Happy Trails, Alan

As Fed chair Greenspan gets set to ride off into the sunset, economists look back at his tenure

By Paul R. La Monica, CNNMoney.com senior writer
January 17, 2006: 12:45 PM EST



NEW YORK (CNNMoney.com) - What do Alan Greenspan and Muhammad Ali have in common?

Many observers say the two men are the greatest of all time in their respective professions.

Greenspan's tenure as chairman of the Federal Reserve comes to a close at the end of this month and economists looking back at his 18-plus years as the head of the central bank almost uniformly say Greenspan did a more than admirable job.

During a presentation at a prestigious economic conference in Jackson Hole, Wyo., last year, Princeton economists Ricardo Reis and Alan Blinder said that Greenspan "has a legitimate claim to being the greatest central banker that has ever lived."

Lyle Gramley, a former Fed governor and now a senior economic adviser with the Stanford Washington Research Group, said he agreed with that assessment. He noted that Greenspan has been able to keep inflation in check through periodic interest rate hikes but that he was able to do so without causing any major dents in job growth.

"Greenspan brought down inflation and restored price stability and did so in the context of an economy that is quite close to full employment," Gramley said.

"He was one of the first economists in the country to recognize the historic gains in productivity in the mid-90s and was able to persuade colleagues to follow more accommodative monetary policy as a result," he added.

Superb crisis management
Greenspan had to deal with numerous financial problems during his tenure as well, and Christian Stracke, fixed income strategist with research firm CreditSights, said the chairman's handling of them, particularly his first major challenge, is what most will remember him for.

"Where the credit is really due is in the early part of Greenspan's tenure: being faced with the aftershocks of the Wall Street crash in 1987 and dealing with that quite well," Stracke said. "He confronted some very serious potential crises and got us to a point where we avoided them and are better off than we might have been otherwise."

In addition to the '87 crash, Greenspan had to manage monetary policy through two Gulf wars, a savings and loan crisis in the early 1990s, the collapse of hedge fund Long-Term Capital Management and the Sept. 11 terrorist attacks.

With all that in mind, David Kelly, senior economic adviser with Putnam Investments, a money management firm based in Boston, noted that the fact that were only two significant economic slowdowns (1990-1991 and 2001) during Greenspan's tenure is remarkable.

"Two recessions in more than eighteen years is not a bad E.R.A. -- earned recession average," Kelly said. "The bottom line is he did a very good job as Fed chairman."

In addition to his crisis management skills, another noteworthy hallmark of Greenspan's tenure is the increased openness of the Fed in recent years.

It wasn't standard practice until May 1999 for the Fed to release a statement after meetings of its policy-makers. And more recently, the Fed started releasing minutes from those gatherings just three weeks after the latest meeting. The market previously had to wait six weeks.

"When you look back to what we had before Greenspan, we had a Fed that was much more controlled with information," said Bill Davison, managing director of fixed income at Hartford Investment Management. "He brought so much transparency to the job."

Too open and less than perfect on rates?
Despite the generally high marks, even Greenspan's admirers note some shortcomings in his performance.

Putnam's Kelly, for example, said that the Fed's increased openness has not always been a good thing.

He argued that too much information has often caused the financial markets to misinterpret the Fed and noted that Greenspan should have been tougher on fellow board members who often went on television or made speeches that hinted at future Fed policy.

"There is a difference between transparency and clarity. You can put everything out there and have a full airing of different opinions," Kelly said. "But sometimes there is too much emphasis on the Fed's deliberations rather than its conclusions and that confuses things."

Greenspan's monetary policy decisions haven't been perfect either, Stracke at CreditSights said. He argues that aggressive interest rates hikes led to the recession in 1990 and 1991.

Stracke also said that despite Greenspan's tough talk about stock market valuations -- the infamous "irrational exuberance" comment from 1996 – the Fed may have made matters worse by cutting rates too much in the wake of the Long-Term Capital Management meltdown.

"There is some question as to whether the Fed left monetary policy too accommodative in 1998 and whether that fed the bubble and led to them then having to maybe raise rates more than they otherwise wanted in 2000," Stracke said.

To that end, Hartford's Davison said the jury is still out on whether the Fed's slashing of short-term rates in 2001 and 2002 may have led to a real estate bubble similar to the stock market bubble of the late 1990s.

What's more, the current round of interest rate hikes, started by Greenspan in June 2004, may wind up going too far and hurting the economy.

Still, Stracke conceded that most nitpicking of Greenspan's record is minor.

"All of this is Monday morning quarterbacking. If you or I were in there we'd probably have done a much worse job," Stracke said. "His great legacy was his pragmatism. He was cautious."

Kelly added that his complaints about the Fed's openness are small issues and that Greenspan's successor, Ben Bernanke, will certainly have a tough act to follow.

"America has been extraordinarily fortunate to have this man as Fed chairman," he said.