The Chairman's Mystique
The paradox of Alan Greenspan's achievement as he leaves office today after 18 years as Chairman of the Federal Reserve is that nearly everyone is praising his performance but no one seems to know exactly how he did it. He bequeaths to successor Ben Bernanke a record but not a method -- which means we all have to see if the new guy has the same juggling skills.</br></br>As no less an authority than Milton Friedman notes nearby, this monetary eclecticism hasn't detracted from Mr. Greenspan's historical accomplishment. With a blip or two along the way, he has continued the progress toward price stability begun at the Fed under Paul Volcker. He also steered the economy through or around more than one major crisis, including the stock market crash of 1987 and the savings and loan debacle of a couple of years later.</br></br>We'd give Mr. Greenspan less credit than the conventional wisdom does for his handling of the foreign-exchange crises of the 1990s. His willingness to join Robert Rubin in bailing out Mexico's foreign-debt holders in 1994 accentuated the moral hazard that led to the Asian and Russian crises later that decade. The Bush Administration's change of policy in refusing to bail out such global deadbeats as Argentina has done more to limit currency crises than those episodes did.</br></br>On the other hand, Mr. Greenspan deserves more praise than he typically receives for his stewardship over financial markets. He has tried to demystify the widespread use of credit derivatives, which have helped financial institutions diversify their risk. One happy result is fewer bank failures than in previous recessions or periods of rising interest rates. This Greenspan contribution will be especially missed, since no one else has the same stature to counter the misguided fears tossed around by Warren Buffett and other media favorites.</br></br>Another misguided critique of the Greenspan era is the recent preoccupation with "global imbalances." This is an updated version of the 1980s' alarums over the U.S. "twin deficits," in the trade account and federal budget. The fear now as then is that the trade deficit in particular is "unsustainable," and that it will lead to a crash in the dollar and thus in the global economy. The conventional wisdom's proffered cure, now as then, is a major U.S. tax increase.