Federal Reserve Chairman Greenspan Retires

RAY SUAREZ:

He's arguably the most famous Fed chairman in history: The maestro. Federal Reserve Chairman Alan Greenspan left it all behind today and stepped down after 18 years as America's central banker.

SPOKESMAN:

I, Alan Greenspan —

ALAN GREENSPAN:

I, Alan Greenspan —

RAY SUAREZ:

Sworn in to office by President Ronald Reagan in 1987, Greenspan was charged with the task of keeping the nation's economy stable by adjusting interest rates.

He took over for Paul Volcker who won praise for taming run-away inflation in the early '80s.

Greenspan was not academically trained as an economist but had served as chairman of Gerald Ford's Council of Economic Advisors and on President Reagan's Social Security Commission. He was a private economic consultant when Reagan tapped him.

SPOKESMAN:

Five hundred –

RAY SUAREZ:

Just two months after Greenspan was sworn in, the stock market crashed on Oct. 19. The Dow Jones Industrial Average plummeted 508 1/3 points or 22.6 percent, its largest one-day drop since 1914.

Chairman Greenspan assured investors that the Fed would provide enough cash to keep the economy going, and it lowered interest rates with a rapid series of cuts. That response was credited with calming the markets and helping spur a recovery.

PRESIDENT BILL CLINTON:

Good morning.

RAY SUAREZ:

Greenspan served a total of five terms as Fed chairman under four presidents.

When President Clinton re-nominated Greenspan for a fourth term, the Fed chairman talked about why he liked his job.

ALAN GREENSPAN:

There's a certain really quite unimaginable intellectual interest that one gets from working in the context where you have to put broad theoretical and fairly complex conceptual issues to a test in the marketplace.

As I said to the president before, it's like eating peanuts. You keep doing it, keep doing it; and you never get tired because the future is always ultimately unknowable.

RAY SUAREZ:

During his tenure, Greenspan steered the Federal Reserve through financial crises that rocked Wall Street and threatened the U.S. and world economy, including the 1997 Asian currency crisis, the bursting of the dot-com bubble in 2000, and the terrorist attacks of Sept. 11, 2001, that paralyzed financial markets for days.

Over the years, the words of Fed Chairman Greenspan were regularly parsed and pored over, sifted and spun. "Greenspan-speak" was notoriously hard to understand.

ALAN GREENSPAN:

With the firming of monetary policy by the Federal Reserve widely expected, they built large short-term positions and long-term debt instruments in anticipation of the increase in bond yields.

RAY SUAREZ:

But nonetheless his words had dramatic and immediate impact.

In a famous 1996 speech, he questioned whether zealous investors had bid up the price of stocks to an unsustainable level.

ALAN GREENSPAN:

How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?

RAY SUAREZ:

The speech sent markets around the world tumbling.

Under Greenspan's watch, the American economy experienced the two longest expansions ever recorded, interrupted only by two mild recessions. He presided over a decline in both inflation and unemployment.

Greenspan has also become a cultural phenomenon, achieving near rock star status among some with his image gracing countless magazine covers over the years as well as canvases; larger-than-life portraits of the Fed chairman have been drawing crowds and about $2,000 apiece at a New York Gallery. Greenspan has even inspired a country song.

SINGING:

Only in God and Alan Greenspan we trust.

RAY SUAREZ:

Last year President Bush awarded him the presidential Medal of Freedom. The 79-year-old Greenspan reportedly has plans to open an economic consulting firm in Washington.

PRESIDENT GEORGE W. BUSH (addressing Ben Bernanke):

Ben, thanks for serving.

RAY SUAREZ:

His successor, Ben Bernanke, officially takes over at 12:01 tomorrow morning.

RAY SUAREZ:

For more on both Alan Greenspan the central banker and Greenspan the pop culture phenomenon we turn to Irwin Stelzer, director of economic policy studies at the Hudson Institute and contributing editor to The Weekly Standard; James Galbraith, a professor of public policy at the University of Texas at Austin; and Paul Levinson, chair of the Department of Communications and Media Studies at Fordham University.

And, Irwin Stelzer, let's start with you. If we look at Greenspan by the numbers, how do we assess his time in office?

IRWIN STELZER:

I guess you'd have to say phenomenally successful; if the proof of the pudding is in the eating we've seen 18 years of almost uninterrupted expansion with no inflation and we've seen a Fed chairman who has preserved the political integrity of the Fed and who has developed a new methodology of sort of looking forward and not being a prisoner of historic models.

