Ingram: Hey kids — do you believe in Alan Greenspan?
By MATHEW INGRAM
15:47 EST Friday, February 01, 2002
globeinvestor.com
Is there anyone whose reputation has gone through as many wrenching changes as Alan Greenspan, chairman of the U.S. Federal Reserve? It's hard to think of someone, even a perennial public-opinion lightning rod such as Toronto mayor Mel Lastman. Then again, Mr. Greenspan — who in a previous life was a jazz clarinet player and a boyfriend of pop philosopher Ayn Rand — has been put on a pedestal and then pulled down into the muck again so many times over the years that he's probably used to it by now.
At some point in the not too distant future — perhaps later this year — the 75-year-old Mr. Greenspan will retire, and a flood of retrospectives will appear, trying to define his legacy. If history is any guide, there will be dozens of analysts arguing that he is a humble genius whose steady hand on the tiller helped save the U.S. economic ship from certain disaster, and so on — and just as many arguing that he was an error-prone egomaniac whose yanking on the interest-rate strings caused the U.S. economy to gyrate uncontrollably, leaving untold financial disaster in its wake.
Where does the truth lie? Only Mr. Greenspan knows for sure, but the chances are that it is somewhere between those two extremes. He may be "the Maestro" to his fans, but the Fed chairman is still just a single individual, a man who — along with the Federal Open Market Committee — tries to read the shifting winds of the U.S. economy and arrive at a comprehensive weather forecast. He does so knowing full well that whatever he comes up with will be pored over by legions of analysts, each with his own agenda.
Despite this, there was a determined effort in the late 1990s to paint Mr. Greenspan as the all-knowing, all-seeing engineer of the U.S. economy, pulling all the right levers required to keep things humming. Then, when the dot-com bubble burst and the markets began to tank, opinion shifted dramatically almost overnight — now the Fed chairman was the one who created the bubble in the first place with his "loose money" policy, and then popped it himself by hiking interest rates too high, too quickly.
But wait, his supporters say — wasn't he the one who helped the United States avoid a catastrophe during the Russian currency meltdown and the Long Term Capital Management crisis of 1998? No, the critics respond. In fact, he compounded the problem by using his exaggerated profile within financial circles to organize an ill-advised public bailout of Long Term Capital. But then he warned that markets were getting overheated with his famous "irrational exuberance" speech, didn't he? Yes, but he didn't take any action, and watched while insane amounts of money flowed into the tech sector.
Both the "Greenspan is god" and "Greenspan is incompetent" viewpoints have their dangers. Seeing Greenspan as the all-powerful guardian of the stock market may have created a "moral hazard" — the idea that, because Mr. Greenspan would be there to save them (as he did Long Term Capital), investors would feel confident enough to take inappropriate risks. Seeing him as the embodiment of economic evil, meanwhile, is a convenient way for investors to avoid having to think about other economic events.
Some investors who relied on Mr. Greenspan may have been disillusioned by recent events, but others are not. "The fact that he is not infallible is not a surprise," economics professor and former Fed economist Christopher Carroll told the Atlanta Journal-Constitution recently. "There's definitely an element of primal human culture that wants there to be a Delphic oracle. Greenspan was slotted into that mythic role."
Perhaps no one should be expected to have the kind of control over the U.S. economy that people ascribe to Mr. Greenspan. Decades ago, the Federal Reserve might have had enough influence on financial markets to help steer the U.S. economy this way or that, but in the days of currency trading and derivatives, the Fed's moves are often accounted for before they occur. There are those who believe that the Fed changes rates because the markets tell it such a change is necessary, rather than the reverse.
Nobel Prize-winning economist Milton Friedman, in fact, has argued that the Federal Reserve should be abolished, since it is either not very good at or perhaps even incapable of influencing the economy, and any money-supply related duties could be carried out by a computer set up with buy and sell criteria. If that ever happened, of course, we could all look forward to long articles praising the computer — and equally long pieces attacking it and its programmer for screwing up the entire economy.
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