alan greenspan

FOR nearly 20 years Alan Greenspan, as head of America's central bank, was the most powerful economic central planner the world has ever seen. What did he do? Roughly twice a year, the Federal Reserve chairman had to make a substantive decision about whether to raise, lower or keep the level of U.S. interest rates the same.

Why is that important? To lower interest rates is to make the future more valuable relative to the present; to raise interest rates is to make the future less valuable. When the future is more valuable, more people in the economy focus their eyes on it and more actions are taken that will have an effect in the future: the building of factories, investment in research, construction of houses and apartments. To lower interest rates is to shift economic attention and focus from the present to the future. To raise them is to shift that balance back again.

Isn't this odd? Don't we have a market economy? Why should a central planner be setting interest rates? The only reason is that this system appears to work less badly than the alternatives we have tried. Institutions and human psychology lead financial markets to bounce back and forth between exuberant greed and catatonic fear. Times of fear generate high unemployment. Times of greed are likely to be times of destabilizing inflation. Whether the justification is in the terms of Milton Friedman, John Maynard Keynes or -- as Greenspan put it early in the Clinton administration, confusing everybody -- the pre-Keynesian Swedish school, economies seem to function better when intelligent, skilled and public-spirited technocrats perform the calming, coordinating and leaning-against-the-wind role of managing interest rates to curb greed and fortify fear with some low-interest-rate courage.

Greenspan is world famous because he was very good and very lucky at this role. During his tenure at the Federal Reserve, he made roughly 36 substantive decisions about the direction interest rates should go. Six times I disagreed with him. Five of those six times, I was wrong. (The sixth? In the summer and fall of 2000, as the dot-com stock-market bubble crashed, I would have been cutting interest rates had I been sitting in Greenspan's chair; he waited for more information to see how much the fall in stock-market values would affect high-tech investment spending before he acted.)

That is an amazing record -- much better than Barry Bonds', and Greenspan clearly has never been on steroids. It is certainly much better than most economists I know could have done. Now this veritable rock-star economist-technocrat has written "The Age of Turbulence" with Peter Petre (who wrote the autobiographies of Gen. H. Norman Schwartzkopf and IBM head Thomas J. Watson Jr.). The voice in the book is Petre's. In a sense, this is too bad: Greenspan's voice is unique and a good window into his mind. But it is also nearly incomprehensible, even to trained professionals. And Petre has done a superb job of translating Greenspanese into English.

"The Age of Turbulence" is three books in one.

The first tells us who Greenspan is. It is the one that will speak to non-economist non-financier readers. The stories are wonderful: of a professional-caliber jazz clarinetist in New York in the 1950s, playing his sets and then reading his economics books during the breaks while fellow musicians go backstage to party and get high. Of a 26-year-old "math junkie" being knocked back on his heels by his philosophical guru, Ayn Rand, objectivist author of "The Fountainhead" and "Atlas Shrugged," when she pulls Descartes' "I think, therefore I exist" move on him. Of an economic advisor trying to educate, serve and guide Presidents Nixon, Ford, Reagan, Bush I, Clinton and Bush II. (Nixon wasn't just anti-Semitic, Greenspan tells us, but anti-everyone: "I don't know anybody he was pro.") Of inviting NBC News correspondent Andrea Mitchell, now Mrs. Greenspan, back to his apartment to read his essay on monopolies.

The second book gives Greenspan's view of the world and is, I think, least successful. He is trying to convey complicated and subtle technocratic ideas about the global economy -- its current structure and how it functions -- in a way that is comprehensible to general readers whose purchases drive bestseller lists. My students will read it because it will be on the midterm. But the book's target audience is likely to find this world tour a slog, and they are not incentivized by midterms.

The third book -- Greenspan's account of public policy -- is making the biggest splash as news. But it is news only in a very peculiar sense. That Greenspan and other committed small-government Republicans have been horrified at the turn their party has taken and have desperately sought some way to take it back from the cynical media consultants and political hacks who now run things is well-known -- to readers of Ron Suskind's "The Price of Loyalty" and Bruce Bartlett's "Imposter" and a host of people who know people who know Bush administration undersecretaries. Greenspan's much-quoted judgment in the book -- that current Republican office holders "deserve to lose" elections because they sold their principles for power and "ended up with neither" -- should come as no secret. Yet stories over the last few days have breathlessly reported selected phrases from the new book, characterizing them, as the Washington Post's Bob Woodward did, as "unusually harsh criticism [of] President Bush and the Republican Party" for abandoning "the central conservative principle of fiscal restraint."

It is not surprising that a prominent economist with a lifelong commitment to sound money and sound public finance does not like the policies the current government has followed.

