Alan Greenspan, Who Led Fed During Boom Before 2008 Bust, Dies at 100

In a 1996 speech, Greenspan posed a rhetorical question: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” Investors fixed on the phrase “irrational exuberance” and sent stocks briefly lower before they shot higher still. The phrase became part of the national lexicon a few years later when pricey internet shares plunged.

Investors grew confident that Greenspan would deploy the tools at his disposal, including interest rates, to buoy the stock market during major declines. That idea — shorthanded as the “Greenspan put,” after the investing maneuver used to limit potential losses — was blamed for creating a moral hazard by making risky market behavior appear safer than it should be.

Prolonged Growth

Greenspan’s tenure was the second-longest for a Fed chief, behind that of William McChesney Martin Jr. It coincided with the steadiest period of economic growth since the central bank’s creation in 1913, a 10-year run between a recession that ended in March 1991 and another that began in March 2001. (The expansion of 2009-2020 would eclipse that mark.) The Standard & Poor’s 500 Index almost quadrupled during that stretch, while the US economy grew at an average annual pace of 3.5%. The jobless rate averaged 5.5% and touched 3.8% in April 2000, which at the time was the lowest level since 1969.

But financial pressures were building in the final years of Greenspan’s term.

Some homebuyers were approved for subprime mortgages they couldn’t afford. Others borrowed heavily against their home equity. Investment bankers packaged mortgage-backed loans into securities, and companies sold protection from defaults on that debt. The machine hummed along until its fuel — ever-rising home prices — finally ran out.

Transcripts from Fed policy meetings in 2005 showed that central bank staff and officials had identified a housing bubble. Greenspan judged that “whatever froth there is in the housing market is becoming contained at this stage, and it’s getting contained largely because mortgage rates have moved up and are beginning to have an impact.”

In mid-2007, lending among banks seized up, setting off events that culminated in the September 2008 bankruptcy of Lehman Brothers Holdings Inc. The crisis thrust the Fed and Greenspan’s successor as chairman, Ben Bernanke, into uncharted territory.

Long celebrated for his stewardship of the economy, Greenspan found himself in the unaccustomed position of fending off critics who said that his hands-off approach to financial markets and bubbles — specifically the one in housing that was inflating as he left office — had laid the groundwork for the worst economic meltdown since the Great Depression. By promoting a boom in productivity as a sign of a so-called new economy, Greenspan “aided and abetted the biggest stock-market bubble in the history of this country,” Paul Kasriel, a former Fed official then with Northern Trust Co. in Chicago, put it in 2010.

Greenspan had opposed increasing government regulation of the financial industry during his tenure. After the financial system’s near-collapse, he said in congressional testimony and speeches that regulators had “failed” and that the “once-in-a-century credit tsunami” showed that his free-market ideology may have been flawed. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told lawmakers in 2008.

In testimony to the congressionally appointed Financial Crisis Inquiry Commission, Greenspan said, “I was right 70% of the time, but I was wrong 30% of the time.”

In its final report, the commission said: “More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve Chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe.”

Portrayed as Culprit

The 2010 Academy Award-winning documentary Inside Job by Charles Ferguson portrayed Greenspan as a culprit of the financial crisis, due to his opposition to federal regulation of mortgage and derivative markets in the 1990s. Greenspan declined to be interviewed for the film.

Journalists got their hands on Greenspan’s 1977 Ph.D. thesis, which had disappeared from public records decades earlier, and reported with delight that Greenspan back then had espoused the libertarian view that the Fed’s “clear and inviolable duty” was “to avoid printing the money that fueled financial bubbles,” as Greenspan biographer Sebastian Mallaby wrote.

“Greenspan had been too lax on regulatory policy throughout most of his tenure, but it had not led to any disastrous consequences,” Alan Blinder, who served as Fed vice chairman under Greenspan from 1994 to 1996, said in a 2011 interview. “Once we got into the crisis, it did.”

Greenspan presented his defense in 2010 a 63-page paper titled The Crisis. In retrospect, he said, banks took too much risk and had too little capital to draw on when things went wrong. He rejected the notion that it was the Fed’s role to prevent a housing bubble by raising interest rates.

