Judging A Giant: Greenspan's Legacy -- Policy Maestro And Second Fiddle
By: A market crash, currency meltdowns, asset bubbles and wars -- Alan Greenspan weathered them all during his stint as Fed chief. And yet some think he’s second best.
“I still put him behind (Paul) Volcker,” says Robert Brusca,
chief economist of Fact And Opinion Economics and a long-time Fed watcher. “The reason he’s in second is that he ran the place by personality and didn’t leave the mechanisms in place where he could say he left the Fed in better operating shape than when took it over.”
Greenspan was sworn in as Federal Reserve Board Chairman 20 years ago. His accomplishments -- as well as the myriad challenges and crises he faced – are considerable, as is his length of service, second only to that of William McChesney Martin Jr. who served three months shy of 20 years (April 2, 1951 -- Jan. 31, 1970). Greenspan, however, followed in the footsteps of Volcker, whose eight-year term may have been comparably brief, but was nevertheless legendary because of his ability to slay inflation.
The Sept. 17 release of Greenspan's highly-anticipated memoir, “The Age Of Turbulence: Adventures In A New World”, which comes right on the heels of the 20-year anniversary of his swearing in as Fed chairman, is stoking the debate about his legacy.
Greenspan’s 18½-year tenure began with a bang. In what most called an almost necessary move to prove his inflation-fighting prowess, Greenspan raised interest rates by 50 basis points less than a month after being sworn in on August 11, 1987. That rate hike on Sept. 4 would be among the reasons citied for the stock market crash of October 19, 1987. (Ironically enough, Greenspan would go on to win plaudits for his role in handling the event and its aftermath.)
It was the first of many exercises in crisis management, from the Russian debt crisis and the subsequent collapse of Long-Term Capital Management in 1998 to 9/11 to the deflation scare of 2003-2204. And, yes, there were the two Persian Gulf Wars, two recessions and a handful of emerging market meltdowns as well.
“He was a steady hand,” says economist Lawrence White, now a professor at NYU’s Stern School of Business. “It is an important characteristic.”
“What he brought to the table was a sixth sense to things,” adds Ram Bhagavatula, a former Wall Street economist, now managing director of Combinatorics Capital, a head fund.
Not that Greenspan is beyond second-guessing or criticism, whether it’s his interest rate moves, his eagerness to spearhead a rescue package for Long Term-Capital Management – a rare interventionist moment -- a tendency to drift into the political arena or an autocratic management style.
Warts and all, his was a remarkable stewardship during a period of enormous change for the global economy, the financial markets and the institution itself. Not only was Greenspan smart and intuitive, he was flexible, adaptable and not dogmatic.
On The Money With Policy
Greenspan’s highest marks may be for his handling of monetary policy during his tenure, which was marked by two uncharacteristically short and mild recessions, wrapped around the nation’s longest peacetime economic expansion in history.
“The recessions suffered in his watch were milder and he can take some credit for that, “ says Bhagavatula. “Where he was different, better, was in his short-term judgments about the economy, the twists and turns of short-term of the economy.”
“Greenspan’s strength was his command of the small nuances of economic data that were not obvious in the overall picture,” adds David Resler, managing director and chief economist at Nomura Securities International. “He was able to see inconsistencies of the factual representation of the economy and what seemed to be going on.”
For example, Resler notes, in the late 1990s Greenspan determined that unusually high productivity was putting a lid on inflation, which made it easier to keep interest rates low as the economy grew at a healthy pace.
David Jones, one of the early Fed watchers and an author of four books on the institution, cites that as one of two keys to the Greenspan legacy.
Bubbles And Myths
The other was Greenspan’s ability to recognize the impact of globalization, beginning with the collapse of the Soviet Union and the fall of the Berlin Wall in 1989 right through to the opening of the Chinese and Indian economies. He “knew this would moderate labor compensation,” says Jones, which “allowed him to push the economy.”
Economists also credit Greenspan with turning monetary policy into a pre-emptive tool rather than a reactive one – though it is probably worth noting that his predecessor Paul Volcker was probably never in a position to do that.
Others are not as generous about his policy success. “He had some good wind at his back in stable energy prices and good fiscal policy,” says Prof. White, whose career includes stints as a governor on the Federal Home Loan Bank Board in the late 1980s and as an economist for both the Justice Department and the Council of Economic Advisors. In addition global economic conditions – despite a spate of emerging market crises -- were also mostly favorable during the bulk of Greenspan’s tenure.