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Greenspan the Meddler

Like an overachiever, Alan Greenspan has actually written two books within The Age of Turbulence.

The first half of the book is a memoir of his rise to the position of Fed chairman and his experience as the nation's chief central banker. The second half is an analysis of major domestic and international economic issues and speculation about the future until 2030.

I read the segments in reverse order, which turned out to be instructive.

The second segment is an informative and insightful read. Greenspan is a self-professed data wonk, and the depth of his knowledge is put to the service of an extraordinary analytic scope. (Greenspan thinks the economic future will be OK, although the United States will probably have to cope with higher inflation and interest rates due to financing the impending Social Security and Medicare deficits and investments in the rest of the world becoming more attractive.)

The first segment, however, serves as a reminder of how often inappropriate, and potentially dangerous, was Greenspan's view of the role of chief central banker.

The primary economic function of a central bank is to control inflation.
And this was done well on Greenspan's watch, continuing the taming of inflation that was the singular contribution of his predecessor, Paul Volcker.

To accomplish this, the Fed needs independence, since politicians always prefer loose money. Greenspan was naturally sensitive to any attempt to influence the Fed's monetary policy, and mildly rebukes the Bush 41 administration for attempting to jawbone a loosening prior to the 1992 election.

However, Greenspan clearly felt free, impelled in fact, to meddle in fiscal policy.

He advised Clinton Treasury Secretary Lloyd Bentsen about how much the Clinton budget plan should cut deficits. When the plan ran into political difficulty, he responded to a plea by White House staffer David Gergen to buck up the president. He made "no secret" of his belief that Bush 43 should veto some spending bills.

In his book, Greenspan confesses to trying to deflate stock prices with his comment about "irrational exuberance" in 1996 and a subsequent rate hike.
He professes not to have tried again. However, the series of rate hikes at the turn of the century, reaching 6.5 percent, certainly seem more of a second effort than the soaking up of excess liquidity and hedging against inflation Greenspan claims.

Greenspan clearly preferred the Clinton administration to either Bush administration. After helping craft the Mexican bailout (another dubious role for a Fed chairman), Greenspan describes how he became "economic foxhole buddies" with then Clinton Treasury Secretary Robert Rubin and then assistant Larry Summers.

However, he was a bipartisan meddler. Greenspan reports plotting with Bush
43 Treasurer Paul O'Neill over a "strict new law to govern CEO accountability."

Greenspan apparently viewed anything that affected the economy as his business. Which is pretty much everything.

There's some loose language in Humphrey-Hawkins that, stretched, could justify some of this. But meddling in everyone else's business is hardly the way to prevent meddling in the Fed's main function of maintaining price stability.

Greenspan thinks psychology plays a large economic role. And he apparently felt that consumers and investors needed to believe that someone wise was in change of the entire economy. It was a role he played convincingly.

However, the Fed chairman isn't in charge of the entire economy and it's a dangerous superstition to perpetuate. Fortunately, to the extent circumstances permit, Ben Bernanke appears dedicated to shrinking the Fed's public perception to more closely match reality.

There are two examples that perhaps best illustrate how far the Fed strayed from its appropriate role during Greenspan's tenure.

In his memoir, Greenspan recounts approvingly how the head of the New York Fed convened a meeting of Long-Term Capital Management creditors, including institutions regulated by the Fed, and said that if they knew what was good for them, they would work things out. Greenspan apparently sees nothing unseemly about the Fed strong-arming regulated institutions to bail out an overleveraged hedge fund.

Greenspan also reports matter-of-factly about Rubin calling him trying to get him to tone down his support for tax cuts during Bush 43. At the time, Rubin was a director of Citigroup. Greenspan apparently saw nothing untoward about the director of a regulated institution trying to influence his testimony before Congress.

The Fed chairman doesn't have to maintain the independence of a judge. But if the independence of the Fed is to be maintained, its officials need to be at least a little stand-offish about matters not immediately within its orbit.

In politics, meddling rarely remains a one-way street.

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