Greenspan era is coming to a close
Alan Greenspan
In October 1987, Alan Greenspan hopped off a plane in Dallas and was greeted with some grim news.
The stock market had crashed. Not just crashed, but posted its worst day on record, even more harsh than any day in 1929.
For the economist with the dark-rimmed glasses, it was a defining moment. Greenspan, then just 10 weeks on the job as chairman of the Federal Reserve, responded quickly. He aggressively slashed interest rates. The economy kept its footing.
Eighteen years later, Greenspan - who'll retire Tuesday - has become an icon, the rare economist who's entered the realm of popular culture. His morning baths have become public fodder, as has his marriage to TV journalist Andrea Mitchell. His popularity helped to make "irrational exuberance" a household term.
But it's the way Greenspan handled crises such as the crash of 1987 that has defined his legacy, observers say. In the opinion of many economists, Greenspan was also as lucky as he was good. That fortunate mix allowed him to preside over one of the most prosperous periods in American history.
"What Greenspan did well is he steered through these crises and came out with minimal damage to the economy," said Gus Faucher, director of macroeconomics at the consulting firm Moody's Economy.com, in West Chester, Pa. "Over an 18-year period, we had just two short recessions and low inflation. That combination says he's done a good job."
Along with the 1987 market crash, Greenspan also endured the first Gulf War, the bursting of the tech bubble and the terrorist attacks of 2001. For his work, he was knighted by the Queen of England and declared the world's "second-most powerful man" by Newsweek.
"There's simply no precedent for his popularity," said Stephen Ferris, the Rogers chair of Money, Credit and Banking at the University of Missouri at Columbia. "When you look at his job, it's really a dull and dreary thing ... But he's become an icon."
Born in New York City in 1926, Greenspan pursued music before economics. A clarinet player, he enrolled in the Juilliard School in the 1940s. A year later, he left to study business at New York University. In the 1950s he met and became a disciple of the libertarian philosopher Ayn Rand, and he later served as an economic adviser to Richard Nixon.
Despite his lack of any experience at the Federal Reserve, Greenspan was appointed by President Ronald Reagan as the agency's chairman in 1987. He then went on to serve the second-longest term in the 93-year history of the Fed. While in the job, Greenspan was known as an inflation hawk and a staunch opponent of government regulation. On Tuesday, he will be replaced by Ben Bernanke, a former Fed governor and Princeton economist.
While polls show that a only tiny percentage of Americans truly understand Greenspan's job, the chairman of the Federal Reserve may have a more profound impact on their lives than even the president. The Fed is charged with lifting the nation to full employment and keeping inflation low through the manipulation of interest rates. It requires a balancing act between stimulating the economy and then curbing it.
Greenspan elevated the profile of the Federal Reserve. During his tenure, Americans became more aware than ever about the power and importance of the Fed. As a result, Greenspan found his face on TV and in magazines with a frequency not enjoyed by previous Fed chiefs.
"If you look back at the'70s and'80s, the Fed was perceived to be the man behind the curtains. Today, it's looked at as a more prominent player," said Gary Thayer, an economist at A.G. Edwards Inc. in St. Louis. "I'd say (Greenspan's) better known than members of the Supreme Court, and that wasn't true of his predecessors."
Economists generally applaud him for the savvy he displayed in 1996, when a tug-of-war had gripped the Fed. At the time, a rapidly-growing economy had several Fed governors pushing for the agency to pull back the reins to curb inflation.
But Greenspan had a hunch that they were wrong. His theory: Computers were finally making U.S. workers more productive. That meant the economy could grow further without risking inflation. As it turns out, he was right.
"Based on the old rules of the game, the Fed would have raised rates," said Thomas Melzer, former president of the St. Louis Fed and a managing director with RiverVest Venture Partners in St. Louis. "But he basically convinced policymakers that the economy could grow even more quickly. Because of his insight, the Fed allowed the economy to grow much faster in the late 1990s."
More recently, Greenspan slashed interest rates to historic lows to help end a jobless recovery that lingered after the 2001 recession.
Media savvy and a frequent guest of congressional committees, Greenspan maintained a high profile among non-economists. The fast-growing financial media of the 1990s covered him endlessly, said Andrew Leckey, director of the Donald W. Reynolds National Center for Business Journalism in Virginia.
