washingtonpost.com
Greenspan's Legacy

Nell Henderson
Washington Post Staff Writer
Tuesday, January 31, 2006 12:00 PM

In a recent story , Washington Post economics reporter Nell Henderson wrote: Government leaders, Wall Street analysts and academics have heaped accolades on Alan Greenspan as he prepares to step down as Federal Reserve chairman Tuesday, leaving behind a strong economic expansion, tame inflation and low unemployment after more than 18 years of adjusting the nation's interest rates. But Greenspan, 79, also leaves a remarkable political legacy, say Republican and Democratic policymakers who have worked with him in Washington over nearly four decades.

Today, she examines the team that Greenspan built at the Federal Reserve.

Nell was online at Noon ET on Tuesday, Jan. 31 to discuss the impact Greenspan had on the U.S. economy and what the future may hold. A transcript follows.

Read more about Alan Greenspan's tenure here .

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Nell Henderson: Hi everyone. Thanks for coming. I see some questions already waiting, and will get right to it in one minute.

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Washington, DC: One less positive side of Greenspan's tenure is his intervention into policy matters that were not the Fed's direct responsibility. His support for George W. Bush's tax cuts that have since produced record deficits is one example; another is his (lousy) advice to home buyers to get a variable rate mortgage in an environment where low 30-year mortgage rates were just beginning to rise! How should this affect his legacy?

Nell Henderson: Interesting question! Goes to the heart of our discussion today. I guess the answer depends on how you define his many various legacies. The factors you mention don't really touch on his legacy of low inflation and low unemployment_which is the primary goal of a Fed chairman. But you point out correctly that some critics think he should have stuck with monetary policy and not ventured as much as he did into political debates about economic policy. Many critics (particularly Dems on Capitol Hill) say he bears some responsibility for our budget deficits, because of his support for the Bush tax cuts. He has said that's unfair, because he has always urged Congress to take other steps as well to restrain deficits.

On the mortgage issue, I think most economists would agree that for some people an adjustible rate mortgage is more advantageous than a fixed-rate mortgage (depending on how long you plan to stay in your house, how much downpayment you're making, closing costs etc.) But the Fed and other regulators have warned recently that some of the new adjustibles that require no downpayment or allow borrowers to skip payments may be risky for some borrowers, particularly if home prices drop.

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Rolla, MO: Any relationship with monetary policy and the negative savings rate by Americans? Just wondering how we became such a debtor nation.

Nell Henderson: Ah! You missed my big article on exactly this issue last week. The long version has more details, but the short version here is that the Fed contributed to the current record level of household indebtedness by slashing interest rates after the stock bubble burst in 2001. You remember that triggered a recession and a rocky recovery, made more difficult by the 9/11 terrorist attacks, corporate scandals, wars in Iraq and Afghanistan etc. Greenspan and his Fed colleagues lowered interest rates to keep the economy going by stimulating consumer borrowing and spending. Americans responded with gusto, snapping up autos at zero-percent financing, boosting homeownership to a record 69 percent of households, and fueling a housing boom. When I say "contributed," I refer to the fact that other factors played a role as well. Americans like to spend. Long-term interest rates have stayed low also because of low inflation, economic stability and foreigners pouring their savings into U.S. assets. So the Fed bears some responsibility, but so do we consumers.

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Arlington, VA: As someone who has worked as an economist for the past 10 years, my final take on Alan Greenspan is: 1. Very knowledgeable and skilled, 2. Politically adroit, and 3. Very lucky. There's only so much a Fed Chairman can do to "fine-tune" the economy. Rarely, if ever, can they actually prevent a recession or an extended period of slow growth. What is the view of most economists with regard to his tenure?

Nell Henderson: His peers in the economics profession give him rave reviews. At the Fed's conference at Jackson Hole last summer,Princeton University Prof. Alan Blinder (a former Fed vice-chairman who had clashed with Greenspan at times) declared him to be perhaps the greatest central banker ever.

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Laurel, Md.: The beginning of your article implies, accurately in my view, that one of Mr. Greenspan's most important achievements has been to reduce polarization on economic issues.

It is a nearly universally piece of conventional wisdom today that federal politics has become extremely polarized, but not about the issues that are most important to the American people -- economics and national security.

