"Those who cannot remember the past are condemned to repeat it." -- George Santayana, "The Life of Reason"
A debate has emerged in this country regarding the legacy Alan Greenspan has left after his nearly 19 years as chairman of the Federal Reserve. Some have argued that Greenspan ushered in an era of prosperity. Others would counter that his decisions have nearly led to the decimation of the world's largest ﬁnancial system. Who is correct?
If Wall Street had a chisel, Alan Greenspan's smiling face would today be carved on Mount Rushmore. From the late 1980s until just recently, the Maestro, as an admiring journalist styled him, could seemingly do no wrong. He set interest rates -- always, so his fans insisted, the right rates. He presided over an economy that only rarely stumbled into recession or crisis. And when it did lose its way, the Greenspan Fed could be counted on to ease the pain with freshly printed dollars and low interest rates.
The archetypical central banker is dour and fretful, but Greenspan broke the mold. Polite, self-effacing and pleasant, he gave no offense even when badgered by his critics in the endless congressional hearings to which every Fed chairman is subjected. He could scold and worry -- usually on matters over which the Fed had no control -- but his characteristic posture was one of sunny optimism. The computer revolution, ﬁnancial innovation and the globalization of trade and investment were, for him, developments of immense promise. Don't worry, he assured the United States. Wall Street heartily agreed. The future glowed bright. Newly printed dollars and low interest rates were a fabulous stimulant for investment assets and real estate.
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The truth is that the majority of Greenspan's decisions as Fed chairman from Aug. 11, 1987, to Jan. 31, 2006, were not beneﬁcial to you, nor did they leave the country better off, despite Greenspan's glowing self-critique in his latest book, "The Age of Turbulence." In reality, the overwhelming majority of people in the United States will be worse off in the years ahead as a result of his stewardship.
Some might ask, "He was the Fed chairman -- how could he have been wrong?" My response is: Greenspan erred by continually picking an interest rate that was too low. Then he solved the turmoil that resulted from that decision with another period of interest rates that were again too low.
The result was that during his reign, the United States experienced a bubble in stocks and then in real estate. These two massive bubbles emerged within 10 years of each other. Prior to Greenspan's arrival at the Fed, excluding the brief mania for commodities and precious metals from late 1979 to early 1980, the country had been bubble-free for more than 50 years.
Central bankers like Greenspan aren't bankers at all. Anyone who thinks a central bank such as the Federal Reserve performs any function remotely similar to those they've experienced in their local branch banks would be wrong. Central bankers are actually like the bureaucratic leaders of centrally planned, or command, economies. They pick an interest rate to within two decimal places that they guess will be the correct one, and then they proceed to cram it down the throat of the banking system.
It is oddly ironic that a small group like the Federal Open Market Committee, similar to those found at all levels of any former communist regime, would be in charge of the world's largest and most successful capitalist country -- that is, the United States of America and its $13 trillion economy.