WASHINGTON, 31 January 2006 — Few people other than Alan Greenspan know what it’s like for every word they say — and even the words they don’t say — to carry the power to move financial markets. When Greenspan, 79, hands over the reins of the Federal Reserve Board on Jan. 31, he’ll leave a legacy that even his critics agree is one to be reckoned with.
Greenspan steered the US economy through two recessions, an economic meltdown in Asia, banking and hedge-fund crises, the bursting of the Internet bubble and the 2001 terrorist attacks - to list just some of the highlights of his 18-year tenure. “Greenspan taught the world how to run a central bank,” said Kevin Hassett, director of economic policy studies at the centre-right American Enterprise Institute. “If you look at how much the US economy has outperformed the economies of Japan and Europe, it’s hard to find fault.”
Hassett said that Greenspan brought about an economic climate in which people think risks are manageable. “Panic is now less a factor in economic markets,” he said. “For example, after 9 11 and the Asian crisis, things didn’t fall apart.”
Lee Price, research director at the leftwing Economic Policy Institute, agreed. “I think he’ll go down in history as someone who’s a good student of the economy,” he said, praising Greenspan policies in the late 1990s that led to a tight labor market and fast growth. But not all of Greenspan’s decisions over the years got rave reviews.
Price said that Greenspan in recent years has raised interest rates too soon and too fast, slowing job creation. “If we’re going to absorb our growing population into jobs, we need to have faster GDP growth,” he said.
Price also said that Greenspan was not vocal enough on the “irrational exuberance of the stock market, froth on the housing market and the unsustained levels of foreign borrowing”.
While some critics argue that the Fed’s aggressive interest-rate hikes led to a brief recession in the early 1990s, others insist that the sharp slashing of short-term rates in 2001-02 may have contributed to a real-estate bubble comparable to the stock market bubble of the late 1990s. There is also debate about whether Greenspan’s current round of interest rate tightening may end up harming the economy down the road.
Stephen Roach, chief economist at investment house Morgan Stanley, says that Greenspan’s true legacy will only be clear in years to come. “The jury is out on his legacy in large part because of the (federal government) debt and the trade deficit,” Roach told the Washington Post. “You will not be able to truly judge his accomplishments until we see how this plays out in the post-Greenspan era.”
Whether Greenspan ultimately leaves a stellar or slightly tainted reputation, it’s undeniable that Greenspan’s successor, Ben Bernanke, has large shoes to fill.
Hassett predicted that Bernanke, a former Fed governor and White House economic adviser, would follow Greenspan’s successes. But he will face significant political pressure and scrutiny — at least at first, Hassett said.
Two weeks after he is sworn in, the new Fed chief’s first test will come when he scheduled to testify to a committee in Congress. “Bernanke is jumping right into the fire,” Hassett said.
Peter Morici, professor at the University of Maryland, contends that Bernanke’s first important challenge will likely be a crisis in the foreign exchange or real-estate markets, “stemming from all those dollars we printed and sent abroad to pay for our trade deficit”. “Bernanke’s real challenges lie in accepting that markets are messy places and blackboard remedies won’t do,” Morici said, “and in finding the personal courage and political skills to act on what he learns.”
