Alan Greenspan may be the only man who is more interesting than the Dos Equis guy – “who could speak French in Russian…”
Mr. Greenspan just passed away, after making an enormous mark on the world.
He was nominated by Reagan to be the Fed Chair in 1987, and he served for almost 19 years until early 2006.
He was born in 1926 in NYC, when the Fed was still a baby, and antibiotics, transistors, atomic energy, computers, chips, jet travel, space travel, cell phones, and the internet were mere pipe dreams.
He was a very accomplished clarinet and saxophone player who toured with a jazz band before becoming an economist.
He studied economics in the early 1950s under future Fed Chair Arthur Burns – who oversaw the 1970s inflationary disaster.
He was a disciple and close friend of Ayn Rand, the author of Atlas Shrugged (the famous pro-capitalism book that disdained the kind of central planning that Greenspan’s Fed ultimately embraced to some extent).
And, he was married to the famous NBC reporter, Andrea Mitchell, for decades, while playing the role of one of the most powerful men in the world.
The entire world hung on every word Mr. Greenspan spoke because the Fed became far too powerful and influential during his tenure.
Mr. Greenspan oversaw numerous financial crises:
- Black Monday (October 1987) — the stock market crashed ~22.6% in a single day, just two months into his chairmanship. His response set the template: flood the system with liquidity, issue a one-line pledge to backstop it.
- The Savings & Loan crisis (late 1980s–early ’90s) — he inherited it and presided over the worst of it. Hundreds of thrifts failed; the RTC cleanup and the resulting credit crunch fed straight into the next item.
- The 1990–91 recession and Gulf War oil shock — Iraq’s invasion of Kuwait spiked oil, the S&L fallout choked credit, and he eased aggressively, taking the Fed Funds Rate down to 3%.
- The 1994 bond market massacre — largely self-inflicted. His rapid tightening from 3% to 6% torched the bond market, bankrupted Orange County, and blew up derivatives books at the likes of Procter & Gamble.
- The Mexican peso / “Tequila” crisis (1994–95) — the peso devaluation and capital flight, partly downstream of those ’94 hikes, prompted a roughly $50 billion U.S.-led rescue.
- The Asian financial crisis (1997) — the Thai baht’s collapse cascaded through Indonesia, South Korea, and the region, with global contagion.
- The Russian default and LTCM collapse (1998) — the one we dug into: three quick rate cuts and the NY Fed-orchestrated private recapitalization.
- The Y2K liquidity scare (late 1999) — a preemptive flood of liquidity over millennium-bug fears, which arguably poured fuel on the final dot-com melt-up.
- The dot-com bust (2000–2002) — the NASDAQ fell roughly 78% from its March 2000 peak. He slashed rates from 6.5% to 1%, the most aggressive easing of his career.
- 9/11 and its economic aftermath (2001) — markets shut for days; the Fed pumped in massive liquidity and cut rates, compounding an already-underway recession.
- The corporate accounting scandals (2001–02) — Enron, then WorldCom and others, a crisis of market confidence that produced Sarbanes-Oxley.
His solution for every crisis was more Fed cowbell, aka lowering rates… a lot!
He earned the nickname “Maestro” because of his ostensible ability to orchestrate a strong economy.
But critics argue that any Fed Chair could have just lowered rates and pushed for bailouts – with similar results – because pumping money into an economy often stimulates growth.
Other Fed Chairs did not do so as aggressively as Greenspan, though, because they were afraid of the inflation that results from such policies.
Greenspan, however, got very lucky and avoided inflation because he was able to ride the productivity waves resulting from the internet, improved computing power, plunging energy prices, and cheaper overseas production.
In other words, monetary inflation was offset by the ability to produce goods and services at much lower cost, thanks to new technology, cheap oil, and China.
But for those factors, Greenspan could well have been Arthur Burns 2.0.
So, in other other words, Greenspan and the Fed got credit for economic improvements that should have been attributed to the private sector.
And worse, Greenspan became so convinced of his ability to “orchestrate” growth with lower rates that he kept rates way too low for far too long in the early 2000s, helping to foster the 2008 financial crisis.
What Are the Repercussions of Greenspan’s “Maestro-Ism”
- Expecting A “Fed Put”: Investors worldwide now expect the Fed to come to the rescue every time there is a crisis. This often results in inflation, rising asset prices, and – more inequality (non-asset holders get killed by inflation while asset holders get richer).
- Propping Up Zombie Companies: When companies that could not otherwise survive are continually propped up by an ability to borrow at very low rates (zombie companies), economies grow much more slowly than they might otherwise grow. And severe financial crises ultimately ensue.
I know this because we have been watching this unfold for 30 years in Japan, where living standards flatlined years ago, there are few startups, and they now face a severe currency crisis that will not end well. America is on a path to become Japan 2.0.
- Economy reliant on Fed policy instead of old-fashioned opportunity: Our economy becomes overly financialized and suffers when it relies on Fed policy rather than on old-fashioned business investment and startup ideas.
Hopefully, the new Fed Chair will be less interventionist than Mr. Greenspan and his successors.
But, interestingly, the Maestro is dead, but the new Fed Chair, Kevin Warsh, is playing the same tune – hoping that productivity improvements from AI will offset the inflation that will come from bad Fed and government policy.
So, the private sector may well bail out the Fed again. And the Fed may well take full credit for the private sector’s efforts again.
