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Get Four
|  | JANUARY 31, 2006
By Michael Wallace Greenspan's Legacy of Substance and StyleConcise when it suited him and artfully opaque when it didn't, his prescience, record, and stewardship of the Federal Reserve make for a hard act to followJust a month away from his 80th birthday, Alan Greenspan will be retiring as Federal Reserve Chairman on Jan. 31, following the final Federal Open Market Committee (FOMC) meeting of his storied career. The Fed chief has presided over two of the three longest economic expansions in U.S. history. Yet his legacy as a champion of economic growth may be matched only by his legendary phrase-making. A statement from Greenspan early in his career was one part jest and one part prophecy: "If I seem unduly clear to you, you must have misunderstood what I said." Aside from his astute management of the U.S. economy in the nearly 19 years since his first term began on Aug. 11, 1987, Greenspan is likely to be remembered foremost for his refinement of "Fedspeak" to a rhetorical art form. Well aware of the gravity of his words on the U.S. and global stages, he moved nimbly between sublime clarity and maddening obfuscation, which -- along with his bottle-thick glasses -- scarcely concealed his wry sense of humor. In a greater sense, both his substance and style will be his most enduring legacy, which will likely provide a stark contrast with his the painful sincerity, transparency, and plain-speaking style of his designated successor, Ben Bernanke. BRANCHING OUT. In his public appearances, Greenspan fully embodied the Fed, though he was supported by an army of highly qualified policy makers, economists, researchers, statisticians, and bankers. His ability to patiently foil and parry with Congress in testimony, and come up with deceptively simple sound bites and phrases that resonated with the public well past their introduction, made the chairman near-omniscient in some quarters. When he saw fit, he would cultivate this aura to make pronouncements on the stock market, housing, fiscal policy, protectionism, taxation, and many other issues generally beyond the scope of his monetary policy beat. In contrast, Bernanke, who is expected to take over the chairmanship on Feb. 1, has vowed to stray as little as possible from his main policy mandate. This apparent hubris earned Greenspan as many foes as friends, though he arguably managed to avoid overreaching his mandate without overly politicizing his views. Ironically, he would readily admit his lack of control over these other areas (the Fed does not target asset prices), while effectively embodying a sort of economic barometer or conscience for the nation. WAY WITH WORDS. As a student of human nature, the Fed chief was never shy about sharing his insights into the national psyche, whether appropriate or not. Who can forget some of his most telling phrases: "infectious greed" (corporate governance scandals), "signs of froth" (rapidly appreciating housing prices), "soft patch" (an unexpectedly weak interval of economic growth), "conundrum" (the fact that long-term rates remained low despite rate hikes), "irrational exuberance" (stratospheric equity valuations), "productivity paradigm" (the Fed chief's acknowledgement of the New Economy," and "measured pace" (the FOMC's steady drip-feed of rate hikes), to name a few. Many were on the mark, some wide, others premature. Yet he seemed to be able to distill and capture the economic climate like no other before him, or likely after. In a sense, his special insights as an economic seer gave him license to operate in a mode of a "risk manager," because only "the Maestro" could divine so well the secrets of mankind's economic self-interest. This allowed pundits to forgive him for such odd blunders as emphasizing the cost effectiveness of adjustable rate mortgages at a time when market yields hit historical lows. This encouraged household leverage and arguably extended the housing boom, only to subsequently warn of "some signs of froth in the housing sector in some local markets" and abandon his endorsement after short-yields jumped over 3% against ARM holders. Critics might also accuse him of hypocrisy. He also famously uttered his "irrational exuberance" comment in 1996 at the cusp of what proved to be a broad and sustained U.S. stock market rally, only to gradually shift his focus to the positive implications of the "new economy" for the stock market as valuations reached a cyclical peak in 2000. TROUBLE AVERTED. Perceptions of Greenspan's exceptional capacity to micromanage the business cycle may not stand the test of time either. The chairman's "edits" to the policy path, to the extent we can distinguish his views from those of other policymakers and Fedwatchers in the financial markets, included apparent preferences to steer rates higher in 1987, 1994, 1997, and 2001, while holding rates down in 1988, 1996, 1998, and 2002. The spin in each case, on the margin, was ill-timed from a business cycle perspective. But Greenspan's primary strength as Fed chairman was his ability to avoid or mitigate crises, which he did exceptionally well, even though such actions may have worked at odds with efforts to steer the business cycle. His skills were tested with the 1987 stock market collapse, the 1998 triple whammy of long-term capital management, Russian default, and Asian financial crisis, Y2K liquidity worries, the Internet bubble, the Sept. 11 terrorist attacks, corporate governance scandals, and fears that disinflation would give way to deflation, among others. In these cases, Greenspan acted decisively to ensure that the financial cancers were cut out without killing the patient, injecting liquidity post-haste and slowly draining it as the global economy bounced back. If he successfully avoided major financial dislocations at the price of some excessive rate cuts on a few occasions, the price paid was certainly worth the benefits received. SPEAKING UP? In retirement, Greenspan's plans include a consulting firm in Washington, D.C. He also expects to continue to give speeches and write a book, according to people familiar with the matter. The most intriguing aspect of his transition back to the private sector will be one of style; will he become more frank and forthright in his analysis, or will he remain his old inscrutable self? It may be a question of what clients are willing to pay for, as an endorsement from Greenspan will still carry some weight, and he is not likely to readily dilute it. Will we finally get to hear what he really thinks? His publishers and accountants must certainly hope so. The new chairman, Ben Bernanke, is likely to differ from Greenspan in many important respects. Rather than obfuscation and jargon, transparency and plain-speaking are likely to be the hallmarks of Bernanke's Fed stewardship, judging by his written testimony and Senate confirmation hearings. In his own way, Bernanke is uniquely qualified for the post, but more on the shoulders of his academic and government service credentials than his private-sector experience. NO REPLACING HIM. Bernanke has said up front that he is likely to be less outspoken on issues unrelated to monetary policy than his predecessor, and has been keen to steer clear of partisan minefields on taxes, the budget deficit, and foreign financing of the current account gap. As he becomes more comfortable in his role, he is likely to have a more consensual management approach, and even allow his own self-deprecating sense of humor to emerge on occasion. He has emphasized that he would scrupulously maintain the Fed's political independence, and there is little doubt that he will. The incoming Fed chief has said that any new ideas he brought to the Fed would be more of an attempt to "institutionalize" Greenspan's successes before him, acknowledging his predecessor's special leadership qualities and setting himself apart more as a manager than a guru. Bernanke has also struck the right chord of humility in drawing on the strengths of the committed Fed staff, which speaks to his preference for consensus-building and harnessing the strengths of the institution from within. He has also appropriately has thanked Greenspan for his "collegiality and support" when he served as a board member, concluding presciently that "one may aspire to succeed Chairman Greenspan, but it will not be possible to replace him."  Wallace is global investment strategist for Action Economics
BW MALL
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