One piece of this third book is worth noting: Greenspan's defense of his tenure as Fed chief. Why does he need a defense? Thirty-five out of 36 decisions is a very good batting average. But one could indict him on four counts: that he should not have, but did, support the Bush tax cut of 2001; that he should not have, but did, encourage new U.S. homeowners to get adjustable-rate mortgages -- ARMs -- in the early 2000s; that he should have done something to abort the dot-com bubble of the late 1990s; and that he should have done something to prevent the real estate bubble of the 2000s.

The first two counts are misdemeanors, and Greenspan pleads guilty. He says that he was warned that his testimony on the proposed 2001 tax cut would send a different message than he intended and that he ignored those warnings, which proved correct. Greenspan says his support for a tax cut was nuanced and partial, provided there were triggers to prevent budget deficits but that his statements were interpreted by the news media and politicians as a blanket endorsement. He adds that he did not understand how institutionally corrupt and thus unconcerned about good budget policy his Republican Party had become by early 2001. He says he did not properly understand in the early 2000s the large effect low teaser interest rates and prepayment penalties would have in leading new and financially strapped homeowners into deals that were not in their best interest.

The other two counts could be considered economic felonies, and here Greenspan stands his ground. Given the state of investor psychology, he says, he could have aborted the stock market and housing bubbles of the late 1990s and the early 2000s but only by paying an unacceptable price in idled factories and unemployed workers. He may be right and he may be wrong in this judgment -- I don't know. I do know that this is a judgment call, a difficult aspect of monetary policy.

I also know that Greenspan's judgment on monetary policy is very good, and looks to be better than mine.

J. Bradford DeLong, a former deputy assistant U.S. Treasury secretary, is a professor of economics at UC Berkeley. Alan Greenspan (born March 6, 1926 in New York City) is an American economist and was Chairman of the Board of Governors of the Federal Reserve of the United States from 1987 to 2006. Following his retirement as Fed chairman, he accepted an honorary (unpaid) position at HM Treasury in the United Kingdom.

First appointed Fed chairman by President Ronald Reagan in August 1987, he was reappointed at successive four-year intervals until retiring after a record-setting tenure on January 31, 2006, at which time he relinquished the chairmanship to Ben Bernanke. Greenspan was lauded for his handling of the Black Monday stock market crash that occurred very shortly after he first became chairman, as well as for his stewardship of the Internet-driven, "dot-com" economic boom of the 1990s. However, this expansion culminated in a stock market bubble burst in March 2000 followed by a recession beginning in late 2000 and continuing through 2002.

From 2001 until his retirement, he was increasingly criticized for some statements seen as overstepping the Fed's traditional purview of monetary policy, and viewed by others as overly supportive of the policies of President George W. Bush, as well as for policies seen as leading to a housing bubble. Greenspan was nonetheless still generally considered during that time to be the leading authority on American domestic economic and monetary policy, and his active influence continues to this day



Greenspan was born to a Jewish family in the Washington Heights area of New York City. He studied clarinet at The Juilliard School from 1943 to 1944[4] and is an accomplished saxophone player who has played with Stan Getz.[5] While in College, he played in a jazz band. He then attended New York University (NYU), and received a B.S. in Economics (summa cum laude) in 1948, and an M.A in Economics in 1950. Greenspan went on to Columbia University, intending to pursue advanced economic studies, but subsequently dropped out. Much later, in 1977, NYU also awarded him a Ph.D. in Economics. He did not complete a dissertation[citation needed], normally required for that degree. On December 14, 2005 he was awarded an honorary Doctor of Commercial Science from NYU, his fourth degree from that institution.

Starting in 1950, Greenspan began a 20-year association with famed novelist and philosopher Ayn Rand. He wrote for Rand's newsletters and authored several essays in her book Capitalism: The Unknown Ideal.[6]

Greenspan has been married to NBC journalist Andrea Mitchell since 1997.

From 1948 to 1953, Greenspan worked as an economic analyst at The Conference Board, a business and industry oriented think-tank in New York City. From 1955 to 1987, Greenspan was Chairman and President of Townsend-Greenspan & Co., Inc., an economic consulting firm in New York City, a 33-year stint interrupted only from 1974 to 1977 by his service as Chairman of the Council of Economic Advisers under President Gerald Ford. In the summer of 1968, Greenspan agreed to serve Richard Nixon as his coordinator on domestic policy in the nomination campaign.[7] Greenspan also has served as a corporate director for Aluminum Company of America (Alcoa); Automatic Data Processing, Inc.; Capital Cities/ABC, Inc.; General Foods, Inc.; J.P. Morgan & Co., Inc.; Morgan Guaranty Trust Company of New York; Mobil Corporation; and The Pittston Company.[8]


