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Alan Greenspan to step down Tuesday
(Reuters)
Updated: 2006-01-29 11:44 It will be business as usual
when Alan Greenspan wraps up nearly two decades at the Federal Reserve on
Tuesday.
![Greenspan, chairman of the Federal Reserve Board, testifies before the US House of Representatives Budget Committee on Capitol Hill in Washington, DC. [AFP]](xin_3403020510132651008510.jpg)
Greenspan, chairman of the
Federal Reserve Board, testifies before the US House of Representatives
Budget Committee on Capitol Hill in Washington, DC.
[AFP] | He probably will raise interest
rates one last time as he presides over the Federal Open Market Committee.
Afterward, there will be a low-key luncheon with his colleagues and a reception
for Fed staffers.
Greenspan will be leaving on top _ rare in Washington _ when he walks out the
door of the Fed's imposing marble building.
Widely viewed as the most successful chairman in the Fed's 92-year history,
Greenspan presided over an era of low inflation rates, low unemployment and the
longest economic expansion in U.S. history _ a decade of uninterrupted growth
from March 1991 to March 2001.
Greenspan was a master in handling not only the economy but also the
treacherous shoals of politics. He won nominations for the Fed job from four
presidents _ three Republicans and one Democrat. The occasional critics said he
was too political.
Upset over Greenspan's support of President George W. Bush's tax cuts, Senate
Minority Leader Harry Reid, a Democrat, said Greenspan was "one of the biggest
political hacks we have in Washington."
In Greenspan's early days, Wall Street investors also harbored concern that
Greenspan, who had advised Republican Presidents Richard Nixon, Gerald Ford and
Ronald Reagan, would lack the iron-willed independence needed to fill the shoes
of Paul Volcker.
Volcker conquered a decade-long bout of double-digit inflation by driving up
interest rates to levels not seen since the Civil War.
Showing his own inflation-fighting credentials, Greenspan pushed through a
half-point rate increase at his first Fed policy meeting. After just two months
on the job, the stock market crashed. It was called Black Monday, October 19,
1987; many blamed Greenspan's credit-tightening.
The Fed declared it stood ready to lend freely to distressed institutions. It
was a policy that would become a hallmark of Greenspan's tenure. The market
stabilized and began rising. So did Greenspan's star.
It was the first of many economic crises that would confront Greenspan.
_From 1989 to 1992, hundreds of savings and loans and banks _ more than at
any time since the Great Depression _ went out of business.
_A global currency crisis began in Asia in 1997 and spread to Russia. Some 40
percent of the global economy was pushed into recession. The U.S. economy
seriously was threatened before Greenspan's Fed stepped in with a series of
rapid-fire rate reductions in the fall of 1998.
_The stock market bubble burst in 2000, wiping out trillions of dollars in
paper wealth.
During Greenspan's 18 1/2 years in office, the country had two recessions.
The first was in 1990-91, when oil prices spiked after Iraq invaded Kuwait. The
second came in 2001 in the aftermath of the steep plunge in stock prices in the
previous year. Both were mild downturns that lasted eight months each.
By contrast, in the 18 years before Greenspan took over at the Fed, the U.S.
experienced four severe downturns.
By the numbers, the overall economy has done well during Greenspan's terms.
Consumer inflation soared as high as 13.3 percent in 1979 amid a decade of
oil shocks. It was at 3.4 percent last year, even though the country was hit by
another oil surge that pushed gasoline prices above $3 per gallon.
Unemployment stands at 4.9 percent after dropping to a four-decade low of 4
percent in 2000. Greenspan was able to convince skeptical Fed colleagues that
rising productivity would allow jobless rates to fall without triggering
inflation.
"He was the first economist in the United States to perceive what was
happening," said Lyle Gramley, a former Fed board member.
Greenspan says he was merely building upon the inflation gains made by
Volcker. Greenspan credits factors such as globalization and deregulation of
U.S. industries for setting the stage for the country's prosperity.
Private analysts believe Greenspan is being modest.
"Greenspan has had the most successful tenure in Fed history. He kept
inflation under very tight control while avoiding any major recessions," said
David Wyss, chief economist at Standard & Poor's in New York.
Of course, there were controversies.
Many analysts cite Greenspan's decision to support the current president's
tax cuts in 2001. They helped push the federal budget from trillion-dollar
surpluses to record deficits.
Greenspan says he would recommend tax cuts again, given projections _ which
failed to happen _ of budget surpluses that would total $5.6 trillion over a
decade.
He is also faulted for failing to rein in the high-flying stock market in
time. He did famously wonder in 1996 whether investors could be in the grip of
"irrational exuberance." But prices kept climbing. When the bubble burst,
Greenspan moved to contain the damage by lowering interest rates.
"If Greenspan had been stronger in his views, then the bubble would not have
been as large and the subsequent correction not as severe," says Mark Zandi,
chief economist at Moody's Economy.com.
Greenspan's response: To pop the bubble earlier, the Fed would have had to
raise interest rates so high that the country would have been pushed into a
severe recession.
As his influence grew, Greenspan was called upon to advance opinions on
matters beyond the realm of monetary policy. Not only did he lend support to
Bush's tax cuts, but eight years earlier he blessed President Bill Clinton's tax
increases to deal with troubling budget deficits.
This has opened him to attacks from both Republicans and Democrats.
By comparison, Ben Bernanke, the former Princeton economics professor
selected to succeed Greenspan, says he plans to limit his public advice to areas
directly under the Fed's control. Bernanke also has pledged to follow the
Greenspan play book when it comes to running the economy.
That may turn out to be Greenspan's most lasting legacy.
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