CU Economists Discuss Why Greenspan Oversaw Long Span Of Green

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Former Federal Reserve Chairman Alan Greenspan has left the building, but the legacy he leaves behind will live on, even as Ben Bernanke steps in to replace him.

"In the big scheme of things, Greenspan will go down in history as one of the most successful chairmen of the Federal Reserve," said Bill Hampel, chief economist at CUNA. "He was remarkably successful. He took an eclectic database, non-ideological approach to the economy. He looked at lots of data and wasn't tied to any one strict theory of the way things should work."

He was also remarkably lucky, Hampel suggested. "The economy responds to all sorts of forces, not just the Fed. The Fed's policies necessarily deal with what will happen in the future, so to some extent, it's always a guessing game. The economy has been pretty friendly these last 15 years, and all sorts of things have contributed to it, so there is some luck involved in being chairman during a strong economy. That's not to say Greenspan isn't a very skilled and talented man, because he is, but we will never know just how much of his success was because of his eclectic database approach and how much was luck."

While Greenspan's reign has been atypically long, his term as chairman was not the longest in history. What stands out then is not so much the duration of his term but the durability of it.

"He's built his legacy on being a model-centric banker, and he's used monetary policy effectively to survive a number of different shocks to the market, such as Sept. 11 and some of the emerging markets," said Jeff Taylor, an economist at NAFCU. "Remarkably, there have been only maybe three or four quarters of negative growth over the 18 years he was chairman. To be in office that long and make so few mistakes is pretty remarkable."

Greenspan also contributed toward raising the visibility of the Fed while at the same time making something that was once a mysterious entity into part of the nation's everyday vocabulary.

"He's a memorable guy. He's done a lot for the Fed's stature globally," NAFCU's Tun Wai related. "Greenspan was the one who said that the Federal Reserve is involved in every life in the nation because it is the Fed's job to preserve the dollar. It's not like a secret ivory tower."

For all that, Greenspan wasn't perfect.

"There are two things history will say he messed up on, that he did not fully appreciate and respond to asset-priced bubbles," Hampel noted. "The first was the stock market bubble, predominantly technology stocks, but also stocks in general. The Fed kept rates down longer, which made the stock market more attractive, and eventually the market overheated which led to corrections in 2000 and 2001 which in turn caused the recession in 2001."

The second example, Hampel said, is one that is still being played out right now: the potential housing bubble that observers are still watching to see if it bursts or fizzles.

"The Fed has the unenviable job of taking away the punch bowl just as the party is getting started," Hampel said. "One judges the chairman of the Fed with 20/20 hindsight, and it would seem he just left that punch bowl out a little too long. But I think history will show that he had a very good run and that he is a very skilled and talented person."

And the fact is, the Federal Reserve isn't one man, no matter how charismatic a leader the chairman may be.

"Greenspan had an army of experts behind him," Taylor noted. "No chairman stands alone." And because the Fed's job is to see into the future and make decisions that affect the future economy, no chairman inherits a blank slate.

"Greenspan is leaving his successor with lots of work to be done," Taylor related. "There's the funny yield curve, the trade deficits and geo-political uncertainty."

It can be hard taking over from someone who has been on the job for nearly two decades and has become a household name in the process, but Bernanke can take solace in this: Greenspan was once a relative unknown, too.

"One little weird thing about Greenspan that you don't hear anyone mention anymore is that he once was a sycophant of Ayn Rand," Hampel recalled. "Probably the one thing that has really characterized his chairmanship is the lack of doctrine, of one ruling ideology or theory, but in his younger days, he had a very strong libertarian bent, a very strong ideological bent, and he was part of Rand's entourage for a time."

Even so, it is more likely that his decision to eschew one particular model or theory in favor of looking at mounds and mounds of data from all over the place will be one of Greenspan's legacies that Bernanke may choose to carry through his own chairmanship.

"It's too soon to tell, but the Fed is not a one-person organization. There are seven governors, plus five of the 12 Federal banks serve on a rotational basis on the Free Market Committee," Hampel explained. "Greenspan was a charismatic leader, and through his force of will, it may have appeared to be more of a one-man show, but it isn't. Bernanke came up through the board and may lead a more collegial Open Market Committee with a lot of group think. But he was an academic for most of his life, so he might be more theory-based than eclectic database based, which makes the market a little nervous. But having come up under Greenspan, I don't think we'll see much change."

"Bernanke will fight inflation with the same zealousness, if not more, and I think we'll see a continued transparency at the Fed," Taylor offered. "We may see more consensus building, especially in the first few years, since he's the new chairman on the block, it will take him a while to find and wield his power."

A good indicator of Bernanke's vision for the Fed could be coming up in his testimony before Congress on Feb. 15, Taylor and Wai added.

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