"He hit it at exactly the right time, when there was a lot more opportunity for him to become a media star," said Leckey, who also writes a syndicated business column. "What was also different about Alan was that he was very much a political and media animal."
In addition, during his tenure, "I think we finally began to understand the importance of the Fed and interest rates," Leckey said.
Thanks to the media, Greenspan's chiding of overly bullish stock market investors in the 1990s for their "irrational exuberance" has become legendary.
Greenspan was not loved by all. As his detractors are quick to point out, Greenspan will not step away with a perfect record. His critics blame him for what they believe is a housing bubble and for his role in the swelling budget deficit.
Princeton economist Alan Blinder, a former Fed governor, has criticized his colleague for ignoring input from other Fed officials.
Greenspan's legacy could be tarnished, too, if the housing market boom that he helped precipitate ends with a free-fall in house prices, said Ferris, the Mizzou economist.
"I think history may second-guess how he handled the bubbles: the tech bubble and housing bubble," Ferris said. "He may have left Bernanke with a bubble that's yet to burst."
Still, Ferris generally gives Greenspan good marks.
Allan Meltzer, a Fed historian at Carnegie Mellon University, adds that a Fed chairman doing his job will inevitably make some enemies. "The fact that you have only these minor criticisms is quite an achievement," he said.
Several key indicators have risen dramatically during Alan Greenspan's tenure.
1987 to Sept. 30, 2005: Increase in median house price, 157.8 percent
1987 to Sept. 30, 2005: Increase in per capita income, 107.7 percent
1987 to Jan. 26: Increase in Dow Jones industrial average, 470.1 percent
Sources: Office of Federal Housing Enterprise Oversight, U.S. Bureau of Economic Analysis, Dow Jones indexes
What does the Fed do?
The Federal Reserve affects the economy by influencing interest rates. When the economy is lagging, the Fed's Open Market Committee lowers the federal funds rate, the rate banks charge one another for overnight loans.
That typically triggers a chain reaction where other interest rates fall, stimulating economic investment.
When the economy is too hot, the committee raises the federal funds rate to hold inflation at bay.
The chairman of the Fed heads the Open Market Committee. The committee meets eight times a year.
By Eric Heisler
ST. LOUIS POST-DISPATCH
01/28/2006
In October 1987, Alan Greenspan hopped off a plane in Dallas and was greeted with some grim news.
The stock market had crashed. Not just crashed, but posted its worst day on record, even more harsh than any day in 1929.
For the economist with the dark-rimmed glasses, it was a defining moment. Greenspan, then just 10 weeks on the job as chairman of the Federal Reserve, responded quickly. He aggressively slashed interest rates. The economy kept its footing.
Eighteen years later, Greenspan - who'll retire Tuesday - has become an icon, the rare economist who's entered the realm of popular culture. His morning baths have become public fodder, as has his marriage to TV journalist Andrea Mitchell. His popularity helped to make "irrational exuberance" a household term.
But it's the way Greenspan handled crises such as the crash of 1987 that has defined his legacy, observers say. In the opinion of many economists, Greenspan was also as lucky as he was good. That fortunate mix allowed him to preside over one of the most prosperous periods in American history.
"What Greenspan did well is he steered through these crises and came out with minimal damage to the economy," said Gus Faucher, director of macroeconomics at the consulting firm Moody's Economy.com, in West Chester, Pa. "Over an 18-year period, we had just two short recessions and low inflation. That combination says he's done a good job."
Along with the 1987 market crash, Greenspan also endured the first Gulf War, the bursting of the tech bubble and the terrorist attacks of 2001. For his work, he was knighted by the Queen of England and declared the world's "second-most powerful man" by Newsweek.
"There's simply no precedent for his popularity," said Stephen Ferris, the Rogers chair of Money, Credit and Banking at the University of Missouri at Columbia. "When you look at his job, it's really a dull and dreary thing ... But he's become an icon."
Born in New York City in 1926, Greenspan pursued music before economics. A clarinet player, he enrolled in the Juilliard School in the 1940s. A year later, he left to study business at New York University. In the 1950s he met and became a disciple of the libertarian philosopher Ayn Rand, and he later served as an economic adviser to Richard Nixon.
Despite his lack of any experience at the Federal Reserve, Greenspan was appointed by President Ronald Reagan as the agency's chairman in 1987. He then went on to serve the second-longest term in the 93-year history of the Fed. While in the job, Greenspan was known as an inflation hawk and a staunch opponent of government regulation. On Tuesday, he will be replaced by Ben Bernanke, a former Fed governor and Princeton economist.
