How will history pass its judgment on Alan Greenspan’s time at the Fed?
October 26, 2001
For a long, long while Alan Greenspan, the Chairman of the U.S. Federal Reserve, seemed as if he positively, absolutely could do no wrong. He surely had the mythical Midas touch, you would think.
He seemed capable to right every wrong he encountered whether in the U.S. or the global economy. More important, just like King Midas, he seemed able to turn Americans’ stock market investments into gold — without an apparent effort.
But lately, the opposite has been the case. The slumping U.S. economy has failed to respond to an unprecedented dose of monetary easing in 2001. Interest rates went down from 6.5% to 2.5% in nine months between early January and early October. But even before the terrorist attack on the United States economic activity, instead of perking up, continued to slump.
Mr. Greenspan also threw his considerable weight behind a massive personal income tax cut advocated by the Bush Administration. His support was crucial in getting the rate cut, and the $600-per-household tax rebate, passed through Congress. Yet, even before September 11, economic data suggested that rebate checks had no appreciable impact on plummeting U.S. consumption.
Actually though the unraveling of Mr. Greenspan’s golden touch is probably due neither to monetary policy nor to his support for the useless tax cuts — but to his poor sense of timing. His major mistake probably just amounts to this: He has overstayed his welcome as Fed Chairman by one term in office.
Reappointed for an amazing fourth term on June 20, 2000, his personal timing turned out to be a lot worse than that of the other magician — Bill Clinton’s Treasury Secretary Robert Rubin. The latter — an experienced hand in the roulette of the financial markets — had the foresight to leave at the height of his success, even though the stock market and business leaders still clamored for more. Even President Clinton got out just in time, while the economy was still humming along.
Not so Mr. Greenspan. His reappointment was something financial markets demanded after 12 years of financial market bliss, and the 70-year old chairman couldn’t resist all the adulation.
Now, however, Mr. Greenspan’s legacy is suddenly in question. He is certainly no longer seen as infallible. After investors sustained trillions in stock market losses, with pension funds losing up to half of their value and some of the hottest stocks of the 1990s shrinking by more than 90%, future generations are unlikely to remember Mr. Greenspan for his golden touch.
So the question arises: What will be his legacy then? How can the Fed Chairman still attain immortality?
Why, by educating the nation about economics, of course. Mr. Greenspan has always been a national educational guru. His testimonies before Congress and other official pronouncements may often have been so opaque. In fact, some of his statements seemed to come straight from another Ancient Greek mythological creature, the Oracle of Delphi. Or from some esoteric Eastern religion.
Still, perhaps U.S. economists and market analysts — and increasingly common folks as well — spent their time closely following the chairman’s statements. China’s chairman Mao could only have wished his followers had paid him so much voluntary and dedicated attention.
So the Fed, with its chairman’s blessing, recently embarked on an educational mission to bolster public knowledge of economics — starting at high-school level or even earlier. The Fed has created a Web site, www.federalreserveeducation.org, designed to fill the gap in perception on how the central bank works and what exactly its powers over the economy are.
The Fed hopes that the Web site will be used by students and their teachers, and it also produced an educational video “The Fed Today” to go with it. The Web site covers such topics as the history of the Federal Reserve and the conduct of monetary policy. It explains how the Fed sets interest rates, how monetary policy impacts bank lending and credit creation, and how this in turn either spurs or slows the economy.
It is a virtual classroom, complete with quizzes that help test students’ ability to absorb facts about the Fed and its history. There are also sections for the use of teachers who want to introduce the new educational site into their curriculum.
The Web site is remarkably informative. God knows, ordinary Americans can use some tutoring in Economics 101. However, the educational material is quite heavy on theory and has little about the intangibles that made Mr. Greenspan so successful for so long. It certainly contains no tips on how to reassure panicked markets or instill confidence into American investors.
And one more thing. There is some doubt as to whether the education project would help rescue Mr. Greenspan’s sagging reputation.
After all, those who know something about economics realize that there is only so much the Fed can do to promote economic growth or prevent a recession. Armed with newly acquired economic knowledge derived from www.federalreserveeducation.org, Americans may indeed stop blaming Mr. Greenspan for the economic slump. On the other hand, his earlier stellar reputation may also suffer a reappraisal — if only in retrospect.