RIP Alan Greenspan, Who’s Just Coming Back into Style
The longtime Fed Chair was known for his cryptic pronouncements and penchant for vagaries. It’s a legacy being revived today.
ALAN GREENSPAN, THE FAMOUSLY inscrutable long-time chair of the Federal Reserve, died on Monday at the ripe old age of 100. And just as his signature style was coming back in vogue, too, thanks to our new Fed chair, Kevin Warsh.
Greenspan was appointed Fed chair by Ronald Reagan in 1987 and held the post for nearly two decades. The Greenspan era was known chiefly for two things: a booming economy, with low unemployment and inflation and relatively mild recessions (an era sometimes referred to as the “Great Moderation”); and his impenetrably cryptic public communications, a.k.a. “Fedspeak” or “Greenspeak.”
When Greenspan took over the position from Paul Volcker, the Fed had virtually no public communications at all—no statements following meetings, no published minutes, and definitely no press conferences. That began to change starting in the early 1990s with public announcements of changes in policy. But even so, Greenspan remained wary of too much transparency, and cultivated a deliberate abstruseness and intentional “syntax destruction.”
In fact, at times Greenspan wanted the public to be confused about Fed policy. “I have learned to mumble with great incoherence,” he told Congress in 1987. “If I seem unduly clear to you, you must have misunderstood what I said.” When news reports about his remarks sometimes produced opposing headlines about his intentions, he said that meant “I succeeded.”
Greenspan had started his career hoping to be a professional musician, having studied clarinet at Julliard. But even as a central banker he practiced jazz aesthetics: The art was in the words he didn’t say.
The paucity of Greenspan’s public remarks gave every one of his words extra power. This also at times caused wild market swings, as investors tried to divine the meaning of Delphic decrees about “irrational exuberance.” The mystique made him a household name. A frequent theme in ’90s political cartoons involved Greenspan sneezing or burping, thereby prompting people to jump out of windows.1 The “underwear index” he followed provided comedy fodder too. (Delays in replacing threadbare skivvies were supposed to be a useful bellwether for tracking economic anxiety.)
Even when taking a position that might be viewed as warm, or socially progressive, Greenspan’s words and reasoning could be jarring. Such was the case when he explained why his financial firm, unlike most on Wall Street, employed so many women in senior leadership roles. His apparent feminism was motivated by pragmatic bargain-hunting, he said: “I always valued men and women equally, and I found that because others did not, good women economists were cheaper than men. Hiring women does two things: It gives us better quality work for less money, and it raises the market value of women.”
As Fed chair, Greenspan guided the economy through several bumpy patches,2 and presided over the longest economic expansion in American history. This record, plus his almost mythological dialect and musical background, helped earn him the nickname “Maestro.”
But his actual economic legacy is a bit messier than the name might imply.
That “Great Moderation” he oversaw also masked enormous market bubbles,3 an extremely laissez-faire approach to bank oversight, and of course a brewing global financial crisis that boiled over within a year after Greenspan’s departure from the Fed.
And thank God, in retrospect, for the timing of that particular changing of the guard.
After all, Greenspan was succeeded by Ben Bernanke,4 a scholar of financial crises who wrote his dissertation on the Great Depression. Relative to Greenspan, Bernanke favored more muscular monetary policy interventions that almost certainly rescued us from plunging into another global depression.5
Bernanke also set the Fed on a path toward more open and more frequent public communication. He declared that the days of the dictum “Never explain, never excuse”—a line attributed to a pre-World War II Bank of England governor—were over. The logic was that increased visibility into the Fed’s actions and aims improves the central bank’s accountability, effectiveness, and (perhaps most critically) its speed.6
“Ambiguity has its uses, but mostly in noncooperative games like poker,” Bernanke explained to his Fed colleagues a few years before getting the top job, while Greenspan was still chair. “Monetary policy is a cooperative game. The whole point is to get financial markets on our side and for them to do some of our work for us.”
A few weeks after Bernanke was appointed chair, in 2006, Warsh was confirmed as a Fed governor, with Bernanke’s help. And while Warsh and Bernanke were reportedly close allies during the early days of the crisis, Warsh ultimately broke with the boss over two things: the bank’s bond-buying, and Bernanke’s emphasis on more public communications and “forward guidance.”
