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