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Alan Greenspan spent much of his career at the highest levels of government economics. He served as a top advisor to presidents Ford and Nixon, but is most widely known for his long tenure as chairman of the Federal Reserve, a position he held from 1987 to 2006.
For much of that period, Greenspan was arguably the most influential economist in the world. His early reputation as chairman of the Fed was boosted by his able handling of the 1987 stock market crash, wherein he quickly provided the economy with the liquidity needed to offset the market’s falloff. Beginning in the mid-1990s, Greenspan was among the first to recognize the importance of productivity’s acceleration. Given this increase in the growth of output per hour, Greenspan believed that the economy’s “speed limit”—the rate of growth consistent with stable inflation—had increased. During the latter 1990s, the unemployment rate fell well below the comfort level of most economists, yet inflation decelerated, and broadly shared real wage gains were handily paid for out of rising productivity growth.
Greenspan was widely viewed as favoring conservative economic policy, a view reinforced by his early association with the libertarian, antiregulatory philosophy of the writer Ayn Rand. And while he exhibited throughout his career a strong preference for market-driven outcomes and a diminished role for government, his approach to monetary policy was largely pragmatic and data-driven. Though he avoided true “inflation-targeting”—explicitly stating the range of price growth acceptable to the Fed, a practice he viewed as too restrictive—he focused closely on measures of inflation and resource utilization, urging the Federal Open Market Committee (the group of Fed governors that set interest-rate policy) to adjust rates based on the relationships between these variables.
Though generally highly regarded by the economics and policy community, Greenspan has had his critics. Throughout his term at the Fed, he was sometimes viewed as elevating inflationary concerns above the goal of full employment, despite the Fed’s mandate to maintain balance in its simultaneous pursuit of stable prices and low unemployment. Most recently, some have maintained that Greenspan played a decisive role in the swing from fiscal surplus to fiscal deficits. Based on what turned out to be a highly optimistic forecast of government revenues, Greenspan endorsed large tax cuts proposed by the Bush administration. Though the chairperson of the Fed is a political appointee, it is rare for the Fed chief to play such an overtly political role in a policy matter before the Congress. Furthermore, his endorsement was instrumental in the passage of these cuts, which ultimately played an integral role in the move from federal budget surpluses in the latter 1990s to deficits in the 2000s.
The most common criticism of Greenspan, however, is that he presided over damaging investment bubbles that could have been avoided by more aggressive Fed policy. Two major speculative bubbles emerged over Greenspan’s tenure: the information technology (IT) bubble of the latter 1990s and the housing bubble of the 2000s. Speculation in IT firms, some of which had little more than a sketchy business plan, was rampant in the 1990s, while at the same time, many firms overinvested in ITrelated goods and personnel. When it became clear that returns on these investments could not be sustained, a large sell-off of stocks and IT-related assets ensued. Shortly thereafter—in March 2001—the economy entered an investment-driven recession.
More recently, speculative bubbles formed in housing markets as prices were steeply bid up, particularly in highly populated areas of the country. Though Greenspan observed the sharp rise in home values, he again refrained from criticizing the development of what some observers recognized as a housing bubble. In fact, critics argue that Greenspan and the Fed further inflated the bubble by sharply lowering interest rates in response to the recession of 2001. Moreover, many homeowners took advantage of the rising value of their home equity, and boosted their consumption with cash borrowed against their homes. As this bubble began to burst in the mid-2000s, home prices fell steeply, slowing the economy and hurting key economic sectors, such as construction and real estate.
In both cases, Greenspan and the Fed did nothing to intervene as speculative bubbles formed. During the formation of the IT-bubble in 1996, Greenspan popularized the oft-repeated term “irrational exuberance,” suggesting speculation was inflating asset values. Thereafter, however, he refrained from either critical scrutiny of the stock market’s run-up, or more concrete policies, such as raising the Fed’s margin requirements (i.e., limiting the amount that investors could borrow to purchase stocks “on margin”).
Prior to retiring from the Fed, Greenspan defended his lack of action in these cases by claiming the Fed has neither the ability to recognize bubbles, nor the tools to deflate them. Especially given the fact that Greenspan himself clearly recognized the irrational nature of the stock market’s climb in the latter 1990s, the first part of this defense seems weak. Whether the Fed could have intervened is another question. Reflecting on the IT bubble, Greenspan reasonably argued that “it was far from obvious [that the bubble] could be pre-empted short of the central bank inducing a substantial contraction in economic activity, the very outcome we were seeking to avoid” (Greenspan 2002).
These criticisms aside, Greenspan will likely be remembered in a positive light, as an excellent crisis manager and an able central banker who presided over two of the longest economic expansions in the country’s history. True, his conservative political ideology inappropriately broke through on occasion, and he might have led the Fed to do more to push back against speculative bubbles that formed on his watch. Nonetheless, his economic insights and data-driven approach to monetary policy remain the model for central bankers today. In fact, when nominated by President George W. Bush to succeed Greenspan, current Fed chief Ben Bernanke paid a high compliment to the retiring chairman: “[I]f I am confirmed to this position, my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years” (The White House 2005).
- Galbraith, James K. 2006. Unbearable Cost: Bush, Greenspan, and the Economics of Empire. Basingstoke, U.K.: Palgrave Macmillan.
- Greenspan, Alan. 2002. Economic Volatility. Remarks by Chairman Alan Greenspan at a Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 30. http://www.federalreserve.gov/boarddocs/speeches/2002/2002 0830/.
- Jones, David M. 2002. Unlocking the Secrets of the Fed: How Monetary Policy Affects the Economy and Your Wealth-Creation Potential. Hoboken, NJ: Wiley.
- The White House. 2005. President Appoints Dr. Ben Bernanke for Chairman of the Federal Reserve. October 24.
- http://www.whitehouse.gov/news/releases/2005/10/2005102 4-2.html.
- Tuccille, Jerome. 2002. Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker. Hoboken, NJ: Wiley.
- Woodward, Bob. 2001. Maestro: Greenspan’s Fed and the American Boom. New York: Simon & Schuster.
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