Web Exclusives: PawPlus

March 8, 2006:

Deconstructing Greenspan
Two Princeton professors analyze the longtime Fed chairman’s record of success

In February, former Princeton professor Ben Bernanke became chairman of the Federal Reserve, taking the reins from 18-year veteran Alan Greenspan. While Greenspan’s record was extraordinary, his methods remain largely unknown, according to Professor Alan Blinder ’67, who served as the vice chairman of the Federal Reserve Board of Governors from 1994-96, and Ricardo Reis, an assistant professor of economics and public affairs. Blinder and Reis, who presented a paper about Greenspan’s term at a Federal Reserve Bank of Kansas City symposium last August, spoke with PAW’s Brett Tomlinson about the outgoing chairman’s legacy and the future of the Fed. A condensed version of this piece was published in the March 8, 2006, issue of PAW.


In your paper, you said that Greenspan “has a legitimate claim to being the greatest central banker who ever lived.” What sets him apart?

AB: Some of it is the style. But in addition to that, it’s his incredible longevity – he was by far the most senior central banker in the world – and also the success of that period. There are several metrics of this success, but one very obvious one is the near-absence of recessions in the Greenspan era. I would count it as one recession and one recession-ette. … That’s very little in 18 1/2 years.

RR: And at the same time, inflation has been very low. He really kept the inheritance of Paul Volcker [’49] in that sense. He has solidified the expectations of low inflation that many Americans have nowadays.

Why were you interested in taking a closer look at the Greenspan years?

AB: I thought this would be interesting because you have here a man who has almost single-handedly run monetary policy in the United States for nearly two decades with seemingly very good results – exceptional results. And yet, [he] has given very little information about how he goes about conducting monetary policy. The secret of Greenspan’s success remains a secret, and to me, one of the principal challenges of this paper was to peel away the onion a little bit and find the secret. I’m not sure we’ve fully succeeded, but I think we made some progress.

Obviously Greenspan is a very public figure, but the Fed’s decisions are supposed to be made by committee. Do people give Greenspan too much credit and overlook the contributions of his colleagues on the Open Market Committee?

AB: I’d say a little bit, but he was a very strong influence. Anybody who’s been on the committee and is honest about it would say that. An objective indicator – a fallible but at least objective indicator – is the number of dissents, which has been so low throughout the Greenspan period but especially [during] what I would call “late-Greenspan.” … In the second nine [years], there was miniscule dissent, and that reflects a degree of dominance – not achieved, by the way, by pounding the table or threatening people, that’s not his way – but a degree of dominance that we’ve never seen in the Federal Reserve.

RR: It is Greenspan’s policy, at the end of the day.

There were many challenges in Greenspan’s 18 years at the Fed. Does any one challenge stand out?

RR: One episode where he deserves a lot of credit is detecting the productivity acceleration of the mid-1990s. In ’95 or ’96, if you had polled a series of economists either at the Fed or in academia, most people would have argued that nothing was happening. Indeed, even as late as 2001, the statistical evidence for a break in productivity was very low, and there was still heavy debate. Now, in 2006, we pretty much agree that it did happen in ’95. Greenspan, in ’95, called it, and he set monetary policy according to that. There was a great call. Was it a stroke of luck or a stroke of genius? Who will ever know?

So is this another case in which his secret is still a secret?

AB: Yes, very much so. We have little snippets, but it’s largely a secret. What it is a case of is what you were asking about before: Is this Greenspan’s policy or the committee’s policy? There is simply no doubt that if Greenspan, say in late ’96, had said to the committee, “OK, you’ve got a free vote, I’m going to close my eyes, and you all vote what you want to do with monetary policy,” the Fed would have been raising interest rates. It’s clear. And he stopped that. It was very much his policy. So I agree with Ricardo. To me that was his finest achievement.

Is Bob Woodward’s depiction of Greenspan as the “maestro,” tuning the various instruments of the economy, an appropriate way to think of him?

