Greenspan's legacy: plenty to praise, less to lambaste

Greenomics. Embodiment of Prosperity. Maestro. Sacred cow. Fraud. Political hack. All these terms have been used to refer to Federal Reserve Chairman Alan Greenspan. He's the world's most powerful economic official. As captain of the monetary crew steering the globe's largest economy, he's important to almost everyone, everywhere. That makes him a target for both virulent attacks and worshipful praise - especially now since Mr. Greenspan's 18-year Fed tenure is ending.

Greenspan's term as a governor of the Fed expires Jan. 31. Unless the Senate hasn't confirmed a successor by then, that's it. He won't report to congressional committees anymore. TV cameras won't focus on him as he testifies in carefully chosen, sometimes Delphic, words that could be dubbed "Greenspeak."

Already, economists are evaluating the central bank chairman's role in financial history. His legacy will be examined later this month at a high-powered conference in Jackson Hole, Wyo., sponsored by the Kansas City Fed branch. Wall Street is now speculating on a successor, fed by White House leaks of names of possible candidates. The arrival of a new Fed chairman could cause a financial fuss.

"Past transitions at the Fed have often been accompanied by volatile financial markets," notes Bill Dudley, an economist with Goldman Sachs Group, an investment banking firm in New York.

Indeed, soon after Greenspan took office in August 1987, the stock market crashed. To deal with that, the Fed combined a dramatic decrease in interest rates with words of assurance for Wall Street. The economy remained unharmed. Stock prices recovered.

Economist Allan Meltzer, busy these days on the second volume of a history of the Fed, places Greenspan in "the front rank" of the 12 chairmen that have led the Fed in its modern era - since reforms of 1935-36.

Like many others, the Carnegie Mellon University professor praises Greenspan for his success during much of his tenure in achieving the Fed's top two objectives: low inflation and low unemployment.

Robert Barro, a Harvard University economist, praises Greenspan for an "extremely good job" at keeping inflation close to 2 percent a year by one measure.

Another achievement is the Fed's increased transparency. It quickly advises the public of its monetary policy, even hinting at future moves. For instance, a decision to raise short-term interest rates to 3.5 percent from 3.25 percent was announced immediately after Fed policymakers met in Washington last Tuesday, along with a rationale for the change.

When Greenspan took office, Wall Street experts had to guess at Fed policy by trying to track central bank sales and purchases in the financial markets in the days following a Fed meeting. That was regarded as an advantage for financial market professionals - though not for investment amateurs.

At first, Greenspan argued against immediate policy announcements, recalls Laurence Meyer, a former Fed governor, now vice-chairman of Macroeconomic Advisers, a consulting firm. But Greenspan's reluctance faded and he became satisfied with the change.

While Greenspan presided over two of the longest US economic expansions, and only two mild, short recessions, he doesn't escape criticism. Mr. Meyer, author of a new book, "A Term at the Fed: An Insider's View," holds that Greenspan was wrong to state his views on issues outside the purview of the Fed. "The chairman should not become a party in partisan debates about economic policies," he says.

For example, in 2001, Democrats accused Greenspan of breathing life into President Bush's proposal for massive tax cuts that soon swelled a budget deficit.

In 2003, Greenspan cast doubts on the Bush plan for a second round of tax cuts. The economy needed no new stimulus, and the lost revenue would expand the deficit, Greenspan testified. "The Fed chairman should not try to make fiscal policy," responded a Republican senator at the time.

Greenspan has also supported generally Republican views that the minimum wage should not be raised and that Social Security badly needs trimming.

Professor Barro calls Greenspan's verbal interventions in nonmonetary policies "a bit of a mistake." And, as for the Fed chairmanship, "It's not that exciting a job. Maybe you need something to do with your time."

What Meltzer, Barro, and Meyer see as praiseworthy - Greenspan's steady, disciplined hand on the monetary steering wheel, and his aggressive preemptive moves to alleviate crises (stock market plunges in 1987 and 2000; Mexican, Asian, and Russian financial blowups) - economist Ravi Batra regards as having had "devastating" effects on ordinary Americans.

The Southern Methodist University economist and author of a another new book on the Fed ("Greenpsan's Fraud") argues that by pumping up America's money supply in crises and tightening monetary policy afterward, the Fed hasn't let booms last long enough for workers' wages to catch up with growing productivity.

"CEOs have gained ... and workers have suffered sharply," he says. Real wages have fallen. More Americans have slipped into poverty.

And so goes the debate over Greenspan's performance. History's verdict will be less favorable if today's massive US trade deficit causes an international financial crisis, or the sharp rise in housing prices proves to be a bubble soon after the familiar figure has left office.