Can we largely credit Alan Greenspan for greatly reducing economics as a political issue -- leaving the (federal-level) pols to fight tooth and nail about things like stem cells and gay marriage? If so, I think we can thank him for the service he's done the economy, but at the expense of the value of voting.

Nell Henderson: Well Greenspan probably deserves part of the credit. After all he has worked well with both Republicans and Democrats on economic issues for nearly four decades. But the economics profession itself has changed. A few decades ago, they believed there was a real trade-off between employment and inflation: meaning you can get more employment if you tolerate more inflation. In that framework, both Democratic and Republican politicians often pressured the Fed to lower interest rates to stimulate the economy, even at the risk of higher inflation. Now, the profession generally agrees the best way to ensure maximum employment is to keep inflation very low, and politicians of both parties have come to accept that. That itself has depoliticized the Fed's job.

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Nat Bahn: Greenspan -consistently- placed the interests of bondholders over that of wage earners. Why is the mainstream media always giving him a pass on this?

Nell Henderson: That's one perspective. The Fed's job is to keep both inflation and unemployment low, which Greenspan has done. Low inflation is good for bondholders. But low unemployment is good for wage earners.

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Princeton, NJ: My big complaint about Greenspan was his raising the interest rate in the summer of 200 to fight non-existent inflation. Raising rates has a large affect when inflation is low. This shock to the booming economy was followed by others (election, tax cuts, 9/11, etc.) that took us off the sweet spot of the 90's and we have never found it again.

Nell Henderson: I'm not sure most economists would agree that raising interest rates in 2000 triggered the recession that followed. The consensus is more that the stock market boom was a bubble that was doomed to burst as everybody went stock-crazy, driving up prices to unrealistic levels, at a time when businesses were overinvesting in factories, equipment and software. The slump that followed resulted from some of the things I mentioned above, plus the fact that the fall in stock pries erased a lot of consumer wealth while businesses hunkered down for years and even today are not spending as much as economists would predict given a healthy economy and fat profits.

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Rockville, MD: What's to be said about him, in some of his more recent years, in his agreements with some of Bush's economic policies, like tax cuts for only the super rich or some of Bush's inaccuracies in regards to fiscal spending, budget allotments, etc?

Nell Henderson: Greenspan is at heart a libertarian, free-enterpriser who prefers government be as small as possible and keep taxes as low as possible. Not only did he urge Congress to cut taxes in 2001, he has recommended since then that Congress make permanent those tax cuts that are set to expire in coming years. But he has pointed out that in 2001, all the government economists were forecasting the federal budget to be in surplus for years to come. And at that time, he did not actually support Bush's specific plan: both Bush and Democrats had competing tax cut proposals. And he recommended Congress design the tax cuts with "triggers" so they might be automatically repealed if the budget swung back into deficit. Needless to say, Congress ignored the trigger idea. And Congess has ignored his advice that it restore budget controls that would force any tax cuts to be offset by equal-sized spending cuts, so they don't increase the deficit.

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Boyero, Colorado: Mr. Greenspan and his mentor Mr. Volcker always managed inflation by raising interest rates with the result of creating more unemployment. It looks to me that they have always been more concerned with wage inflation for working class folks and not the excessive CEO salaries and benefits. Isn't that a form of class warfare?

Nell Henderson: You are welcome to your conclusions, but your facts are wrong.

Volcker did beat inflation by jacking up interest rates, which pushed unemployment up high during the recession of the 1980s. And since then, Greenspan has both raised rates to head off inflation pressures and lowered rates to stimulate the economy when unemployment rose. The result, after 18 years, is that inflation and unemployment are both lower today than when Greenspan became chairman.

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nat bahn Rockville, MD: Thought you might want to peruse this article at your own leisure:

http://www.dollarsandsense.org/1105greider.html

Nell Henderson: Will do. As you may know, William Greider is both a former Washington Post editor and a long-time critic of Mr. Greenspan. Will read with interest!

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Arlington, VA: While working at the Fed, an economist explained to me economic theory that reducing inflation also promotes employment. So, in essence, the Fed can knock two birds with one stone - stifle inflation and watch unemployment lines shrink. It seems that the empirical results substantiate the claim.

Nell Henderson: Yes, that is now pretty much accepted in the economics profession, and even by politicians.

And that's our last question today. Thanks to all who participated. Nell

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