasn’t done as much as he could have to deal with America’s disastrous trade deficit.

All the same, his cool actions on October 19, 1987, his calm response to Russia’s 1998 default, and his policy attitude during the Long-Term Capital Management crisis would get him solid marks under any grading system. However, the fact that the September 11, 2001 attack on America didn’t result in a total failure of the American economy is largely his doing, and that earns him quite a place in economic and political history. Not a bad run.


© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent.
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