Instead, over the past decade or so, Warsh has called for a rollback of Bernanke’s changes and a return to Greenspanian levels of evasiveness. When Warsh was sworn in as chair last month, Greenspan was the only former Fed chair to whom Warsh paid homage by name. Bernanke, the chair whom Warsh actually served under, was neither mentioned nor even on the guest list.7
Last week, days before the Maestro passed, Warsh gave a taste of what this Greenspanian throwback might look like.
In his first Fed meeting as chair, Warsh slashed the length of the official Fed statement on interest rates, and punted on most reporter questions. (He declared that a future “task force” would resolve whatever issue they asked about.) He also announced that he had not participated in Fed officials’ standard practice of forecasting the path of interest rates, via an anonymized chart known as the “dot plot.”
This approach is consistent with Warsh’s stated preference for opacity—but also, conveniently, allows him to avoid publicly acknowledging that interest rates are going up, not down, contrary to Donald Trump’s demands.
Greenspan lasted through four presidents. If Warsh survives just one, it may be thanks to the Maestro’s playbook.
There is at least one way in which Greenspan was more loquacious than his reputation usually allows: He weighed in somewhat regularly on non-monetary topics, including by endorsing tax cuts and Social Security reform. These days Fed chairs would probably be admonished and told to stick to their knitting if they waded into those waters.
The 1987 stock market crash; the 1997 Asian financial crisis; the bursting of the dot-com bubble in 2001.
Investors came to refer to the “Greenspan Put,” the idea that the Fed could be relied on to step in to prevent a major market decline.
When Bernanke was nominated for the top job in 2006, he was teaching at Princeton, where I happened to be taking a workshop on musical-theater-writing. Our first workshop assignment was to pen new lyrics to a well-known melody. A classmate chose the Indiana Jones theme song. Ever since, whenever the swashbuckling “Raiders March” plays, I always hear: “Ben Bernanke/He’s the man/That we’ve chosen/To replace Greenspan!” I shared this once with Bernanke; he was less amused.
This research also earned Bernanke a Nobel Memorial Prize in Economics.
There are long and variable lags between the time when the Fed announces an interest rate change and when its effects are felt throughout the economy. But if people know with some “forward guidance” where rates are likely headed, the thinking goes, markets can start to scramble things into place much faster. Businesses can price in future rate cuts (or hikes), and make decisions today based on where the Fed has signaled financial conditions will be tomorrow.
Some people who were on the guest list include: Clarence Thomas, Brett Kavanaugh, Samuel Alito, Dan Quayle, Condoleezza Rice, and Kevin McCarthy. Fun fact: Warsh is actually the first Fed chair to have been sworn in at the White House, rather than the Fed offices, since Greenspan back in 1987. Ayn Rand, a close friend of Greenspan’s, attended his swearing-in.
Another great article by Catherine. She does a great job getting out economic information in an informative and understandable manner. Volcker set Greenspan up by making a lot of the hard decisions taking over for and coming out of the Carter administration. He deserves credit for managing monetary policy during his tenure.
Great article. Per other commenter, Volcker did alot of clean up before Greenspan--it's largely forgotten how tough late seventies and early eighties were--12% unemployment--I remember news story in Chicago of people circling the block during the winter to apply for hotel jobs--and eye watering interest rates. Nixon had experimented with price/wage controls, a Republican President, which along with oil embargoes and war debt sent rates to 15%, with inflation's effects forcing Volcker to set prime rate at !9% sending home and car loans well above 20% . It worked but it was brutal. What I most remember though was Greenspan's repeated rejection that anything should be done about the mortgage based securities, over and over, the market would take care of it all. The rating agencies were the weak link, but it's still amazing the Fed or SEC didn't bother to determine what these bonds actually contained. It would all just work itself out. Lesson in part has to be beware of ideological assumptions as Fed Chair because Greenspan's bio will always revolve around 2007-2008. Being in DC was terrifying--no one wanted to be Bernanke, Geitner at NY Fed, or Hank Paulson at Treasury--the latter admitted having thrown-up in a nearby waste can before congressional testimony. There were a handful of days it looked like it all was going down the drain--Andrew Sorkin wrote a pretty good book about it as I recall. Beware the new Fed Chair.