Exit The Maestro: The Economy Owes Much To His Deft Handling Of Inflation
Alan Greenspan is a man of numbers. So to tell the story of the central banker many consider to be the nation's greatest ever, let's begin with them: 18, 5.55, 3, 2. Greenspan has spent 18 years as chairman of the board of governors of the Federal Reserve System, the second-longest term in the Fed's 92-year history. During his tenure, the unemployment rate averaged 5.55 percent, and the average annual inflation rate was 3 percent. Compare that with 6.85 percent unemployment and 6.5 percent inflation over the prior 18 years. Finally and most important, there's the number 2: two mild recessions during his term, or the longest economic expansion in U.S. history. Impressive, considering that from World War II until the man known as the maestro took the economy's helm, recessions occurred every six years or so.
Of course, numbers don't tell the whole story, even that of an economist known to digest reams of them in his bathtub. Greenspan's genius, in the minds of many who follow the Fed, was his ability to inspire confidence in the markets, nurture economic prosperity through multiple financial crises, and build upon the inflation-crushing success of his predecessor, Paul Volcker.
"Prop him up." Indeed, faith in Greenspan as a miracle worker ran so high that during the 2000 presidential campaign, Sen. John McCain quipped that "if Mr. Greenspan should happen to die, God forbid . . . I'd prop him up and put a pair of dark glasses on him and keep him as long as we could."
With Council of Economic Advisers Chairman and former Fed governor Ben Bernanke now nominated to replace Greenspan, who will leave the Fed on January 31 and turn 80 five weeks later, that won't be necessary. Instead, expect a long goodbye marked by glowing tributes bordering on worship.
And yet, despite all the accolades, criticisms linger, even among those who acknowledge the astounding job he has done in stewarding the enormous--and enormously complicated--U.S. economy through perilous straits.
Principal among them is the complaint that Greenspan did nothing to deflate the stock market bubble of the late 1990s. Greenspan argues that nothing should be done by the Fed to prick asset bubbles. "Relying on policymakers to perceive when speculative asset bubbles have developed and then to implement timely policies to address successfully these misalignments in asset prices is simply not realistic," he reiterated recently. The best solution is a flexible economy, Greenspan says, and the Fed can work to contain the damage after the bubble bursts. The Greenspan Fed did just that after the 2001 meltdown of technology and telecom stocks by taking interest rates to 45-year lows. Yet that policy, say critics, merely set the stage for another bubble to appear in housing, fueled by mortgage rates below 6 percent. "Until the aftermath of the housing bubble is determined, Alan Greenspan's track record will not be carved in stone," says Jim Stack, president of InvesTech Research.
Greenspan relied on his personal judgment to formulate monetary policy. As successful as that method has proved, it presents a formidable problem for his successor. "When the next leader of the Fed takes his seat behind the chairman's desk and opens the top drawer in search of Alan Greenspan's magic formula, he may be sorely disappointed," wrote Princeton economist Ricardo Reis and former Fed Vice Chairman Alan Blinder in a paper presented this summer at the Fed's annual Jackson Hole, Wyo., conference.
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