Polite monetary policy aficionados referred to him as “the Maestro”. The more profane denizens of the trading floors simply called him “god”. They coined the phrase “Greenspan put”, and along with his own words “irrational exuberance”, the concepts took a permanent place in the financial market lexicon.
As Federal Reserve chairman for almost two decades from 1987, Alan Greenspan regulated liquidity in the world’s largest economy. And as financial flows increasingly crossed borders over the period, the world’s bankers began to hang on his every impenetrable word.
But his actions were what really mattered, and the bursting of the global tech bubble in 2001 and the global credit bubble in 2007 have now led to questions over whether the man was as strictly focused on inflation as his reputation suggested.
John Taylor, undersecretary at the US Treasury from 2001 to 2005, is one of those who harbours the suspicion that Greenspan might have become a little too generous towards the end of his tenure. “I do think that the low rates in 2003-2004 and maybe the slow coming back has added to the pressure on housing markets that was already there and got the inflation rate higher, and to some extent accentuated the boom which made the correction and the bust more severe,” he tells Emerging Markets.
Unrepentant
Greenspan is resolutely unapologetic. In an interview with Emerging Markets he says: “The only problem with the argument is it’s not true. The facts don’t support that: who created the other two dozen housing bubbles around the world?” he says. “When real long-term rates started to go down worldwide, prices of homes went up, virtually everywhere. House prices in the US are a function of longer-term rates, and we [the US Federal Reserve] have lost control of longer-term rates, so to argue that the Fed caused the housing bubble makes no sense.”
“It’s true that we’ve had excess liquidity, we did that purposefully as an insurance,” he says. “It’s conceivable that we didn’t sap it up in time. The only problem is that’s not where the problem lay. In fact, I’d been worried about keeping short-term rates where they were, too low for too long. But I was wrong – it didn’t matter.”
Greenspan argues that the decline in long-term interest rates has its roots in the geopolitical changes brought about by the end of the Cold War. That episode, he says, effectively induced China to start in 1991 accepting huge increases in foreign direct investment – a fact which led to its emergence as a major manufacturing powerhouse. This in turn contributed to a global savings excess, which has suppressed long-term interest rates.
The Fed’s greatest achievement, he says, was recognizing that “we are in a huge new global financial environment and market forces are controlling,” he says, and to then “calibrate our policies to be consonant with what was going on globally.”
“The system is very largely a self-regulatory system. It’s as though Adam Smith’s invisible hand turned international.”
Global duty
Did the sense of global responsibility ever impact Greenspan’s decision making? Should it have? “No and it shouldn’t have because to the extent that the United States is functioning properly and effectively, that’s the major contribution that we can make to the global economy,” Greenspan says. “The implication of raising issues other than domestic self-interest presupposes it’s against the interest of the United States and therefore against our maximum sustainable economic growth, which I would argue is also against the interests of the international community.
“We don’t define the differences between what we believe to be in our self-interest and those of the globe. And I’d say that all central bankers have the obligation to be responsible – and by that I mean not seek short-term gains for long-term costs, because that not only negatively affects their own economies, and to that extent affects the world at large.”
His claim has been supported by none other than Milton Friedman, the high priest of monetary economics, in his last known interview. Speaking to Emerging Markets in August 2006, Friedman dismissed the idea that Greenspan had responded to global financial market chaos when he cut rates in 1987 or during the Asia crisis. “Greenspan did not intervene in the international realm. He followed, as he should have, policies of expansion at home. He increased the money supply, it was the right thing to do.”
“In short there really is a synergy in the world where one country doing well helps all other countries,” says Greenspan. “It’s not a zero sum game.”
While international markets may have been beyond his remit, there is no doubt that the confidence in long-term US economic stability engendered by Greenspan’s chairmanship created the environment that supported steadily increased flows into emerging markets. By fostering sustained growth in the US, Greenspan played a key role in sustaining an expanding global economy for much of the 1990s and in this decade.
Today, Greenspan has time to focus on advocating his own record, and his assessment of recession risks (“less than 50%”) has been rather more direct than most of his statements as chairman. Still, with 20 years of low and stable US inflation combined with steady growth behind him, the odds look more than 50% of a favourable judgment.
This profile is one in a series of twenty, published in a special commemorative edition to mark the 20th birthday of Emerging Markets newspaper. The profiles canvass twenty of the figures who have had the most impact on the rise of the emerging markets over the past two decades.