Greenspan's legacy: uncommon insight

Martin Wolk Chief economics correspondent • Profile • E-mail

On June 7, 1995, Federal Reserve Chairman Alan Greenspan attended an international banking conference in Seattle and gave a rare news conference.  The economy was slowing, much as it is now, after a yearlong series of aggressive interest rate hikes.

Greenspan declared the economy was “sluggish” and said the economic slowdown was “quite pronounced.” This was before such an event would be routinely televised live, and wire service reporters scurried to the back of the room, whispering news alerts into their cell phones as Greenspan continued to speak.

Greenspan said the chance of a recession, while still small, had “edged up,” setting off another flurry of sometimes contradictory news alerts.

The next day, headline writers had their choice. “Greenspan Sees Chance of Recession,” trumpeted The New York Times, while the Washington Post focused on the positive, saying, “Recession is Unlikely, Greenspan Concludes.”

It was vintage Greenspan. The Fed chief was not trying to deceive the press and public, but Greenspan’s carefully couched, often ambiguous public statements left plenty of room for interpretation, especially at economic turning points. With his idiosyncratic method of forecasting, sifting through anecdotes, discussions with business leaders and reams of sometimes obscure economic data, Greenspan was working it out.

“He didn’t think about the economic world the way most of us do,” said Laurence Meyer of Macroeconomic Advisers, who served as a Fed governor from 1996 to 2002. “It made it difficult for him to communicate. His model was fundamentally different from everyone else’s. That is what we’ll miss.”

As Greenspan, 79, steps down Tuesday after an eventful 18-1/2 years at the Fed, it seems more than a little ironic that one of his lasting legacies will be a central bank that is far more “transparent” than it was when he took office. After all Greenspan himself was hardly a model of personal clarity.

But if Greenspan could be ambiguous in his public comments, his iron grip on Fed policy allowed him to move steadily toward more open communication with investors. When Greenspan took over, the Fed did not even publicly announce its interest-rate decisions, although traders figured it out quickly when a change was made.

By contrast in recent years the Fed generally has telegraphed its moves well in advance and rarely surprised financial markets. One notable exception came in early January 2001 when the central bank began cutting rates after the economy showed clear signs of slowing.

In the 1995 case, not only was a recession avoided, but the economy went on a tear, adding 3 million jobs a year in the last four years of the decade, compared with about 2 million jobs annually over the past two years.

In fact, a little more than a year later the economy was growing so rapidly that many central bank officials worried about inflation heating up and wanted to cool things down by raising interest rates. That is when Greenspan came up with one of his landmark theories, arguing that the economy could continue growing without fueling inflation because of a previously unidentified increase in productivity.

Virtually all economists recognize now that Greenspan was correct, and that massive spending on information technology in the 1980s and ’90s finally had begun to pay benefits. Companies were able to provide more goods and services per employee, limiting the wage inflation that is one of the Fed’s biggest concerns.

Greenspan became a very public believer in the technology advances that fueled the dot-com boom and the ensuing stock market run-up, leaving himself open to criticism that he let the boom go on too long. The criticism persisted even after Greenspan famously cautioned in a 1996 dinner speech that “irrational exuberance” may have caused investors to to bid up stock values beyond their intrinsic value.  Stock prices fell over the next several sessions but quickly resumed their steady march upward until the decade’s great bull market peaked in March 2000 and then collapsed.

But the recession that followed in 2001, while painful for the tens of thousands of people who lost jobs, was one of the briefest and mildest of the postwar era. Consumer inflation, stamped out under Greenspan’s predecessor Paul Volcker, is still barely a concern nearly five years into the current expansion.

Certainly Greenspan has his detractors. The nation’s record and rising trade deficit requires constant infusions of global capital to keep long-term interest rates low, an imbalance that could lead to a crisis, Volcker and others believe. Some economists say Greenspan was too sanguine about rising household debt, fueled in part by rapidly rising home values that could be prove to be another stock market-style bubble.

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