Alan Greenspan

Alan Greenspan
13th Chairman of the Federal Reserve
In office August 11, 1987 – January 31, 2006
President	Ronald Reagan George H.W. Bush Bill Clinton George W. Bush
Preceded by	Paul Volcker
Succeeded by	Ben Bernanke
Personal details
Born	(1926-03-06) March 6, 1926 New York, New York
Nationality	American
Spouse	Andrea Mitchell
Alma mater	New York University
Profession	Economist

Alan Greenspan (born March 6, 1926 in New York City) is an American economist and from 1987 to 2006 Chairman of the Board of Governors of the Federal Reserve of the United States. He currently works as a private advisor, making speeches and providing consulting for firms through his company, Greenspan Associates LLC.

First appointed Fed chairman by President Ronald Reagan in August 1987, he was reappointed at successive four-year intervals until retiring after a record-long tenure on January 31, 2006, at which time he relinquished the chairmanship to Ben Bernanke. Greenspan was lauded for his handling of the Black Monday stock market crash that occurred very shortly after he first became chairman, as well as for his stewardship of the Internet-driven, "dot-com" economic boom of the 1990s. This expansion culminated in a stock market bubble burst in March 2000 leading to an economic downturn, including negative GDP growth in the first quarter of 2001.

From 2001 until his retirement from the Fed, he was increasingly criticized for some statements seen as overstepping the Fed's traditional purview of monetary policy, and viewed by others as overly supportive of the policies of President George W. Bush, as well as for policies seen by Business Week Magazine and others as leading to a housing bubble. During his tenure Greenspan was considered to be the leading authority on American domestic economic and monetary policy, and his active influence continues to this day.

Biography

Greenspan was born in 1926 to a Hungarian Jewish family in the Washington Heights area of New York City. He studied clarinet at The Juilliard School from 1943 to 1944. He is an accomplished saxophone player who has played with Stan Getz. While in college, he played in a jazz band. He then attended New York University (NYU), and received a B.S. in Economics (summa cum laude) in 1948, and a M.A in Economics in 1950. Greenspan went on to Columbia University, intending to pursue advanced economic studies, but subsequently dropped out. At Columbia, Greenspan did study economics under the tutelage of former Fed chairman Arthur Burns, who constantly warned of the dangers of inflation. Much later, in 1977, NYU also awarded him a Ph.D. in Economics. He may not have done a dissertation, normally required for that degree. On December 14, 2005, he was awarded an honorary Doctor of Commercial Science from NYU, his fourth degree from that institution.

In the early 1950s, Greenspan began an association with famed novelist and philosopher Ayn Rand that would last until her death in 1982. He wrote for Rand’s newsletters and authored several essays in her book Capitalism: The Unknown Ideal. Rand stood beside him at his 1974 swearing-in as Chair of the Council of Economic Advisers.

From 1948 to 1953, Greenspan worked as an economic analyst at The Conference Board, a business and industry oriented think-tank in New York City. From 1955 to 1987, when he was appointed as Chair of the Federal Reserve, Greenspan was Chairman and President of Townsend-Greenspan & Co., Inc., an economic consulting firm in New York City, a 33-year stint interrupted only from 1974 to 1977 by his service as Chairman of the Council of Economic Advisers under President Gerald Ford. In the summer of 1968, Greenspan agreed to serve Richard Nixon as his coordinator on domestic policy in the nomination campaign. Greenspan also has served as a corporate director for Aluminum Company of America (Alcoa); Automatic Data Processing, Inc.; Capital Cities/ABC, Inc.; General Foods, Inc.; J.P. Morgan & Co., Inc.; Morgan Guaranty Trust Company of New York; Mobil Corporation; and The Pittston Company. He was a director of the Council on Foreign Relations foreign policy organization between 1982 and 1988. He also served as a member of the influential Washington-based financial advisory body, the Group of Thirty in 1984.

Alan Greenspan has been married twice. His first marriage was to Joan Mitchell in 1952; the marriage ended in divorce one year later. He dated newswoman Barbara Walters in the late 1970s. In 1984, Greenspan began dating journalist Andrea Mitchell. Greenspan at the time was 58, and the also once divorced Mitchell was 20 years his junior at the age of 38. In 1997, they were married by Supreme Court Justice Ruth Bader Ginsburg.