So I think on almost all counts– he's not perfect– but on almost all counts you have to say this was an "A" operator of monetary policy.

RAY SUAREZ:

It's interesting that you say "new methodology" because a lot of the appreciations being written this week say that he had no hard-and-fast rules and that's what made him interesting.

IRWIN STELZER:

Well, he doesn't have hard-and-fast rules but, I mean, I've known Alan Greenspan when he was a consultant, and the notion that he relies on intuition is really not correct.

He relies on data sources from which he extracts information, data sources that other people ignore, freight car loadings I remember way back and things like that. And so what he's done is he has jumped beyond the historical models in two ways: First of all with new data that he gets. It's enormously useful. And second, by saying, wait a minute, the future won't replicate the past; that's how he predicted and acted on the productivity revolution that was not captured by past data.

So it's more than just intuition and no rules; it's the application of judgment to masses of data within a — an analytical framework that is not just random.

RAY SUAREZ:

Professor Galbraith, when you look at the numbers how do you see the Greenspan tenure?

JAMES GALBRAITH:

Well, I'm more critical in several respects, but tonight especially I want to salute him and underline his greatest achievement, which was in the late 1990s to ignore one of the hard-and-fast rules of the economics profession, which was that you couldn't push unemployment down below a certain value without having runaway inflation.

There were only a very small number of economists who thought that you could get unemployment lower, safely; Greenspan proved that we were right. And that was a great thing for the country. It's also something for which I'm professionally and personally grateful.

RAY SUAREZ:

When you say "proved," what did he do? What did he do and what was his job to do that showed that full employment could actually be a lower number without sparking inflation?

JAMES GALBRAITH:

He resisted pressure, which was coming from a great many very influential voices to start raising interest rates in 1996, 1997. He waited. He let the economy grow, and the economy proved that it could go to full employment without inflation.

RAY SUAREZ:

And you began by saying you're a little bit more critical but then you didn't mention why. What are the things that you were looking at?

JAMES GALBRAITH:

I think notwithstanding that, he has on several occasions been overly fearful about rising inflation. Inflation was really squeezed out of the system by the mid 1980s, but he raised interest rates in 1987 which set off that big stock market crash. He raised them in 1994, which really upset the early days of the Clinton administration. He raised them briefly in 1997, and that had an effect setting off the Asian crisis. He raised them in 2000.

And in the last year he's been raising them, the last year and a half or so. And I think that's largely misguided. You say that — one says that this is fighting inflation. But we don't have an inflation that's being generated by wages.

As your report said this evening, wages have not been keeping up with inflation. What little bit of inflation that we have, it's historically still a very low number, comes from energy and from the Iraq war. And that's not something for which monetary policy is an appropriate cure.

RAY SUAREZ:

Professor Levinson let me get you in here. This is the second longest period as Fed chairman in history. Has there ever been one whose name is as well known, who is recognizable on the evening news the way Alan Greenspan is?

PAUL LEVINSON:

No, definitely not. And part of that, of course, is the ubiquity now of media coverage, 24/7 cable, the Internet; that kind of coverage would make most people more famous than forty or fifty years ago.

But that said, there are a lot of things that Alan Greenspan had and has going which made him unique. He certainly has something of the philosopher-king about him.

In fact, he was a disciple of the philosopher Ayn Rand. And in his early years Alan Greenspan helped research one of Rand's most important books, "Atlas Shrugged." And he actually brought that philosophy and that flare into his work as chair of the Federal Reserve.

He also, I think, captured something that Henry Kissinger knew well. Kissinger said power is the ultimate aphrodisiac. And I think Greenspan projected that kind of power.

PAUL LEVINSON:

And the fact that he was in office much longer than any secretary of state, in fact only a Supreme Court justice could be in office longer than Greenspan, that increased his mystique as well, and he almost had a McLuhanesque, a Marshall McLuhanesque sense of phrasing. We saw the irrational exuberance. He talked about the real estate market being frothy.

His language was not completely comprehensible but it was always appealing and attractive and it invited public discussion.

Finally, I think his marriage to Andrea Mitchell certainly didn't hurt. Arthur Miller, when he stole Marilyn Monroe away from Joe DiMaggio, showed that even the nerd can sometimes, you know, get the beautiful woman.

