Alan Greenspan is ending his 18-year reign as chairman of the Federal Reserve System Jan. 31 at a time of considerable volatility in the nation’s financial markets. His successor, Ben Bernanke, will get his feet wet soon enough, recognizing as much as anyone that he has a tough act to follow.
Now hailed by some academics as “the greatest central banker in history,” Greenspan was a paradoxical choice to manage the American economy when he relieved the respected Paul Volcker in 1987. An admirer of the fiercely laissez-faire writer Ayn Rand, he would become the most skillful “fine tuner” of the American economy in the nation’s history. Greenspan’s success at both soothing and stimulating the economy, as called for, was marred by his relative silence in the face of federal deficits that will act as a burden on the U.S. economy for years to come.
Serious attempts to manage the U.S. economy date back to 1935, when British economist John Maynard Keynes famously recommended using deficit spending to bring nations out of a worldwide depression. A succession of U.S. presidents adopted those policies so enthusiastically that Richard Nixon once claimed, “We’re all Keynesians now.”
Actually, they were were only foul-weather Keynesians. In good times, few politicians had no stomach for Keynes’ complementary doctrine of raising taxes and cutting government spending to control inflation. Finally, theorists like Milton Friedman developed alternative tools that the Federal Reserve Board could deploy swiftly: raising or lowering interest rates and otherwise managing the money supply.
Greenspan used those tools deftly, keeping inflation low while generating two long economic expansions (marred only by two mild recessions.)
His initial tight money policies helped curb inflation but also contributed to the soft economy that imperiled President George H.W. Bush in 1992. He would be far more accommodating to the current President Bush, endorsing Bush’s tax cuts even in the face of rising federal spending ranging from the Iraq war to the new Medicare drug benefit. Such pandering led Senate Minority Leader Harry Reid to call Greenspan “one of the biggest political hacks we have in Washington.”
Given Greenspan’s overall record, that’s a faulty indictment. But America’s soaring debt and ballooning trade deficits will pose huge dilemmas for Bernanke when he takes over Wednesday. In solving those problems, we hope Bernanke will show the political independence and fiscal discipline of the early Greenspan.
