In contrast to much of the whispering that took place after he criticized the U.S. administration’s tax plan, it seems Federal Reserve chairman Alan Greenspan isn’t about to get the axe (at least not right now). President George W. Bush has said he supports the idea of another term for the man known as The Maestro. But does Mr. Greenspan deserve to be reappointed -– and would that be a good thing for the U.S. economy?
Not that long ago, even asking such a question would have been absurd, if not actually blasphemous. In financial and economic circles, Mr. Greenspan was — until recently — revered by virtually everyone as the all-seeing and all-knowing architect of the longest period of economic expansion in U.S. history, a boom that helped drive prosperity around the globe. Questioning him was like debating the Ten Commandments.
At one point in 2001, in fact, presidential candidate John McCain said that if Mr. Greenspan died while he was in office, “We’d prop him up and put sunglasses on him like they did in the movie Weekend At Bernie’s,” in order to give the impression that he was still in charge. The obvious implication was that if anything happened to Mr. Greenspan, the wheels would fall off the U.S. economy and disaster would ensue.
As it turned out, of course, the wheels fell off the U.S. economy anyway, as the dot-com boom became a dot-com bust, and the collapsing bubble took much of the stock-market wealth of the previous five years with it. Technology companies that expanded so dramatically during the late 1990s either went under or were forced to lay off thousands of staff, and the spinoff effects took the steam out of the U.S. economy.
Whether Mr. Greenspan is to blame for any of this depends on whom you ask. Some critics argue that rather than guiding the United States through a storm, the chairman himself was responsible for some of the damage –- and not just by failing to act, but by actively promoting the “New Economy.” On more than one occasion, he said that technology was allowing companies to become more productive without increasing costs, and that this would allow the U.S. economy to expand without inflation.
Were it not for the Fed, Alan Abelson wrote in Barron’s, “the stock market bubble could never have reached the monstrous dimensions it did… The Fed wasn’t just relaxed through the better part of the ‘90s — it was out to lunch.” Paul McCulley of fund manager Pimco said: “Unless there is a return of the feel-good factor in the next couple of years, Mr. Greenspan’s term will have the lustre of nickel rather than gold. The average investor feels suckered by his happy talk about the new economy.”
The less vociferous of Mr. Greenspan’s critics argue that, at the very least, the Fed chairman should have taken action to stem the market bubble a lot sooner by hiking interest rates, after his famous “irrational exuberance” speech in 1996. Even if the central bank didn’t want to go so far as to boost the bank rate, some economists have argued that Mr. Greenspan could have cooled the speculative hysteria by raising the margin requirements that banks must use for brokerage accounts.
In a rare departure from his normally taciturn –- even inscrutable -– demeanor, the Fed chairman did his best to shoot down this criticism in a speech he gave at a meeting of central bankers last September. Mr. Greenspan said that even if he had felt the situation warranted dramatic action, raising rates could have caused far more long-term economic damage than not doing so, killing the patient in order to cure the disease.
In fact, some economists and Fed defenders have made the case that the stock-market crash of 1929 was partly caused by a rapid increase in interest rates — an attempt to cool the speculative hysteria that took hold of the market in the late 1920s. Any idea that the central bank could have stopped the bubble with well-timed rate hikes, Mr. Greenspan said, “is almost entirely an illusion,” while raising margin requirements has been shown to have very little effect on such market speculation.
In a sign of how Mr. Greenspan can’t win no matter what he does, there are those who believe that he and the Fed tried to make up for their earlier inactivity by hiking interest rates too quickly in 1999 and 2000, which caused the market to drop precipitously. Although the bank tried to compensate by cutting rates rapidly in 2000 and 2001, this theory holds that the damage to the economy was already done.
In the end, ironically, many of the Fed chairman’s critics suffer from the same delusion as his worshippers: the assumption that a single man can somehow control the movements of both the world’s largest economy and the entire stock market with a wave of his hand. Has Mr. Greenspan made mistakes? No doubt. He is mortal, after all. But he shouldn’t be accountable for all the ills of the past few years, just as he shouldn’t have been celebrated for all the successes of the late 1990s.
E-mail Mathew Ingram at mingram@globeandmail.ca
Look for exclusive Mathew Ingram commentary at GlobeInvestorGold
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