Toting Up the Greenspan Legacy


By Rich Miller In his 18 years atop the Federal Reserve, central bank Chairman Alan Greenspan has never found it easy to admit to making a mistake. Whether it be in his managing of the economy or his handling of the financial markets, the 79-year-old monetary maven is usually quick to defend his record as America's second-longest-serving Federal Reserve chief. That's why it was so unusual when he acknowledged in a speech last year that the central bank may have erred in keeping monetary policy too loose following the 1987 stock market crash.

Now, as Greenspan and his fellow central bankers prepare for their annual confab at picturesque Jackson Hole, Wyo., starting with a dinner on the evening of Aug. 25, some economists -- both outside and inside the Fed -- are wondering whether the nation's premier economic policymaker didn't make the same mistake again in the wake of the stock market bubble bursting in 2000.

DAY OF RECKONING? Fearful that the U.S. would suffer the same fate as post-bubble Japan and sink into a deflationary abyss, Greenspan cut short-term interest rates to a 45-year low of 1% in the summer of 2003 and kept them there for a year before gradually starting to raise them back up. The cheap credit did the trick in helping to revive the economy following the shock of the September 11 terrorist attacks.

But in the process, the easy money helped pump up house prices to levels that even Greenspan now admits look frothy in some parts of the country. The rock-bottom rates also contributed to a widening of what the Fed chief had already called an unsustainably large U.S. trade deficit by spurring consumer spending and boosting demand for imports.

Concerns about those imbalances, however, are likely to take a back seat to paeans of praise in the foothills of the Grand Tetons for the departing Fed chairman, who's slated to step down as head of the central bank early in 2006. The theme of the Kansas City Fed's three-day conference -- "The Greenspan Era: Lessons for the Future" -- should lend itself easily to such congratulatory chatter.

TRICKY NAVIGATING. Greenspan himself will kick off the formal proceedings on Aug. 26 with his reflections on his years at the Fed. Other speakers at the elite get-together include former Fed Vice-Chairman Alan Blinder and ex-Treasury Secretary Robert Rubin, both of whom have expressed admiration in the past for the job Greenspan has done at the Fed.

Still, Greenspan's legacy will at least be partly determined by how the economy holds up as the housing market cools down and the trade deficit crests and heads lower. If the expansion stays on track, then Greenspan's reputation as one of America's better central bankers -- if not the best one -- seems assured. But if a steep decline in house prices or a dollar nosedive cripples the economy in the coming months, then history won't judge him so kindly.

In some ways, then, Greenspan's fate rests in the hands of his successor and how the next Fed chief handles the unwinding of the housing boom and the trade imbalance. That, perhaps, is fitting. After all, it was Greenspan's successful effort in the early days of his chairmanship to shelter the economy from the fallout of the 1987 market crash -- an effort he now thinks may have gone on too long -- that helped cement the reputation of his predecessor, Paul Volcker, as a premier Fed policymaker. The outgoing Fed chief can only hope his successor serves him as well.

Miller is a senior correspondent in BusinessWeek's Washington bureau


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