JOHANNESBURG (Business Day) -- Alan Greenspan ends his 18-year stint as chairman of the board of the U.S. Federal Reserve tomorrow. But the debate about the Greenspan legacy is just beginning. The real impact of his tenure on the U.S. economy may not become clear for years. And monetary policy makers everywhere will be weighing up the Greenspan era's lessons, positive and negative.
His admirers credit him with steering the U.S. economy through its longest expansion in history, from 1991 to 2001. During his 18 years the U.S. experienced only two, brief recessions compared with the four much deeper downturns it saw in the previous 18 years. The past decade saw it enjoy the lowest inflation and strongest productivity growth it had seen in four decades.
His "steady hand" (as former president Bill Clinton called it) saw the U.S. safely through market crashes in the late 1980s and early this millennium. More than anything, he is credited with a kind of economic sixth sense that often enabled him to see what was happening in the economy long before it showed up in the statistical data - and to take some unconventional decisions. So for example he went against conventional wisdom and held off raising rates when unemployment fell in the mid-1990s, guessing (correctly as it turned out) that productivity growth was speeding up and would neutralise inflationary pressures. He declined to raise rates to curb the stock market bubble of the late 1990s, choosing instead to let the bubble pop of its own accord and cut rates to minimise the impact on the economy.
His management of monetary policy won him wide popularity, and helped give U.S. consumers and businesses the confidence that spurred on a buoyant economy.
So it's not surprising his supporters see him as gifted, even if he made the odd mistake. Princeton economics professors Alan Blinder and Ricardo Reis described him as the "the greatest central banker who ever lived". His detractors counter that he can't take that much of the credit for low inflation, given that global trends favoured it everywhere. More to the point, he is blamed in part for U.S. household debt nearly quadrupling, from $2,7-trillion to $11-trillion, during his tenure, helping to fuel a 55% increase in house prices over the past five years. The huge increase in household debt went to buying imports, helping to drive the U.S. current account deficit up sevenfold in the last decade and making the U.S. heavily dependent on foreign inflows to finance its spending boom.
More profoundly, the Economist magazine has recently questioned the very basis of Greenspan's approach to monetary policy, saying his failure to take action against the stock market bubble, and the more recent house price bubble, created instability in the U.S. economy that will cost it dear in years to come.
Monetary policy makers, the Economist argues, should worry about asset price inflation just as much as more conventional goods price inflation. Central banks in the U.K., Australia and New Zealand are doing just that. Greenspan should have done the same, to save the U.S. economy from the crash that is sure to come. The Economist believes moving to a more strict inflation targeting regime - as Greenspan's successor Ben Bernanke seeks to do - will be a backward step.
But the advantage of the kind of inflation Bernanke wants to introduce in the U.S. is it does provide policy makers with a clear and transparent mandate. Because the trouble with U.S. monetary policy in the past 18 years was that it was all about Greenspan and his instincts. That means his approach, however one judges it, cannot be replicated. Of course, visionary leadership is important. But what's surely needed is a robust framework in which monetary policymakers can make their decisions, so that policy doesn't depend too heavily on the minds of great men.