Greenspan and Objectivism

Earlier image of Alan Greenspan

Greenspan was initially a logical positivist but was converted to Objectivism by Nathaniel Branden. During the 1950s and '60s Greenspan was a proponent of Ayn Rand's philosophy, writing articles for Objectivist newsletters and contributing several essays for Rand's 1966 book Capitalism: the Unknown Ideal including an essay supporting the gold standard.

During the 1950s, Greenspan was one of the members of Ayn Rand's inner circle, the Ayn Rand Collective, who read Atlas Shrugged while it was being written. Rand nicknamed Greenspan "the undertaker" because of his penchant for dark clothing and reserved demeanor. Although Greenspan continues to advocate laissez-faire capitalism, some Objectivists find his support for a gold standard somewhat ironic given the Federal Reserve's role in America's fiat money system and endogenous inflation. He has come under criticism from Harry Binswanger, who believes his actions while at work for the Federal Reserve and his publicly expressed opinions on other issues show abandonment of Objectivist and free market principles. However, when questioned in relation to this, he has said that in a democratic society individuals have to make compromises with each other over conflicting ideas of how money should be handled. He said he himself had to make such compromises, because he actually believes that "we did extremely well" without a central bank and with a gold standard.

Greenspan and Rand maintained a close relationship until her death in 1982.

Chairman of the Federal Reserve

On June 2, 1987, President Reagan nominated Dr. Greenspan as a successor to Paul Volcker as chairman of the Board of Governors of the Federal Reserve, and the Senate confirmed him on August 11, 1987. After the nomination, bond markets experienced their biggest one-day drop in 5 years. Just two months after his confirmation he was faced with his first crisis—the 1987 stock market crash. His terse statement, "the Fed stands ready to provide all necessary liquidity" is seen as having been effective in controlling the damage from that crash. (Others believe that his statement "...that the dollar would be devalued..." just days before was a primary factor in the crash.) Another famous example of the effect of his closely parsed comments was his December 5 1996 remark about "irrational exuberance and unduly escalating stock prices" that led Japanese stocks to fall 3.2%.

President George W. Bush presents the Presidential Medal of Freedom to Alan Greenspan, on November 9, 2005 in the East Room of the White House.

Greenspan was famous for his ability to give technical and confusing speeches. U.S. News & World Report reported that, "Few can confuse Wall Street as thoroughly as Federal Reserve Board Chairman Alan Greenspan can." Greenspan was sometimes so hard to understand that the Motley Fool radio show included a game called "What Did the Fed Chief Say?", where contestants were challenged to interpret snippets of Greenspan's speeches. Greenspan mocked his own speaking style in 1988 when he said, "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said." To a central banker, being unclear is often an advantage since it grants more flexibility: if he is too predictable, markets are more willing to speculate in his future actions, and any move he makes will already be potentially priced into the economy. During his period at the Fed, Greenspan never publicly commented what algorithms or inflation and unemployment targets the Fed used in setting the interest rate. Despite this, over the years he built credibility in the financial markets that he was willing to fight inflation. The flexibility permitted him to affect the economy by, say, lowering interest rates in order to fight a recession while his credibility made it possible to do this without shocking the bond market.

On May 18, 2004, Greenspan was nominated by President George W. Bush to serve for an unprecedented fifth term as chairman of the Federal Reserve. He was previously appointed to the post by Presidents Ronald Reagan, George H. W. Bush and Bill Clinton. Greenspan was awarded the Presidential Medal of Freedom, the highest civilian award in the United States, by President George W. Bush in November 2005. His honorary titles include Knight Commander of the British Empire, bestowed in 2002 and Commander of the Légion d'honneur (Legion of Honor).

Greenspan's term as a member of the Board ended on January 31, 2006, and Ben Bernanke was confirmed as his successor. Bernanke is a former chairman of the U.S. President's Council of Economic Advisers, and his appointment is seen in part as a move to effect a smooth transition. He does disagree with Greenspan on the question of "inflation targeting," a practice in which the Fed makes public a projected inflation rate, effecting a greater transparency in likely Fed moves to raise or lower short-term interest rates. Inflation targeting arguably reduces certain forms of economic volatility. Bernanke is for a targeted minimum level of inflation, Greenspan against.

Greenspan and the housing bubble

In the wake of the subprime mortgage and credit crisis in 2007, Greenspan admitted that there was a bubble in the US housing market, warning in 2007 of "large double digit declines" in home values "larger than most people expect." However, Greenspan also noted, “I really didn't get it until very late in 2005 and 2006.”

Greenspan admitted that the housing bubble was “fundamentally engendered by the decline in real long-term interest rates”, though he also claims that long-term interest rates are beyond the control of central banks because "the market value of global long-term securities is approaching $100 trillion" and thus these and other asset markets are large enough that they "now swamp the resources of central banks."

Following the attacks on September 11, 2001, the Federal Open Market Committee voted to reduce the federal funds rate from 3.5% to 3.0%. Then, after the accounting scandals of 2002, the Fed dropped the federal funds rate from then current 1.25% to 1.00%. Greenspan acknowledged that this drop in rates would have the effect of leading to a surge in home sales and refinancing.

"Besides sustaining the demand for new construction, mortgage markets have also been a powerful stabilizing force over the past two years of economic distress by facilitating the extraction of some of the equity that homeowners have built up over the years."

However, Greenspan's policies of adjusting interest rates to historic lows contributed to a housing bubble in the US. The Federal Reserve acknowledges the connection between lower interest rates, higher home values, and the increased liquidity the higher home values bring to the overall economy.

"Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission." —Board of Governors of the Federal Reserve System, September 2005.

In a speech in February 2004,[13] Greenspan suggested that more homeowners should consider taking out Adjustable Rate Mortgages (ARMs) where the interest rate adjusts itself to the current interest in the market. The fed own funds rate was at an all-time-low of 1%. A few months after his recommendation, Greenspan began raising interest rate, in a series of rate hikes that would bring the funds rate to 5.25% about two years later. Hence, Greenspan's recommendation came at a time when interest rates bottomed out making it a particularly bad time to take out an ARM. A triggering factor in the 2007 subprime mortgage financial crisis is believed to be the many subprime ARMs that reset at much higher interest rates than what the borrower paid during the first few years of the mortgage.

In 2008, Greenspan expressed great frustration that his 23 February 2004 speech was used to criticize him on ARMs and the subprime mortgage crisis, and stated that he had made countervailing comments eight days after it that praised traditional fixed-rate mortgages. .

In that speech on February 23, 2004, Greenspan had suggested that lenders should offer to home purchasers a greater variety of "mortgage product alternatives" other than traditional fixed-rate mortgages. Greenspan also praised the rise of the subprime mortgage industry and the tools with which it uses to assess credit-worthiness in an April 2005 speech:

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. … Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s."

The subprime mortgage industry collapsed in March 2007, with many of the largest lenders filing for bankruptcy protection in the face of spiraling foreclosure rates. For these reasons, Greenspan has been criticized for his role in the rise of the housing bubble and the subsequent problems in the mortgage industry, as well as "engineering" the housing bubble itself:

"It was the Federal Reserve-engineered decline in rates that inflated the housing bubble … the most troublesome aspect of the price runup is that many recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable-rate mortgages. That leaves them fully exposed to rising rates." —BusinessWeek, July 19, 2004, Is A Housing Bubble About To Burst?

Charges of politicization

Greenspan describes himself as a "lifelong Libertarian Republican". On March 3, 2005, Democratic Senate Minority Leader Harry Reid attacked Greenspan as "one of the biggest political hacks we have here in Washington" and criticized him for supporting Bush's 2001 tax cut plan. Greenspan has also received criticism from Democratic Congressman Barney Frank and others for his support of Bush's plan to phase out Social Security in favor of private accounts. Greenspan had said Bush's model has "the seeds of developing full funding by its very nature. As I've said before, I've always supported moves to full funding in the context of a private account."

Economist Paul Krugman, a frequent Greenspan critic, wrote in the New York Times that Greenspan was a "three-card maestro" with a "lack of sincerity" who, "by repeatedly shilling for whatever the Bush administration wants, has betrayed the trust placed in the Fed chairman."

Charges that Greenspan was veering beyond the Fed's purview of monetary policy into fiscal and political matters traditionally left to lawmakers became more prevalent, coming for example from sources such as Republican Senator Jim Bunning who voted against reconfirming him. Then-Democratic House Minority Leader Nancy Pelosi stated in 2005 there were serious questions about the Fed's independence as a result of Greenspan's public statements. But others like Republican Senator Mitch McConnell disagreed, stating that Greenspan "has been an independent player at the Fed for a long time under both parties and made an enormous positive contribution." Furthermore, Greenspan had used his position as Fed Chairman to comment upon fiscal policy as early as 1993, when he supported President Clinton's deficit reduction plan, which included tax hikes and budget cuts.

Later career

Greenspan now works as a private advisor making speeches and providing consulting for firms through his company, Greenspan Associates LLC. Directly following his retirement as Fed chairman, Greenspan accepted an honorary (unpaid) position at HM Treasury in the United Kingdom. In May 2007, Greenspan was hired as a special consultant by PIMCO to participate in Pimco’s quarterly economic forums and speak privately with the bond manager about Fed interest rate policy. In August 2007, Deutsche Bank announced that it would be retaining Greenspan as a Senior Advisor to its investment banking team and clients.

On February 26, 2007, Greenspan forecast a possible recession in the U.S. before or in early 2008. Stabilizing corporate profits are said to have influenced his comments. The following day, the Dow Jones Industrial Average closed at 12,216.24 dropping by 416 points and losing 3.3% of its value, the worst one day loss since September 17, 2001, when the Dow Jones lost 684 points (7.1%) after reopening in the wake of the 9/11 terrorist attacks. This drop is not thought to be entirely due to Greenspan's recent comment, whose opinion is nonetheless substantially influential.

He has written his memoir, titled The Age of Turbulence: Adventures in a New World, published September 17, 2007. Greenspan says that he wrote this book in longhand mostly while soaking in the bathtub, a habit he regularly employs ever since an accident in 1971, when he injured his back.. Greenspan discusses in his book, among other things, his history in government and economics, capitalism and other modes of economies, current issues in the global economy, and future issues that face the global economy. In the book Greenspan criticizes President George W. Bush, Vice President Dick Cheney, and the Republican-controlled Congress for abandoning the Republican Party's principles on spending and deficits. Greenspan's criticisms of President Bush include his refusal to veto spending bills, sending the country into increasingly deep deficits, and for "putting political imperatives ahead of sound economic policies". Greenspan writes, "They swapped principle for power. They ended up with neither. They deserved to lose [the 2006 election]”. Of all the presidents with whom he worked, he praises Bill Clinton above all others, saying that Clinton maintained “a consistent, disciplined focus on long-term economic growth.” Although he respected what he saw as Richard Nixon's immense intelligence, Greenspan found him to be the most profane, bigoted, and disturbed president to work with. He said of Gerald Ford that he "was as close to normal as you get in a president, but he was never elected."

After Federal Reserve Employment

In middle January 2008, hedge fund Paulson & Co employed Alan Greenspan as an adviser on economic issues and monetary policy. This is the third private role given to Alan Greenspan, the first two being given by Deutsche Bank and bond investment company known as Pimco. As an adviser, Greenspan will advise Paulson & Co on economics issues surrounding United States and world financial markets.

He will also counsel on monetary policy and falling housing prices and about a possible recession in the United States. Paulson & Co is famously known for its record profit making during 2007 by conducting bets against mortgage derivatives which earned the firm billions of dollars last year. The financial terms of the agreement were not disclosed and Greenspan must not, under the agreement, advise any other hedge fund manager while working for Paulson.

In February 2008 he spoke at the Jeddah Economic Forum.

Greenspan wrote in the week of March 17 2008 that the 2008-financial crisis in the United States is likely to be judged as the most wrenching since the end of World War II.

Controversy

On March 17, 2008 Alan Greenspan wrote an article for the Financial Times' Economists’ Forum entitled “We will never have a perfect model of risk“, in which he argued: “We will never be able to anticipate all discontinuities in financial markets.” He concluded: “It is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation [do] not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.”

The article attracted a number of critical responses from forum contributors, which consists of some of the world’s leading economists (including two Nobel Prize winners, Edmund Phelps and Joseph Stiglitz), who, finding causation between Greenspan's policies and the discontinuities in financial markets that followed, criticized Greenspan mainly for what many believed to be his unbalanced and immovable ideological suppositions about global capitalism and free competitive markets. For example, one forum contributor, Paul de Grauwe, wrote: “Greenspan’s article is a smokescreen to hide his own responsibility in making the financial crisis possible. Greenspan, who was at the helm of the most important monetary institution in the world, failed to take his responsibility to supervise the financial markets blinded as he, and his colleagues, were by a belief that markets and bankers know better than governments.” Other notable critics included J. Bradford DeLong, Alice Rivlin, Richard Werner, Christopher Whalen, Michael Hudson, and Willem Buiter.

On April 6, Greenspan responded to his critics in a follow-up article entitled, “A response to my critics,” in which he rigorously defended his ideology as applied to his conceptual and policy framework, which, among other things, prohibited him from exerting real pressure against the burgeoning housing bubble or, in his words, "leaning against the wind," (which became a catchphrase used during the discussion). Greenspan argued, "My view of the range of dispersion of outcomes has been shaken, but not my judgment that free competitive markets are by far the unrivaled way to organize economies." He concluded: "We have tried regulation ranging from heavy to central planning. None meaningfully worked. Do we wish to retest the evidence?"

On April 9, the Financial Times associate editor and chief economics commentator, Martin Wolf responded to the discussion with an article entitled, “Why Greenspan does not bear most of the blame,” defending Greenspan primarily as a scapegoat for the market turmoil. Several notable contributors in defense of Greenspan included Stephen Roach, Allan Meltzer, and Robert Brusca.

See also

• Greenspan put
• List of United States political appointments that crossed party lines

Further reading

• Greenspan, Alan (2007). The Age of Turbulence. Penguin Press. ISBN 1-5942-0131-5.
• Batra, R (2005). Greenspan's Fraud: How Two Decades of His Policies Have Undermined the Global Economy. New York: Palgrave Macmillan. ISBN 1403968594. OCLC: 57169884. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
• Martin, J (2000). Greenspan: The Man behind Money. Cambridge, Mass: Perseus. ISBN 0738202754. OCLC: 45188865. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
• Tuccille, Jerome (2002). Alan Shrugged: Alan Greenspan, the World's Most Powerful Banker. Wiley. ISBN 0-471-39906-X.
• The Economist (October 15–21, 2005 issue) page 29, "After Alan"
• Fleckenstein, William (2008). Greenspan's Bubbles. McGraw-Hill. ISBN 007159158-3.
• Woodward, Bob (2000). Maestro: Greenspan's Fed and the American Boom. Touchstone. ISBN 0-7432-0412-30-7432-0562-6.

External links

• Alan Greenspan Video and Audio on MarketWatch
• "The Greenspan years": an article in the TLS by Robert B. Reich, December 19 2007
• 1996 speech by Greenspan about the challenges of central banking
• 2003 speech by Greenspan about "Market Economies and Rule of Law"
• Gold and Economic Freedom, by Alan Greenspan 1967
• Educate Yourself-Greenspan --The Chairman...through the years
• Alan Greenspan's political donations
• Greenspan Warns on Protectionism, BBC News, 26 August 2005
• Criticism of Antitrust
• See analysis of Greenspan featured on Time.com
• Sept 24 2007 - Greenspan and Naomi Klein on Democracy Now: on the Iraq War, Tax Cuts, Economic Populism
• Oct 17 2007 - economist Paul Krugman responds to the Sept 24 Democracy Now interview
• Alan Greenspan Memoirs in the Telegraph

Interviews

• Alan Greenspan interview on Charlie Rose Show - 53 mins video

Criticism

• Stephen S. Roach (2005). Morgan Stanley Global Economic Forum: Original Sin. See also James Wolcott's comments.
• Fleck on Greenspan
• Making Economic Sense - Chapter 83
• From Objectivists: [14], [15], [16], [17], [18], [19]
• From Richard Salsman - Greenspan's Record: Better Than Predecessors, Not As Good as Gold
• Doug Noland. The Greenspan Era: Lessons to be Learned, August 27, 2005.
• Alan Greenspan Has Got to Go
• Secrets of the Federal Reserve
• Housing Bubble Hall of Shame