Alan Greenspan was the first celebrity Federal Reserve chair. Everyone knows “Tall” Paul Volcker for the macroeconomic (and literal) giant he was, but Greenspan was the first true celebrity chair. He served in various roles under six presidents, Bob Woodward wrote a book about him in 2000, He was hailed as a “rock star,” and everyone knew him as “the maestro.” Just before the financial crisis he helped to bring about, 6 in 10 Americans expressed confidence in Greenspan’s leadership of the economy, more than both George Bush and John Kerry.
That would change sharply when, by 2009, he was named by TIME magazine as one of the “25 People to Blame for the Financial Crisis”––by a publication that had featured him on its cover in 1997 and 1999. The low-interest-rate policies Greenspan had pushed that became known as the “Greenspan Put” had fueled a housing bubble, and the growth of the money supply incentivized banks to lower their lending standards to get unneeded liquidity off their balance sheets.
Greenspan himself was an enigma, a jumbled mess of contradictions and smooth talk—which made him the perfect candidate to be chair of the world’s most powerful central bank according to some.
Alan Greenspan was born in New York City in 1926 and graduated in 1948 from New York University with a bachelor’s in economics. Only two years later he would secure a master’s degree in the same field from NYU. Greenspan would go on to join the economic consulting firm Townsend-Skinner, which by 1958 would become Townsend-Greenspan & Co., Inc.
Greenspan earned his reputation as a free-marketeer under the tutelage of Ayn Rand and her associate (and lover) Nathaniel Branden. Introduced to the self-made philosopher and writer by his first wife, Joan Mitchell, he quickly became a staple in Rand’s circles. He authored chapters for Rand’s book Capitalism: The Unknown Ideal and taught courses for the Nathaniel Branden Institute (which would be the chief Randian organization until the Branden-Rand break in the late 1960s).
But Greenspan hardly remained a laissez-faire policymaker when he finally entered the public sphere. He first entered the public spotlight as an advisor to Richard Nixon’s 1968 campaign, a role that would earn him his eventual nomination to be Nixon’s Council of Economic Advisors chair. Nixon exited the White House before he took office, but he served in the position for Ford.
Inflation began to grow in 1974 during the tenure of Federal Reserve Chair Arthur Burns, and the Ford administration was left holding the bag of oil shocks, high inflation, and high unemployment. The Ford administration embarked on perhaps its greatest public relations blunder: WIN, “Whip Inflation Now.”
The campaign, complete with its own buttons and slogans, encouraged decreasing consumption in order to bring down inflation. Greenspan himself would acknowledge the stupidity of the policy in tackling the actual issue, but went along nonetheless. He seemed more than willing to suppress his previous beliefs in order to climb up the social ladder.
Following a brief stint helping the Reagan administration save Social Security, he was finally nominated to the position all social-climbing economists aspire to: chairmanship of the Federal Reserve.
Greenspan’s methodology was inspired less by a commitment to a set of economic theories or rules than by his own statistics-fed intuitions. It was reported that he would consume statistics hour by hour and assign probabilities to future events based on the data he saw. He became known as “the maestro,” a fitting name for this methodology.
Of course, this technique justified his own cause. His job was to tame the attitudes of the market, whose swings were dictated by fears and optimism that was in charge of taming. By speaking in a language that nobody could understand, “Fed Speak,” he became the embodiment of a technocrat in whom the public was supposed to place its trust and think little about. This was perhaps embodied most in a talk he gave to business leaders in what should have been seen as a condescending remark: “If I’ve made myself too clear, you must have misunderstood me.”
Yet all of the data in the world did not bring him to acknowledge publicly or halt the financial crisis that he laid the groundwork for. Volcker aggressively raised interest rates to combat inflation, while Greenspan kept rates close to the floor after the dot-com bubble burst in 2001. It was under his tenure that the Federal Reserve saw a revolution in form and began to deemphasize the role of the money supply in its monetary policy.
The low rates began inflating bank balance sheets, which in turn led to lowered lending standards and a housing bubble. The adjustable-rate mortgage only became attractive because of those conditions. By pushing down the short end of the yield curve, the curve showing the normally increasing yields on shorter- to longer-maturity assets, adjustable rates grew too cheap for many borrowers to pass up.
Greenspan’s “put” pushed real rates negative, creating a grand bubble. The maestro clearly did not understand his craft as much as he claimed. But the Federal Reserve couldn’t hold interest rates down forever, and the bubble popped.
Greenspan was the father of the modern Federal Reserve. His technical jargon and language obscured inflationism under the garb of “playing to the market’s passions.” The negative real interest rates of the post-financial crisis era were given to the world under his tenure. He lived his life like a rock star, but will not be remembered as fondly. RIP Alan Greenspan.
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