“At some rate, monetary policy can crush any bubble,” he wrote. “If not 6.5%, try 20%, or 50% for that matter. Any bubble can be crushed, but the state of prosperity will be an inevitable victim.”

Greenspan was born in the Washington Heights section of New York City on March 6, 1926. His father, Herbert, was a stockbroker. His mother, Rose, was a housewife. The couple divorced when Greenspan was in high school.

He said a love of baseball and its myriad statistics sparked an interest in mathematics. When he realized he couldn’t “hit a curve ball very well,” he turned to music, studying at the Juilliard School in New York. After two years he left to play clarinet and tenor saxophone with the Henry Jerome swing band, performing alongside saxophonist Stan Getz and earning $6 a week.

Greenspan began to read books about finance and economics between performances. He quit the band after one year to study business and economics at New York University, graduating in 1948 with a bachelor’s degree in economics. He continued with night classes for two more years to obtain a master’s degree, spending days working at the National Industrial Conference Board, which did privately funded research.

In 1950 he enrolled in a Ph.D. program at Columbia University, where his faculty adviser was Arthur F. Burns, who later became President Richard Nixon’s chief economic adviser and a Fed chairman. He wouldn’t complete his Ph.D. until two decades later, through NYU.

In 1952, Greenspan married Joan Mitchell, an art historian from Canada studying at NYU’s Institute of Fine Arts. Their marriage lasted just a year. He married Andrea Mitchell in 1997.

Through his first wife, Greenspan met Ayn Rand, the libertarian novelist and philosopher who espoused laissez-faire capitalism.

Almost immediately he became part of her inner circle of disciples, who gathered regularly in her Manhattan apartment. Greenspan said Rand’s influence helped direct his interest to “how fear, euphoria and herd behavior significantly affect modern economies.”

With William Townsend, an investment adviser whose firm was a member of the Conference Board, Greenspan in 1953 opened Townsend-Greenspan, an economic consulting business. When Townsend died in 1958, Greenspan became principal owner.

The firm earned a reputation for its accurate forecasts of the US economy, which were built on microeconomic data that others overlooked such as weekly statistics on freight-car loadings and the quarterly production of shipping containers and boxes. Greenspan said his first big economic forecast correctly foresaw a downturn that became the 1958 recession.

Moving onto the political stage in 1968, Greenspan become director of domestic policy research for Nixon, who was then the Republican presidential candidate. When Nixon won the general election, Greenspan served on the transition team, focusing on budget and trade issues. He declined a job in Washington, remaining an informal adviser.

Nixon and Ford

He became chairman of the Council of Economic Advisers in 1974, serving under Nixon and President Gerald R. Ford. Learning how to be politically circumspect took time. Responding to an assertion that mothers on welfare had suffered the most in the mid-1970s recession, Greenspan said stockbrokers had the biggest loss of income in percentage terms. Although the statistic was accurate, he was pilloried, as was the Ford administration.

Greenspan became adept at maneuvering in official Washington. In December 1981, Reagan named him chairman of a bipartisan commission tasked with studying reform of the Social Security system. Just over a year later, with Greenspan playing a mediating role between the demands of Congress and the White House, the commission coalesced around a series of adjustments to extend the system’s solvency into the 1990s.

Greenspan lent his name and a slice of his time in 1984 to a startup investment company in New York, Greenspan-O’Neil Associates. It lasted only about two years.

Later in 1984, the California banker Charles Keating hired Greenspan to write a brief and letters to Congress in defense of his plan to diversify the activities of his depository institution, Lincoln Savings & Loan. In one letter, Greenspan vouched for Lincoln as “a financially strong institution” with “a long and continuous track record of outstanding success in making sound and profitable direct investments.”

Within a few years, Lincoln collapsed under the weight of bad real estate loans at a cost of $3.4 billion to taxpayers. Keating was convicted of 17 counts of securities fraud in California in 1991 and 73 federal counts of fraud, racketeering and conspiracy two years later, and went to jail.

“Of course I’m embarrassed by my failure to foresee what eventually transpired” with Lincoln, Greenspan told the New York Times in 1989.

