Greenspan's Humility

By David Ignatius
Wednesday, August 31, 2005

Fed Chairman Alan Greenspan has been an unusual figure in Washington because of his willingness to admit that he doesn't have all the answers. In that state of uncertainty, Greenspan developed an economic approach that he described in a farewell speech last weekend as "risk management." I wish more of our cocksure politicians and analysts shared his humility.

Washington is a city that lives on certainties. People want to score political and economic debates like a baseball game -- how many hits, how many errors, who are the heroes and who are the goats. Greenspan wouldn't play by those rules. His famous mumble wasn't always an attempt to mask his real conclusions. Often, I think, it was a way of expressing the reality that he wasn't sure yet what the answers were.

A telling example of Greenspan's agnosticism appeared in a profile last week by Edmund L. Andrews in the New York Times. He cited a comment Greenspan made in November 1999, at the height of the tech boom, to a closed meeting of the Fed: "We really do not know how this system works," Greenspan told his colleagues, according to a recently released transcript. "It's clearly new. The old models just are not working."

Knowing that he couldn't be sure of what was going on in the real economy, Greenspan opted for a pragmatic, seat-of-the-pants kind of economics. He talked to business executives. He studied odd bits of statistical data. He reread his old economics texts. He made decisions about the economy the way most of us try to make decisions about personal matters, by asking: What's the penalty if I'm wrong? How do I reduce the likelihood of a really bad event?

Sometimes that pragmatism made Greenspan cautious -- keeping interest rates higher than critics wanted because he still worried about inflationary expectations. Other times, it made him very bold, as when he pumped massive liquidity into the system after the stock market crash of October 1987; after the collapse of Long-Term Capital Management in September 1998; and after the Sept. 11, 2001, terrorist attacks.

Through the ups and downs of his 18 years as Fed chairman, Greenspan tried to remain supple and adaptive -- and to avoid becoming locked in his own dogma. His genius, it seems to me, was that by leaning one way, then the other, he managed to achieve a series of "soft landings" for economic problems that many analysts thought would produce a crash.

Greenspan was candid (for him) in explaining his approach at last weekend's conference on monetary policy in Jackson Hole, Wyo. He noted how the economic certainties of earlier decades had dissolved: People no longer believed in the "Phillips Curve" that described a long-term trade-off between inflation and unemployment; they lost faith in controlling the money supply -- the famous "M1" and "M2."

Greenspan described the state of economic uncertainty this way in his farewell speech: "Our knowledge about many critical linkages is far from complete and, in all likelihood, will remain so." Lacking certain answers, he continued, the most valuable asset for policymakers is an economy's flexibility. "The more flexible an economy, the greater its ability to self-correct in response to inevitable, often unanticipated disturbances."

Mervyn King, the governor of the Bank of England, explained what he had learned from Greenspan about how to be a central banker. "The key is to recognize that economics tells you how to think, not what to think. It is not a set of settled conclusions about issues."

Right now, Greenspan's critics are taking a poke at him for what they claim has been an overly expansionary monetary policy, which has created a real estate bubble that's about to burst. New York Times columnist Paul Krugman denounced Greenspan for his flip-flopping -- warning of budget deficits now when he didn't four years ago, cautioning about a housing bubble that he said a year ago would be manageable. He accused Greenspan of playing games with his changing views. But to me, that flexibility is precisely what has made Greenspan so successful. He may not always get it right the first time, but he analyzes, considers, adjusts.

I think of Greenspan as Washington's last great rationalist. At a time when people are screaming certainties and dogmas at each other, he's smart enough to admit he doesn't know all the answers. When he makes mistakes, he goes back and rethinks. He's willing to risk small problems to avoid big ones. He never puts a huge stack of chips on a bet when he's unsure of the odds. It's a prudent turn of mind that George Bush's Washington will badly miss when Greenspan retires in January.

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