Exit The Maestro: The Economy Owes Much To His Deft Handling Of Inflation
In between reading the economic tea leaves, the Fed chairman took time out to marry his longtime companion, NBC political correspondent Andrea Mitchell. They had been a Washington item for over a decade, and in April 1997, Greenspan took the plunge. "It was rational exuberance" that prompted him to propose, Mitchell joked at the time.
Greenspan's tenure largely coincided with the longest and strongest economic expansion in U.S. history. Many factors played into that, including industry deregulation that began under Carter, the conspicuous consumption of the baby boomers, and the end of the Soviet Union and the emergence of China. But considerable credit must go to the Greenspan Fed, which kept the boom on track through a soft landing it engineered in 1994 in the face of rising inflation, the 1997 productivity insight, and sound responses to various calamities, including an emerging-market collapse and the demise of hedge fund Long Term Capital Management.
Greenspan also formed a beneficial partnership with President Clinton and his treasury secretary, Robert Rubin, who hailed from Wall Street. Clinton described the relationship to U.S. News: "The basic bargain was if I pursued the path to fiscal responsibility, [Greenspan] would respond by trying to keep interest rates down . . . and then we could do all the things we had to do to manage America out of the Cold War economy into the 21st-century economy."
Greenspan's periodic trips to testify on Capitol Hill became a Washington spectacle, with lawmakers seeking his advice and approval on all manner of legislative issues, from education to taxes. And though the chairman often talked circles around his inquisitors--"If I say something which you understand fully in this regard, I probably made a mistake," he once told a member of the Senate Banking Committee--he always left them smiling. "A big part of the job is to satisfy the public, the markets, the Congress, and the White House, and at the same time to maintain his independence. He did that very well," says Allan Meltzer, professor of economics at Carnegie Mellon University and historian of the Federal Reserve.
Greenspan's Fed also reached out to the public by shining a light on the inner workings of the once secretive institution. When he arrived, the Fed didn't announce monetary policy decisions; Wall Street had to watch rates to divine the central bank's latest action. Eighteen years later, the Fed not only announces rate changes; it gives a statement explaining them and its future leanings, and Fed meeting minutes are publicized.
The gradualistic Greenspan has been the right person for the evolving economy of the past two decades. Indeed, it's possible that he has been too good at his craft. "In perhaps what must be the greatest irony of economic policymaking, success at stabilization carries its own risks," Greenspan said last month. Prolonged stability leads investors to forget about risk, which breeds the "irrational exuberance" that inevitably leads to corrections. But now it will be a new Fed chairman who has to deal with the problem.
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