And I think that Greenspan and Andrea Mitchell make a sort of Arthur Miller/Marilyn Monroeesque couple although neither of them, of course, look precisely like Miller and Marilyn Monroe.

RAY SUAREZ:

You mentioned the now ubiquitous availability of news and cite some of the Greenspan popularity there, but could it also be that the average person on the street is more likely to have a little position in a mutual fund, in a company savings plan, maybe be looking to refinance in a way that perhaps a generation ago they might have stuck with the same mortgage for their whole time in the house?

PAUL LEVINSON:

I think that's definitely a part of it. And, of course, the Internet is a part of that with day trading and the ease with which people can now invest. I think the two played hand in hand. The easier it is for the average person to invest, the more interested they are in what Greenspan is doing.

I think though, in fact, few people understand what the Federal Reserve does. I think the average person, the average highly intelligent person, in fact, really doesn't understand how it is that when the interest rate is lowered, people have more money in their pockets; investors have more money to put into various projects.

And I think the nuts and bolts of what Greenspan did were not the thing that made him interesting. It was more the way in which he did it, the sort of Wizard of Oz, behind-the-curtain, pulling the strings and having this enormous impact on our economic lives.

RAY SUAREZ:

Well, Irwin Stelzer, this is ideally supposed to be a nonpartisan job, even though they're appointed by an elected official. How was Greenspan as a political operator and when did it matter when you're Federal Reserve chairman to be one?

IRWIN STELZER:

Well, I think he showed his independence by attacking both the administration and the Congress for their very poor record in controlling spending. This didn't appeal to anybody.

I think his support of the president's tax cuts were because he supports tax cuts. It wouldn't have mattered what president it was. He is for smaller government as a matter.

I think there's a real question of whether you want the Fed chairman to involve himself in these kinds of policy issues beyond strictly setting interest rates and so on. I think the answer to that is yes, because all of these things impinge on what the chairman can do in setting monetary policy.

RAY SUAREZ:

He got rapped pretty heavily for coming out in favor of the Bush tax cuts at the beginning of the Bush administration. But you're sure that didn't taint him or question his independence politically?

IRWIN STELZER:

I don't think so. I mean, I think he demonstrated his independence by repeatedly attacking the spending programs that the president has signed off on, never willing to veto, and the Congress keeps passing. So that wasn't going to win him friends on Capitol Hill or in the White House.

The tax position is his position. It's been his position for years. And when asked it, I think he had an obligation to state it because obviously he's interested in deficits because deficits constrain monetary policy. And as he saw it, the tax cuts were right; the spending was wrong; and he said so.

RAY SUAREZ:

Professor Galbraith, do you think the Fed chairman maintained his political neutrality throughout his 18 years on the job?

JAMES GALBRAITH:

No, I think it fell off quite a bit in the last five years. On the tax cuts, he spoke in their favor against his own private better judgment, which he shared with Treasury Secretary Paul O'Neil at the time.

JAMES GALBRAITH:

I think that's always a dangerous thing to do, if you're the chairman of the Federal Reserve from the standpoint of your long-term reputation, and coming out in support of the president's very ill-advised Social Security privatization scheme, he brought the Federal Reserve into the middle or he brought himself into the middle of the deeply divisive and partisan issue. And that too I think was ill advised.

I think that on those instances with spending political capital that he had accumulated over many years but he did spend it down quite a bit by taking those two steps.

RAY SUAREZ:

But, Professor, at the same time looking at Social Security, wasn't he also one of the intellectual godfathers of the adjustments during the Reagan years that got Social Security solvent for the next generation?

JAMES GALBRAITH:

All the more reason why he should not have turned around and endorsed a scheme that was based upon the false premise that Social Security was about to go insolvent again because it is not.

RAY SUAREZ:

And what about his pre-Fed time, Professor? He's also credited with, for instance, helping pull back his hometown, New York, from the brink of bankruptcy.

JAMES GALBRAITH:

Oh, I was involved in the New York City bailout as a very young staff member for the House Banking Committee. That was largely accomplished by the work of the leadership of New York and the congressional leadership, Gov. Kerry and the congressional leadership at the time.

The Ford administration's role was really very ambivalent. You remember the famous daily news headline "Ford to City, Drop Dead." Greenspan may have been playing a role behind the scenes in getting the Ford administration to come along on that, and, if so, more credit to him. But he wasn't the central player.

RAY SUAREZ:

Professor, guests, thank you all.