[edit] Greenspan and Objectivism
Greenspan was initially a Keynesian and logical positivist, but was converted to Objectivism by Rand. During the 1950s and '60s Greenspan was a proponent of her philosophy, writing articles for Objectivist newsletters and contributed several essays for Rand's 1966 book Capitalism: the Unknown Ideal including an essay supporting the gold standard.[9] During the 1950s, Greenspan was one of the members of Ayn Rand's inner circle, the Ayn Rand Collective, who read Atlas Shrugged while it was being written. Although Greenspan continues to advocate laissez-faire capitalism,[10] some Objectivists find his support for a gold standard somewhat of an irony given the Federal Reserve's role in America's fiat money system and endogenous inflation. He has come under criticism by Harry Binswanger,[11] who believes that working for the Federal Reserve is an abandonment of Objectivist and free market principles.

When Greenspan was sworn in as chairman of the Council of Economic Advisers in 1974, Ayn Rand attended the ceremony. Greenspan attended Rand's funeral in 1982.


[edit] Chairman of the Federal Reserve
On June 2, 1987 President Reagan nominated Dr. Greenspan as a successor to Paul Volcker as Chairman of the Board of Governors of the Federal Reserve, and the Senate confirmed him on August 11, 1987. After the nomination, bond markets experienced their biggest one-day drop in 5 years. Just two months after his confirmation he was faced with his first crisis -- the 1987 stock market crash. His terse statement, "the Fed stands ready to provide all necessary liquidity" [citation needed] is seen as having been effective in controlling the damage from that crash. (Others believe that his statement "...that the dollar would be devalued..." just days before was a primary factor in the the crash.) Another famous example of the effect of his closely-parsed comments was his December 5, 1996 remark about "irrational exuberance and unduly escalating stock prices" that led Japanese stocks to fall 3.2%.[12]


Earlier image of Alan GreenspanGreenspan was famous for his ability to give technical and confusing speeches. U.S. News & World Report reported that, "Few can confuse Wall Street as thoroughly as Federal Reserve Board Chairman Alan Greenspan can."[13] Greenspan was sometimes so hard to understand that the Motley Fool radio show included a game called "What Did the Fed Chief Say?", where contestants were challenged to interpret snippets of Greenspan's speeches.[14] Greenspan mocked his own speaking style in 1988 when he said, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said." To a central banker, being unclear is often an advantage since it yields more flexibility on the banker: If a central banker is too predictable, markets are more willing to speculate in his future actions, and potentially any move he makes will already be priced into the markets. During his period at the Fed, Alan Greenspan never publicly commented what algorithms or inflation and unemployment targets the Fed uses in setting the interest rate. Yet, over the years he built credibility in the financial markets that he was willing to fight inflation. The flexibility permitted him to affect the economy by, say, lowering interest rates in order to fight a recession while his credibility made it possible to do this without shocking the bond market.

On May 18, 2004, he was nominated by President George W. Bush to serve for an unprecedented fifth term as Chairman of the Federal Reserve. He was previously appointed to the post by Presidents Ronald Reagan, George H. W. Bush and Bill Clinton. Greenspan was awarded the Presidential Medal of Freedom, the highest civilian award in the United States, by President George W. Bush in November 2005.[15] His honorary titles include Knight Commander of the British Empire, bestowed in 2002 and Commander of the Légion d'honneur (Legion of Honor).

Greenspan's term as a member of the Board ended on January 31, 2006, and Ben Bernanke was confirmed as his successor. Bernanke is a former chairman of the U.S. President's Council of Economic Advisers, and his appointment is seen in part as a move to effect a smooth transition. He does disagree with Greenspan on the question of "inflation targeting," a practice in which the Fed makes public a projected inflation rate, effecting a greater transparency in likely Fed moves to raise or lower short-term interest rates. Inflation targeting arguably reduces certain forms of economic volatility.[16] Bernanke is for a targeted minimum level of inflation, Greenspan against.


[edit] Greenspan and the housing bubble
Following the attacks on September 11, 2001, the Federal Open Market Committee voted to reduce the federal funds rate from 3.5% to 3.0%.[17] Then, after the accounting scandals of 2002, the Fed dropped the federal funds rate from the current 1.25% to 1.00%.[18] Greenspan acknowledged that this drop in rates would have the effect of leading to a surge in home sales and refinancing.

"Besides sustaining the demand for new construction, mortgage markets have also been a powerful stabilizing force over the past two years of economic distress by facilitating the extraction of some of the equity that homeowners have built up over the years."[19]
However, Greenspan's policies of adjusting interest rates to historic lows contributed to a housing bubble in the US. The Federal Reserve acknowledges the connection between lower interest rates, higher home values, and the increased liquidity the higher home values bring to the overall economy.