When Greenspan became Fed chairman in 1987 — appointed by President Ronald Reagan, who called him “an economist’s economist, one of the most widely respected men in your field” — it was unclear whether he could match the success of his predecessor, Paul Volcker, who had tamed the high inflation that plagued the US during the 1970s and early 1980s.

Greenspan inherited an inflation rate of 4.4% in 1987. During his tenure, the average annual increase in the consumer price index was about 3%.

He also steered the economy through multiple crises.

He pumped out money to help the economy rebound from a stock-market crash in October 1987. He put off a planned increase in interest rates after the 1997 Asian financial crisis. He cut rates following a Russian debt default in 1998. And he helped develop a $3.5 billion bailout plan for failed US hedge fund Long-Term Capital Management that same year.

President George H.W. Bush, Reagan’s vice president and successor, blamed Greenspan for his failure to win a second term in 1992, saying the Fed had been too slow to cut interest rates at the start of the 1991 recession. Nonetheless, Bush reappointed Greenspan in mid-1991, though only after a delay that Republican officials said was meant to teach Greenspan a lesson. He and Bush remained on the outs for years.

President Bill Clinton nominated Greenspan to his third and fourth four-terms. President George W. Bush — despite his father’s sore feelings — nominated Greenspan to his fifth and final term in 2004.

Less Secrecy

One of Greenspan’s lasting marks on the Fed was eliminating some of its secrecy. Starting in early 1994, the FOMC began announcing policy changes on the day of its meetings and including reasons for those decisions that often held hints about future policy plans.

Another part of Greenspan’s legacy was his recognition, earlier than most analysts, of a fundamental change in the US economy.

As growth accelerated in the mid-1990s, many economists wanted the Fed to raise interest rates to keep prices from soaring. Greenspan let the boom continue. He argued that advances in technology had pushed the US into a new era of productivity growth that would absorb higher labor costs and enable the economy to expand at a much faster pace without rekindling inflation.

Greenspan noticed the pickup in US productivity as early as March 1994. He did so in his characteristic way, looking at narrow sets of data, in this case commodity prices, wages and credit demand, and asked why they didn’t conform to the usual pattern of an expanding economy. Commodity prices were rising while overall inflation wasn’t accelerating.

“We have an economy that doesn’t look like anything that we have experienced in the past 30 years,” Greenspan told Fed policy makers, according to transcripts of a 1994 meeting. “It may very well be that we are getting extraordinary productivity increases that are keeping unit labor costs down.”

When the economy’s long boom finally became undeniably overheated, Greenspan proved he was adept at cooling things down as well. Under his leadership, the Fed doubled interest rates to 6% to ease inflation, then eased them three times in 1995 — ushering in a new growth cycle without causing a recession first. That ideal scenario is what economists call a soft landing, and Greenspan called it “one of the Fed’s proudest accomplishments during my tenure.”

‘Imperial’ Chairman

Beyond the salutary impact on the US economy, this successful wrestling of inflation in the mid-1990s helped establish Greenspan’s unquestioned supremacy over monetary policy — with implications for years to come. “Thereafter,” Mallaby wrote, “Fed governors seldom posed a challenge to Greenspan. The era of the imperial Fed chairmanship was beginning.”

Blinder, who as vice chairman pressed unsuccessfully to slow down the ratcheting-up of interest rates, told Mallaby of one lesson he took: “Never disagree with Greenspan on tactics. He will be better.”

Laurence Meyer, a Fed governor under Greenspan from 1996 to 2002, wrote that he finished his term “not sure I had ever influenced the outcome” of a meeting. He called that “one of the frustrating aspects of serving on the Greenspan FOMC.”

In a paper released in 2005 just months before Greenspan retired, Blinder and Princeton colleague Ricardo Reis assessed his tenure with lavish praise, calling him “an amazingly successful chairman.” But they also took note of what they called “the extreme personalization of monetary policy under Greenspan,” bordering on a “cult of personality,” and wondered what that would mean for future Fed chairs and boards.

Greenspan’s successor, Ben Bernanke, moved the Fed away from discretionary policymaking by pronouncing an inflation target and forecasting moves in interest rates. Those steps “made monetary policy significantly more transparent,” Bernanke wrote in a 2022 book.


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