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Judging A Giant: Greenspan's Legacy -- Policy Maestro And Second Fiddle

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.

President Reagan congratulating Alan Greenspan in August 1987 after he was sworn-in as new chairman of the Federal Reserve Board.
Barry Thumma
President Reagan congratulating Alan Greenspan in August 1987 after he was sworn-in as new chairman of the Federal Reserve Board.

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.

Former U.S. Federal Reserve Chairman Paul Volcker
AP
Former U.S. Federal Reserve Chairman Paul Volcker

Of course, like any Fed boss, Greenspan’s policy decisions may not have been all the right ones at the time, whether it was his first rate hike soon after joining the Fed, failing to raise rates enough during the stock market boom of the 1990s, raising them too much in the first half of 2000 or waiting too long to lift rates off their historic bottom in 2003-2004 then gradually raising them in 25-basis point increments for a year and a half.

In the case of Greenspan’s rate hike ahead of the market crash in 1987, Resler says Greenspan probably “felt like he didn’t have the luxury of time.” Given the economic conditions and the mood of the bond market, “there wasn’t much time to delay.”

Asset Bubbles

Two bubbles marked Greenspan’s tenure: Stocks in the late 90s and housing the next decade.

Most economists interviewed for this story believe it is not the Fed’s job to deal with bubbles, never mind pop them, so Greenspan’s hands-off approach was at least appropriate.

That position is based partly on practicality. “Only after the fact, do you know it’s a bubble,” says White.

Some credit Greenspan with trying to at least talk the market down with his famous “irrational exuberance” speech in December 1996, but others say it was blown out of proportion.

“It was the philosophical musings about a puzzle,’ says Resler. “Maybe some people interpreted that as an implied statement.”

Implied or not, stocks fell sharply the next day, but the rally and the records quickly resumed for the next three years. Critics say Greenspan could have raised interest rates or tightened margin requirements to cool the speculative froth (the latter certainly would have reduced the pain during the NASDAQ’s brutal month-long decline during March and April 2000.)

Jones, who’s currently President of DMJ Advisors, said Greenspan gave the equity bubble plenty of thought – aware of what had happened in Japan -- but ended up taking a reasoned but practical hands-off approach.

“If the bubble isn’t adding to inflation, then you ignore it, “ says Jones, outlining something of a litmus test for intervention. What’s more, he says Greenspan came around to the view that he really could do anything about it anyway.

The consensus is less resounding and the outcome certainly less clear –- especially given recent events -- when it comes to the housing bubble. When Greenspan slashed rates by 50 basis points in between meetings in January 2001 – a rare move that certainly caught the markets attention – many thought housing would be among the first sectors to suffer in an economy that history would show slipped into recession two months later. The housing sector, however, did not behave as it had in the past. Housing prices would continue to rise as the Fed continued to cut rates over the next two years all the way to 1% and for two years after even as the central bank upped rates by more than four percentage points.

“If I had to quibble about policy,” says Bhagavatula. The Fed could have started tightening earlier in 2004, more aggressively between 2004 and 2006.” Bhagavatula adds that could have averted some of the housing bubble.

Most economists give Greenspan the benefit of the doubt in pushing rates to that record low. After all, 9/11 required significant easing, economic growth was for the most part modest and inflation was well under control. As 2002 turned to 2003, that became too much of a good thing. For the first time in three-quarters of a century, the threat of deflation was a serious concern. The Fed erred on the side of caution and kept rates at 1% until June 2004.

Some like veteran money manager Jim Awad say the jury is still out on that move to 1%.

“It created speculation in the financial markets, created a huge appetite for risk,” says Awad, chairman of WP Stewart Asset Management, which manages more than $6 billion in large cap growth stocks “It introduced a lot of leverage into the system.” Not only did the policy “supercharge” housing, argues Awad, it made the carry trade easy money and powered the growth of hedge funds and private equity in a way that would never have happened otherwise.

A few have even suggested that Greenspan’s Fed could have done more to tighten lending standards, but even his somewhat lukewarm admirers don’t blame him for the current mortgage mess.

“Certainly the subprime stuff you can’t put at his doorstep,” says White.

Battling Legends

Man Vs. Legend

Anyone who holds a position for 20 years is going to assume some regal qualities, even of mythic proportions. It happens with CEOs, professors, big city mayors and even Fed bosses.

Greenspan’s reputation got an early boost from his role in handling the stock market crash. Early Tuesday, Oct 20, 1987, the morning following Black Monday, Greenspan issued a brief statement saying that the central bank stood ready to supply however much cash was required to keep the U.S. economy growing steadily. That and other moves by the government did the trick. The crash did not sink the overall economy.

With a couple of outspoken exceptions, those in Congress loved Greenspan and were wont to hear his opinion on virtually any subject. In his first decade he won plaudits for being the first fed boss to announce an interest rate move, which happened to coincide with Congressional efforts to make the central bank more transparent and communicative. Greenspan's contribution to transparency would soon be rivaled by the approach of his successor, Ben S. Bernanke. (See related story)

Federal Reserve Board Chairman Ben Bernanke.
Pablo Martinez Monsivais
Federal Reserve Board Chairman Ben Bernanke.

An even more profound event near the end of his tenure cemented Greenspan’s credentials as a leader who rose to the challenge. In the aftermath of 9/11, his decision to open the monetary floodgates certainly helped stabilize an economy that – hindsight shows – was already in recession.

As facile as he was, Greenspan, who was Chairman of the Council of Economic Advisors for President Gerald Ford from 1974-1977 and an economic advisor for Richard Nixon for a brief time during the 1968 presidential campaign, has drawn some criticism for being overtly political -- but nothing compared to the conduct of Arthur Burns who was seen as a cheerleader for Richard Nixon during his presidency.

“Nobody who has been at the Fed was any more politically savvy than Greenspan,’ says FAO’s Brusca. “He had a greater mission. He used policy as a stepping stone.”

“He talked more about taxes than he probably should have, but Congress worshipped him,” adds Jones. “He didn’t really involve himself in policy.”

The majority say Greenspan was a man of strong options and very at home in the politics of Washington, but whatever his politics they never influenced his decisions. He managed to work well with four very different presidents and getting along with them is part of the job.

President Bush shakes hands with Federal Reserve Chairman Alan Greenspan after the two met in the Oval office at the White House Tuesday, May 18, 2004. The President renominated Greenspan as chairman of the Federal Reserve for his fifth term, praising his leadership and sending a strong signal of stability to financial markets.(AP Photo/Gerald Herbert)
Gerald Herbert
President Bush shakes hands with Federal Reserve Chairman Alan Greenspan after the two met in the Oval office at the White House Tuesday, May 18, 2004. The President renominated Greenspan as chairman of the Federal Reserve for his fifth term, praising his leadership and sending a strong signal of stability to financial markets.(AP Photo/Gerald Herbert)

Others fault Greenspan for being too domineering, especially in his later years.

“Bernanke has restored a bit more democracy,” says Bhagavatula.

Timing Is Everything

In the end, the Greenspan legacy may come down to timing. As good as he was in syncing policy with the ebb and flow of the economy, and as much as he lived in interesting times, Greenspan’s time in the spotlight still came after Volcker, who cast a long shadow.

“You have to take a good man and challenge him with a major crisis,” says Jones, explaining that Volcker withstood the “ultimate, major challenge of the central banker” by fighting and defeating double-digit inflation. “If you want to measure Greenspan in terms of a series of less intense crises, though certainly significant, he’s at the top rung.”