"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission." ―Board of Governors of the Federal Reserve System, September 2005.[20]
Furthermore, in a speech on February 23, 2004, Greenspan suggested that lenders should offer to home purchasers a greater variety of "mortgage product alternatives" other than traditional fixed-rate mortgages.[21] Greenspan also praised the rise of the subprime mortgage industry and the tools with which it uses to assess credit-worthiness in an April 2005 speech:

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s."[22]
The subprime mortgage industry collapsed in March 2007, with many of the largest lenders filing for bankruptcy protection in the face of spiraling foreclosure rates. For these reasons, Greenspan has been criticized for his role in the rise of the housing bubble and the subsequent problems in the mortgage industry,[23][24] as well as "engineering" the housing bubble itself:

"It was the Federal Reserve-engineered decline in rates that inflated the housing bubble … the most troublesome aspect of the price runup is that many recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable-rate mortgages. That leaves them fully exposed to rising rates." ―BusinessWeek, July 19, 2004, Is A Housing Bubble About To Burst?[25]

[edit] Charges of politicization
On March 3, 2005, Democratic Senate minority leader Harry Reid attacked Greenspan as "one of the biggest political hacks we have here in Washington"[26] and criticized him for supporting Bush's 2001 tax cut plan. Greenspan also received criticism from Democratic Congressman Barney Frank for his support of Bush's plan to phase out Social Security in favor of private accounts.[27][28][29]

Economist Paul Krugman wrote in the New York Times that Greenspan is a "three-card maestro" with a "lack of sincerity" who, "by repeatedly shilling for whatever the Bush administration wants, has betrayed the trust placed in the Fed chairman...."[30]

Charges that Greenspan was veering beyond the Fed's purview of monetary policy into fiscal and political matters traditionally left to lawmakers became more prevalent, coming for example from sources such as Republican Senator Jim Bunning who voted against reconfirming him.[31] Then-Democratic House Minority Leader Nancy Pelosi stated in 2005 there were serious questions about the Fed's independence as a result of Greenspan's public statements.[32] But others like Republican Senator Mitch McConnell disagreed, stating that Greenspan "has been an independent player at the Fed for a long time under both parties and made an enormous positive contribution."[33] Furthermore, Greenspan had used his position as Fed Chairman to comment upon fiscal policy as early as 1993, when he supported President Clinton's deficit reduction plan, which included tax hikes and budget cuts (Bob Woodward's book Maestro, page 110).


[edit] Personal Life
Alan Greenspan has been married twice. His first marriage was to Joan Mitchell in 1952. The marriage ended after only one year in divorce in 1953.

In 1985 Greenspan began dating TV personality Andrea Mitchell. Greenspan at the time was 59 and the also once divorced Mitchell was 20 years his junior at the age of 39. In 1997, they married.


[edit] Career after the Fed
Greenspan now works as a private advisor making speeches and providing consulting for firms through his company, Greenspan Associates LLC. On May 16th 2007, Greenspan was hired as a special consultant by PIMCO and he will participate in Pimco's quarterly economic forums and speak privately with the bond manager about Fed interest rate policy.[34] He has has written his memoir.[35], titled The Age of Turbulence.

On February 26, 2007, Greenspan forecast a possible recession in US economy before or in early 2008.[citation needed] Stabilizing corporate profits are said to have influenced his comments. The following day the Dow Jones Industrial Average closed at 12,216.24 dropping by 416 points and losing 3.3% of its value, the worst one day loss since September 17, 2001, when the Dow Jones lost 684 points (7.1%) after reopening in the wake of the 9/11 terrorist attacks. This drop is not thought to be entirely due to Greenspan's recent comment, whose opinion is nonetheless substantially influential.

On August 13, 2007 Deutsche Bank announced that they would be retaining Dr. Greenspan as a Senior Advisor to their investment banking team and its clients. [36]

On September 17, 2007, Greenspan published a 531-page book, The Age of Turbulence: Adventures in a New World, in which he severely criticizes President George W. Bush, Vice President Dick Cheney and the Republican-controlled Congress for abandoning the Republican party's principles on spending and deficits. Greenspan's criticisms of President Bush include his refusal to veto spending bills, sending the country into deeper and deeper deficits, and for putting political imperatives ahead of sound economic policies.[37] Greenspan writes, "They swapped principle for power. They ended up with neither. They deserved to lose" the 2006 election.[38] Of all the presidents with whom he worked, he praises Bill Clinton above all others, saying that Clinton maintained "a consistent, disciplined focus on long-term economic growth." [39] Greenspan also offers his opinion that the Iraq War was driven by oil, writing, "I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil