The Federal Reserve building, where Alan Greenspan worked as chairman.
During nearly 20 years as chairman of the Federal Reserve, Alan Greenspan stood as one of the most powerful individuals in the financial world. When he spoke, markets, corporations and governments listened. Originally appointed in 1987, Greenspan chaired the Fed under four presidential administrations before his retirement in 2006. As the country's top central bank official, Greenspan directed the United States' monetary policy, which during his tenure made controlling inflation a top priority.
Function
Monetary policy involves actions to regulate the nation's money supply, such as trading in government securities and setting short-term interest rates. Through monetary policy, the Fed tries to foster stable economic growth and control inflation. In his 2007 memoir, "The Age of Turbulence," Greenspan said controlling inflation was fundamental to long-term prosperity. During the 1970s, Greenspan chaired the Council of Economic Advisors under then-President Gerald R. Ford and criticized what he saw as an indecisive approach to inflation by Ford's successor, Jimmy Carter. The Fed, under Carter, sought to steer a middle course for monetary policy that tried to reduce inflation by tightening interest rates, but not so much as to make credit too tight and spark a recession. Greenspan wrote that such a middle ground, from his perspective, did not exist.
History
After serving under President Ford and years in New York running his own economic consulting firm, Greenspan received an appointment in 1987 from President Ronald Reagan to chair the Fed. Shortly after taking the helm, Greenspan and other Fed policymakers raised short-term interest rates in a pre-emptive move against moderate inflationary pressures. However, later in 1987, the U.S. stock market fell 22 percent, presenting Greenspan his first major challenge. To reassure the markets, he stated that the Fed was ready to provide needed liquidity to the nation's financial system. However, he wrote, as long as the markets functioned, the Fed did not wish to prop up investment firms and banks. Greenspan later received reappointments to lead the Fed from Presidents George H.W. Bush, Bill Clinton and George W. Bush.
Effects
In a 2002 speech to the Economic Club of New York, Greenspan remarked that the previous two decades demonstrated that prudent monetary policy over a period of time can contain inflationary pressures in the economy. He also expressed doubt that monetary policy can affect a "bubble" in the value of assets such as stocks. In his speech, Greenspan said the Fed sought to use monetary policy that would mitigate the fallout of a sudden drop in the prices of assets, such as stocks or real estate, and foster a smooth transition.
Theories/Speculation
During the late 1990s, the CNBC cable news channel coined the term "briefcase indicator," which used the size of the chairman's briefcase as he arrived at the Fed for a policy meeting as a clue to possible monetary policy actions. A thin briefcase meant the economy was going well and that the Fed would leave interest rates untouched, while a thicker case meant Greenspan had been poring over new data and that the markets should expect a rate hike. In his memoir, Greenspan remarked that the thickness of his briefcase indicated only one thing: whether he had packed his lunch that day.
Expert Insight
A 2008 briefing paper by the Cato Institute, a libertarian think-tank in Washington, D.C., and frequent critic of the Federal Reserve and central banking, noted that many critics blame Greenspan's monetary policies for sparking the housing crash that led to the global economic crunch of that year. However, the briefing paper's authors noted that globalizing trends in the world economy reduce the ability of the Fed to significantly influence interest rates. In addition, the Cato Institute stated that Greenspan presided over a period of low, stable inflation during his tenure at the Fed.
Tags: monetary policy, interest rates, Federal Reserve, Alan Greenspan, assets such, assets such stocks, briefing paper
