Alan Greenspan, darling of Wall Street, monetary ”maestro” and personification of the American boom, retires in the new year. As rumours fly in Washington about who will take charge of the world’s biggest economy, the experts are already weighing up his legacy.
The financial markets made up their minds long ago that Greenspan was a man they could trust. Just months after he arrived at the Federal Reserve, Wall Street was rocked by Black Monday on October 19 1987, when the Dow Jones lost more than 20% of its value in a single day. The new chairperson, who had faced some suspicion from investors for his lack of financial pedigree, acted quickly, promising to pump money into the markets to restore confidence.
Stocks soon recovered, Wall Street was won over and Greenspan began to build his reputation as the man with the golden touch.
His term as reserve chairperson expires in January, and most observers expect him to depart then, though he could stay on for a while if the Bush administration is slow to find a successor.
Greenspan is that rare beast on the United States political scene, a partisan appointee who managed to keep the trust of both Republicans and Democrats.
In his youth, he was a follower of the individualistic ”Objectivist” philosophy of Ayn Rand (whose views were summarised as, ”the concept of man as a heroic being, with his own happiness as the moral purpose of his life”). It was perhaps not surprising, then, that Greenspan became closely associated with the Republican tax cuts of the 1980s.
Even the reserve chairperson’s detractors admit he is good in a crisis. Having witnessed the painful consequences of the 1930s Depression, Greenspan has always moved swiftly to contain the consequences of market wobbles. When the hedge fund Long Term Capital Management faced collapse in September 1998, he got the big beasts of Wall Street together and organised a bail-out to prevent the stability of the entire market being threatened.
After the dotcom boom turned to bust, he slashed interest rates from 6,5% to just 1% over two years, helping to ensure that the resulting slowdown in the US economy was far shorter, and shallower, than many observers had dared to hope.
That sure-footedness in troubled times helped to win Greenspan the accolade ”maestro” — the title of a hagiographic account of his achievements by Watergate journalist Bob Woodward. Greenspan became a talisman for the mighty US economy — and for any aspiring politician who wanted to establish their financial credentials.
And although Greenspan has been masterful in mopping up the consequences of economic shocks, the most frequent criticism of him is that he can fail to anticipate them. Most damagingly, he was widely held responsible for letting the high-tech stock bubble run out of control at the end of the 1990s.
”He’s hopping from one bubble to another,” says Ravi Batra, author of Greenspan’s Fraud, who blames him not only for allowing speculative bubbles to develop in equities and then housing, but for using interest rates to stamp on the wage gains of poorer households in a misguided fear that inflation was about to take off.
In Greenspan’s early days, meetings of the reserve’s Open Markets Committee, which sets interest rates, were held in secret and there was no announcement about what action it had decided on, let alone the thinking behind it.
Greenspan specialised in delphic statements, notoriously telling a congressional committee in 1987: ”Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”
Greenspan’s successor will have a tough task in maintaining his reputation as the guru of Wall Street: but if the pessimists are right about the shaky basis of the current economic recovery, that reputation may yet be tarnished. ”At the moment, everyone seems to think Alan Greenspan can walk on water, and that view will probably remain for a while,” says Gabriel Stein of Lombard Street Research. ”But when someone starts doing research on the financial markets and the economy, you will find he was frequently behind the curve.”
If the second Greenspan bubble, in the frothy housing market, bursts with damaging effects, his legacy to the mighty US economy could yet be questioned. — Â