It's Not His Economy

By Justin Fox

He has been out of office for more than a year and a half now--and has spent, by his own account, a notable amount of that time in the bathtub. Yet many Americans still want to believe that Alan Greenspan is in charge of the economy.

In olden times, mainly the late 1990s, faith in Greenspan's omnipotence was expressed almost exclusively in positive terms. He was the "maestro," as Bob Woodward dubbed him in a best-selling book; the senior member of the "Committee to Save the World," as this magazine put it in a 1999 cover story; the Federal Reserve chairman who didn't just preside over the longest economic expansion in U.S. history but also was credited with somehow willing it to happen.

Since that long boom ended in 2001, though, griping and whining have been ascendant. Greenspan was a bubble blower, the main criticism goes, a man whose lax monetary policies encouraged excess and speculation. What's more, he failed to thwart George W. Bush's demolition of the budget surpluses built up in the Clinton years. These complaints were steadily gaining in volume, thanks to the collapse of a mortgage-lending boom that began on Greenspan's watch, when the man jumped into the fray in mid-September with The Age of Turbulence, a new book about his life, and a barrage of media interviews to promote it.

So is Alan Greenspan really the root of all economic evil? Uh, no. By general agreement, the main jobs of the Federal Reserve are to halt financial panics before they spiral into depressions and to keep inflation from getting out of hand. The Fed has failed miserably at each of these tasks once--depression prevention in the early 1930s and inflation prevention in the 1970s. Under Greenspan, it took care of both pretty well. Brad DeLong of the University of California, Berkeley, an economist with no particular loyalty to the former maestro, estimates that of 36 significant interest-rate decisions during Greenspan's 18-year tenure, the chairman got 35 right. (The exception? DeLong thinks the Fed should have cut rates in late 2000.)

Greenspan is the first to proclaim that his job was made dramatically easier by the fall of the Berlin Wall, the technology-fueled transformation of global business and the long decline in the price of oil and other commodities. He was not a magician, just a very competent central-bank chief with a knack for being in the right place at the right time (not only at the Fed: as a young man, he studied music alongside future saxophone great Stan Getz, learned statistics from the guy who devised the Index of Leading Economic Indicators and thought his first deep thoughts at the personal prodding of philosopher-novelist Ayn Rand).

The very success of the Greenspan years at the Fed, though, created a new set of problems. One was that investors and lenders, convinced that inflation and depression were no longer serious threats--and that the chairman would bail them out of any trouble they stumbled into--became heedless of risk. This has added a hard-to-master new responsibility to the job description of Fed chairman: restrainer of financial-market euphoria. But again, it's the product of success.

More troubling was the elevation of Greenspan to all-purpose economic guru, which he seemed to welcome. His incomprehensible pronouncements about monetary policy weren't a problem; his perfectly comprehensible comments about matters not directly related to Fed policy were.

Consider what happened five days into the Bush presidency in 2001 when the spending-averse Greenspan told a Senate committee that government surpluses were getting so huge, a tax cut was probably a good idea. Given the state of knowledge at the time, this wasn't an unreasonable argument--and when the surpluses became deficits, Greenspan changed his tune. But Democratic critics said his words provided cover for the President and Congress to squander the fruits of a decade of fiscal responsibility in months. While this exaggerates Greenspan's influence, it isn't entirely wrong, and Greenspan admits as much in his book.

Another such problematic comment came in 2004, when he pointed out that many borrowers could save money by taking out adjustable-rate mortgages (ARMS). Many borrowers did save money with ARMs, and the idea that a few words from Greenspan at a credit-union meeting persuaded millions of others to take out teaser-rate loans they couldn't afford stretches belief. But with ARM-related defaults on the rise, it doesn't look good.

Greenspan successor Ben Bernanke has learned from this and doesn't talk about anything but monetary policy in public. The rest of us, meanwhile, may want to work on weaning ourselves off the infantile belief that everything that happens in our economy, good or bad, is the doing of the Fed chairman.