While polls show that a only tiny percentage of Americans truly understand Greenspan's job, the chairman of the Federal Reserve may have a more profound impact on their lives than even the president. The Fed is charged with lifting the nation to full employment and keeping inflation low through the manipulation of interest rates. It requires a balancing act between stimulating the economy and then curbing it.
Greenspan elevated the profile of the Federal Reserve. During his tenure, Americans became more aware than ever about the power and importance of the Fed. As a result, Greenspan found his face on TV and in magazines with a frequency not enjoyed by previous Fed chiefs.
"If you look back at the'70s and'80s, the Fed was perceived to be the man behind the curtains. Today, it's looked at as a more prominent player," said Gary Thayer, an economist at A.G. Edwards Inc. in St. Louis. "I'd say (Greenspan's) better known than members of the Supreme Court, and that wasn't true of his predecessors."
Economists generally applaud him for the savvy he displayed in 1996, when a tug-of-war had gripped the Fed. At the time, a rapidly-growing economy had several Fed governors pushing for the agency to pull back the reins to curb inflation.
But Greenspan had a hunch that they were wrong. His theory: Computers were finally making U.S. workers more productive. That meant the economy could grow further without risking inflation. As it turns out, he was right.
"Based on the old rules of the game, the Fed would have raised rates," said Thomas Melzer, former president of the St. Louis Fed and a managing director with RiverVest Venture Partners in St. Louis. "But he basically convinced policymakers that the economy could grow even more quickly. Because of his insight, the Fed allowed the economy to grow much faster in the late 1990s."
More recently, Greenspan slashed interest rates to historic lows to help end a jobless recovery that lingered after the 2001 recession.
Media savvy and a frequent guest of congressional committees, Greenspan maintained a high profile among non-economists. The fast-growing financial media of the 1990s covered him endlessly, said Andrew Leckey, director of the Donald W. Reynolds National Center for Business Journalism in Virginia.
"He hit it at exactly the right time, when there was a lot more opportunity for him to become a media star," said Leckey, who also writes a syndicated business column. "What was also different about Alan was that he was very much a political and media animal."
In addition, during his tenure, "I think we finally began to understand the importance of the Fed and interest rates," Leckey said.
Thanks to the media, Greenspan's chiding of overly bullish stock market investors in the 1990s for their "irrational exuberance" has become legendary.
Greenspan was not loved by all. As his detractors are quick to point out, Greenspan will not step away with a perfect record. His critics blame him for what they believe is a housing bubble and for his role in the swelling budget deficit.
Princeton economist Alan Blinder, a former Fed governor, has criticized his colleague for ignoring input from other Fed officials.
Greenspan's legacy could be tarnished, too, if the housing market boom that he helped precipitate ends with a free-fall in house prices, said Ferris, the Mizzou economist.
"I think history may second-guess how he handled the bubbles: the tech bubble and housing bubble," Ferris said. "He may have left Bernanke with a bubble that's yet to burst."
Still, Ferris generally gives Greenspan good marks.
Allan Meltzer, a Fed historian at Carnegie Mellon University, adds that a Fed chairman doing his job will inevitably make some enemies. "The fact that you have only these minor criticisms is quite an achievement," he said.
Several key indicators have risen dramatically during Alan Greenspan's tenure.
1987 to Sept. 30, 2005: Increase in median house price, 157.8 percent
1987 to Sept. 30, 2005: Increase in per capita income, 107.7 percent
1987 to Jan. 26: Increase in Dow Jones industrial average, 470.1 percent
Sources: Office of Federal Housing Enterprise Oversight, U.S. Bureau of Economic Analysis, Dow Jones indexes
What does the Fed do?
The Federal Reserve affects the economy by influencing interest rates. When the economy is lagging, the Fed's Open Market Committee lowers the federal funds rate, the rate banks charge one another for overnight loans.
That typically triggers a chain reaction where other interest rates fall, stimulating economic investment.
When the economy is too hot, the committee raises the federal funds rate to hold inflation at bay.
The chairman of the Fed heads the Open Market Committee. The committee meets eight times a year.
By Eric Heisler
ST. LOUIS POST-DISPATCH
01/28/2006
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