Barely a month after his retirement. Alan Greenspan is barely heard from or thought of in the media. As well it should be, as the Federal Reserve and new chairman Ben Bernanke are faced with plenty of challenges in helping guide the economy. It’s very hard, however, to not look back on Alan Greenspan’s distinguished stint as Fed chairman. Despite his ability to shift gears between economic models, there are several recurring themes in Mr. Greenspan’s nineteen-year tenure.
Often considered to be the second-most powerful position in the world, the Fed chairman is intended to be politically independent, and Mr. Greenspan was certainly that. Consider that he was initially nominated by Ronald Reagan and subsequently served during the terms of George H. Bush, Bill Clinton and George W. Bush, earning their confidence as well as that of Congress. He ignored the conventional wisdom that rates won’t be raised in an election year, doing so in 1988 and 2004. Mr. Greenspan regularly spoke out on economic risks, including recent concerns on the budget deficit, the trade daeficit and the long-term viability of Social Security. His arguments have been far more objective and sound than those of elected politicians who lack the will to address these issues, and it was not in his character to merely toe the prevailing administration party line.
Mr. Greenspan provided a steady hand and solid leadership to volatile financial markets. Nowhere was this more evident than following the 1998 collapse of Long Term Capital Management, which had the potential to ripple through the entire global financial system. Mr. Greenspan gathered the major investment banks and (almost literally) didn’t let them out of the room until they agreed to a plan to shore up the system. His appointment in 1987 was quickly followed by the stock market crash of that year, and other crises included both wars in Iraq, the dot.com bust and the aftermath of September 11. The resiliency of the economy sometimes make these seem like bumps in the road, but they were all major disruptions that required decisive action.
Even though his speeches were often difficult to follow, Mr. Greenspan valued open communications. He moved to make the thinking of the Fed more transparent and the Fed’s statement of economic conditions and its policy bias going forward became more important to the markets than the actual rate action taken. Mr. Greenspan even became something of a media star, as evidenced by the CNBC “briefcase watch” that tried to predict rate changes based on the thickness of Mr. Greenspan’s briefcase the day of a Fed meeting. He also turned a few memorable phrases, such as the “irrational exuberance” of the ’90’s stock market bubble and the current “conundrum” that long-term interest rates have stayed low even as the Fed has raised short-term rates.
Mr. Greenspan is not without his critics. The long period of “easy money” to keep the economy growing and the fight against inflation have had the as yet unresolved side effects of a record trade deficit, a negligible savings rate and high housing prices. Likewise, strong productivity growth and growth in most developed countries in the 1990’s provided some tailwinds for U.S. economic growth. And hindsight allows the argument that the Fed has sometimes let the rate pendulum swing too far. Ultimately, though, his legacy will note that inflation was kept under control, unemployment trended lower, there were just two mild recessions and the economy had its longest expansion on record.
As Alan Greenspan retires and short-term rates have risen to their historic norms, what’s next? Current economic data are often inconsistent and do not provide a clear indication of future growth. A recent Fed statement suggested that the Fed may rely more on short-term economic conditions than on sweeping policy. Simply having a change of Fed chairman after nineteen years creates some uncertainty, but Mr. Bernanke insists that his priority “will be to maintain continuity with the policies and policy strategies established during the Greenspan years”.
By any measure, Alan Greenspan has been a dedicated and exemplary public servant and our economy, some may say even our way of life, are better for it. He will be a hard act to follow.