Estimating the legacy of Fe
As the financial world remembers the former Fed chair, economists assess his vast macroeconomic legacy.
Alan Greenspan, the second-longest serving Chairman of the Board of Governors of the Federal Reserve, has died just months after his 100th birthday.
Greenspan, known as “The Maestro”, led the Fed under five US presidents from August 1987 to January 2006. He managed the central bank through two market crashes, two recessions, and various financial crises. Through all this, the US economy experienced significant macroeconomic expansion, rising asset prices, and a dramatic shift in corporate finance.
greenspan put
Early in his tenure, Greenspan intervened to mitigate the effects of the stock market crash of 1987, a move known as the “Greenspan Putsch”. Monetary policy lowered interest rates and injected liquidity, stabilizing the economy, restoring investor confidence, and mitigating financial shocks. However, the Fed’s intervention encouraged investors to take excessive risks, fueled speculative bubbles such as the dot-com bubble of the 1990s, and led to market expectations for future intervention.
Greenspan’s statement is a bit of a delusion, Kenneth Rogoff, an economics professor at Harvard University and former chief economist of the International Monetary Fund, wrote in an email exchange.
“When markets fall, the interest rates needed to maintain stable inflation will usually also fall temporarily,” Rogoff wrote. “His biggest mistakes were in regulatory policy, where he had too much faith in financial market innovation and his attitude towards regulation was too lax. We are now in the second year [second] The Trump administration is repeating that mistake.”
I remembered a man
“He was a great central banker who helped lead his country through two decades of prosperity,” Ben Bernanke, a distinguished fellow at the Brookings Institution and Greenspan’s successor at the Fed, said in a statement. “I always found him generous with his time and insight. We’re still learning from him, even though he’s no longer with us.”
Don Cohn, a senior fellow at Brookings and former Fed Governor and Vice Chairman, recalled Greenspan saying that he encouraged Fed staffers and fellow policymakers to express new ideas and analytical insights, while asking them to find weak points in the hypotheses he put forward.
“But those ideas, insights, and challenges need to be supported by evidence and solid argument,” he wrote in a post on the Brookings website. “Once he asked me what I think we should do on policy, I started my answer with, ‘My gut tells me…’ He immediately cut me off: ‘It’s not your guts, Don, it’s your experience and knowledge.'”
Greenspan’s willingness to experiment with reducing the unemployment rate, which had reached 7.4% in 1992, attracted many admirers.
“They pushed it lower than the conventional wisdom had ever thought, and discovered that it was possible to hire more Americans without driving up inflation,” Justin Wolfers, a professor of economics and public policy at the University of Michigan, wrote in an email exchange. “Hundreds of thousands of people found work, and their families could live better lives because he showed that there was nothing natural about what many economists used to call the natural rate of unemployment.”
Although Wolfers did not agree with all of Greenspan’s decisions, he said that “His intellectual courage and dedication to the public good were never in doubt. He lived a great life and made a difference.”
Contact the author at rdaly@gfmag.com
