After more than 18 years as head of the Federal Reserve, Chairman Alan Greenspan leaves office Tuesday. After four presidential appointments and a tenure spanning everything from "irrational exuberance" to market crashes to terror attacks, we know for sure that Greenspan has endured. But what endures of the chairman?
It’s easy to forget, but hard to imagine, a rockier start for Greenspan at the Fed. On the day he was announced as Paul Volcker's successor there was a stunning sell-off in the dollar worldwide — so bad the Fed ended up bailing out the greenback to the tune of half a billion dollars.
Then, just two months after he takes office, the crash heard round the world — Black Monday. Greenspan swiftly flooded the financial system with liquidity and, say historians, kept a bad situation from growing worse.
Because of deft moves like that, former Treasury Secretary Lawrence Summers says there's Alan Greenspan and then there's everyone else.
“Alan Greenspan was the central most important financial policy-maker of the post-World War II period anywhere in the world,” said Summers. “His legacy of a strong U.S. economy, a credible U.S. currency and a remarkably resilient U.S. financial system is one from which we will all benefit for a very long time.”
So what did Greenspan actually do to earn such accolades? The people who know him best credit what they describe as an unusual, almost "strange" way of analyzing data to spot changes in the economy and, for a guy with a conventional background, a willingness to buck convention.
Fed Governor Donald Kohn, who has been a colleague for nearly 20 years, says, “Chairman Greenspan likes to look for anomalies in data. He likes to see that the incoming information isn't quite the way we expected it to be. He then draws in data from — from lots of different sources — in ways that I admit I would never have imagined to do.”
Globalization, historic gains in productivity, vast changes in financial markets, all occurred on Greenspan's watch. No one claims he's responsible for them.
“I think you make your breaks, and Alan Greenspan did enjoy good luck,” said Summers. “But he earned his good luck through making hard counterintuitive judgments.”
Judgments that have changed our view of the economy to this day.
Four months before his most famous speech, when he wondered whether there's “irrational exuberance'” in the stock market, Greenspan challenged the mainstream and made a strong case that technology was spawning a new economy.
“Powerful forces have evolved in the past few years to help contain inflationary tendencies,” Greenspan said in July 1996. “An ever-increasing share of our nation's workforce uses the tools of new technologies. Microchips embodied in physical capital make it work more efficiently, and sophisticated software adds to intellectual capital.”
That recognition led to the most notable call of his career: a decision in 1996 not to hike interest rates and brake the economy. His reasoning: productivity and technology were lessening the threat of inflation.
“Greenspan had the responsibility, went against the weight of the entire economic establishment. ... He stood his ground. He said, ‘If I don't see it, I’m not going to act as if it's there,’” said Fed historian Martin Mayer.
Fed governor Kohn said that Greenspan's overarching gift to his successor is how he thinks about the economy. “I think a Greenspan legacy, as I watched him make policy is, keep an open mind, look for anomalies and don't be afraid to ask tough questions and look in unusual places for the answers to those anomalies.”
There are, of course, substantial criticisms of Greenspan's tenure. Some say he could have done more to pop the stock market bubble in the late 1990s. Critics also contend he helped create a separate housing bubble by keeping interest rates low after 9/11. Others, especially Democrat-leaning economists, say he was too political, for example, lending his support to the Bush tax cuts.
And yet former President Bill Clinton praises Greenspan for his ability to put his personal politics aside. “The thing I liked about Alan Greenspan was, besides him being intelligent and engaging, is I thought that he never let his philosophy get in the way of examining the evidence.”
Back at the Fed, Kohn says there is a formula Greenspan leaves behind: “Use good judgment and consult your colleagues. Don't be doctrinaire. Look for changes, innovations, rely on the markets, have confidence in the economy but don't be afraid to make changes where they're necessary.”