Exit The Maestro: The Economy Owes Much To His Deft Handling Of Inflation
And some say Greenspan was lucky. He encountered no great oil shocks like the whoppers his mentor Arthur Burns and Volcker had to contend with. He also assumed leadership of the Federal Reserve just a few years into what economists call the Great Moderation, the period beginning around 1984 when the volatility of several important macroeconomic variables began to decrease significantly. Also, Greenspan himself would point to large pools of labor in Asia that have come online over the past two decades as the reason for a slowdown in the increase of labor costs and the resulting fall in the rate of inflation.
Crises. Greenspan showed great deftness, though, in dealing with the 1987 stock market crash, a savings-and-loan banking catastrophe, currency crises in emerging markets, a Russian default, the collapse of one of the world's largest hedge funds, the terrorist attacks of Sept. 11, 2001, and a series of corporate scandals that severely shook investor confidence during his term. "The way the Greenspan Fed responded to not only the Asian crisis but also to 9/11, the readiness to coordinate with other central bankers around the world, that has been pretty impressive," says Edward George, former governor of the Bank of England.
Greenspan also had the politician's touch, certainly a plus in Washington. His first stint as a power player was as chairman of the Council of Economic Advisers. As an economic forecaster in New York, he had taken time out to work on Richard Nixon's 1968 campaign and had impressed the candidate with his knowledge of and ability to explain economic issues. Six years later, Nixon asked Greenspan to become his top economic adviser. Oddly enough, he ended up working for President Gerald Ford, as Nixon resigned the night of Greenspan's nomination hearing. His swearing-in ceremony in the White House Cabinet Room was attended by the two women to whom he was devoted, his mother, Rose Goldsmith, and philosopher and novelist Ayn Rand. For years in New York, Greenspan had been a disciple of Rand and her strict theory of rational self-interest.
Rising unemployment and a 12 percent inflation rate in 1974 made battling stagflation the top priority of the president's new man. Greenspan talked Ford into a tax-cut stimulus, the efficacy of which was debatable. Other White House measures, like an effort to enlist citizens in the fight against inflation by printing millions of buttons emblazoned with the slogan "Whip Inflation Now," or WIN, bore little fruit. More notably, Greenspan was the architect of the 1975 federal bailout of New York City. But probably his greatest achievement during his first two-year stint inside the beltway was to forge relationships with powerful politicians such as James Baker III and Ford's chief of staff, Dick Cheney, and to hew inroads into influential reaches of Washington society, which included dating celebrity journalist Barbara Walters. It all came to an abrupt end the day Jimmy Carter was sworn in, and Greenspan returned to New York.
Ten years later, President Reagan wanted his own man at the Fed--he had inherited Volcker, a Democrat, from Carter. Baker, by then Reagan's treasury secretary, immediately recommended Greenspan. "I don't recall that we considered anyone else," says Baker. "We felt that Greenspan would be acceptable to Wall Street and to economic commentators, and there was no real Democratic opposition to him."
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