AB: [It is] pretty accurate. I think it actually understated how politically astute and adept he was. I think to this day people don’t appreciate what a good “politician” he was – of course he’s not a literal politician, and he wouldn’t be very good on the stump, shaking hands and things – but what a good Washington operator he was.

Occasionally, he did stray into non-monetary issues, leaving himself open to questions of bias. Why is that a significant problem for a central banker?

AB: It hasn’t actually been a problem for Greenspan, but the danger is that there is supposed to be a neutral non-aggression pact, so to speak, between the Fed and the political side of government – the Congress and the president: If you don’t interfere with my work, I don’t interfere with yours. And that’s important for the independence of monetary policy. If you look throughout history and around the world, independent monetary policy has been the exception, not the rule. Now it’s the rule, but that’s not the way history has gone. And a central banker who poaches into the political territory has abrogated the non-aggression pact and invites reciprocal poaching. As I said, it hasn’t happened to Greenspan. …

RR: We actually got a lot of comments on that part of the paper on how much should the Fed chairman, in this case Greenspan, talk about non monetary policy issues. Our view is that he shouldn’t. Others would say that in some ways the press in Washington needs an economic guru, and if you’re going to pick one, Alan Greenspan wasn’t a bad one. If you look at many of the things he said, like defending free trade, they were things that most economists would agree with, and with his political clout he could push for them much more than any academic. Weighing the two, I still think that it’s dangerous.

Is part of the danger that it becomes part of the job description?

AB: Yes, it’s part of the danger and if you keep that up, it’s going to come back and bite you. It didn’t for Greenspan. Partly he was lucky, but partly he had achieved god-like status by the end of his term. Now Ben Bernanke walks into the job – a mere mortal, a person, a human. He happens to be a very high-I.Q. human, but he’s a human. So he’s not wearing the protective halo that Greenspan was wearing by the end of his term. …

RR: When you step out of your domain, you run risks. When you talk for free trade, many people will be on your side. But when you talk about what we should do about Social Security, you’re treading on thin ice. …

You made a clear distinction between Greenspan’s record and his legacy. Why don’t the strengths of his record necessarily carry over into a legacy?

AB: We see the record – it was an excellent one. So now the question is, “How did he do it?” To have a legacy, people have to answer [that question]. In the paper, we use the analogy of what’s inside the top desk drawer. [On Feb. 1] Ben Bernanke pulled it open and found it was empty. Unfortunately, there isn’t what I’ll call euphemistically an “instructions manual.” We tried to provide one with this paper. Greenspan was at the conference, and he wasn’t shaking his head no. I talked to him a little, and he was pretty much accepting of what we had written about him. But as I said to him, “Wouldn’t it have been much better if it came from you?”

Does that make Ben Bernanke’s job harder?

AB: It’s a tough question to answer. Bernanke comes into that job incredibly well-prepared and well-trained for it. Compare him to Greenspan in 1987: Bernanke has been immersed in monetary policy. He served on the Federal Reserve Board for three years. Neither of those was true of Greenspan. Greenspan was a business consultant [who] had been in forecasting. But there was something that he brought to the job that made him a great, maybe the greatest, central banker. Bernanke could turn out to be just as good. We hope he will. But much as he stressed continuity – as he should – he won’t be able to replicate the Greenspan method, because nobody knows what the Greenspan method was.

In spite of his dour appearance and convoluted speeches, Greenspan became a pop-culture figure. Does Ben Bernanke have star quality, or is he just a central banker?

RR: Would you ever have guessed that Greenspan had that quality?

AB: I’m not sure that Greenspan did. He was around so long and was so successful, and he also had the ability to turn a cryptic phrase, like “irrational exuberance.” Out of Bernanke, you’re going to be hearing much more plain-spoken English prose. … He’ll say what he means. Greenspan almost seemed to take delight in people trying to figure out what he meant. It’s a little like taking one of those Beatles records and playing it backwards.