For many years, the global financial world depended on Alan Greenspan’s words, his facial expressions, and his every move. Even the thickness of his briefcase was observed, evaluated and interpreted.
For nearly 20 years, Alan Greenspan led the monetary policy – and with it, the economy – of the United States as Chairman of the U.S. central bank, the Federal Reserve, or Fed for short. He was “Mr. Dollar”, the guru of international finance, the driving force behind the global economy.
George W. Bush awarded him the Presidential Medal of Freedom and Britain’s Queen Elizabeth II knighted him. He was considered honest, talented and intelligent. Greenspan himself liked to say that he began each day with two hours of reading documents in the bathtub, where he was at his most creative. His reputation was impeccable.
However, later – after the financial crisis – this would change. But first, take a look at the beginning.
measure of all things
When Greenspan took over at the Fed in 1987, the positions he had to fill were vast. His predecessor, Paul Volcker, had brought rapidly rising inflation under control with a bold high-interest rate policy. But in terms of prestige, Greenspan was in no way inferior to Volcker.
Around the turn of the millennium, when he was reappointed for another four years as head of the Fed, politicians praised him as “the greatest central banker in the history of the world.” No surprise: Under his monetary policy leadership, the American economy experienced one of the longest periods of prosperity in its history.
Greenspan was an iconic figure. Even a wrinkle will leave investors wondering what it means. Equally famous were his complex and often completely incomprehensible statements, known as “Greenspeak”.
“Since becoming a central banker, I have learned to mother with great incongruity,” Greenspan told Congress in 1987. “If I seem unnecessarily blunt to you, you may have misunderstood what I said.”
According to Bob Woodward’s biography, Greenspan also proposed to his second wife, Andrea Mitchell, which at first was so incomprehensible that the 71-year-old had to repeat it.
Universal Solution: Lower Interest Rates!
Greenspan faced his first major test as Fed chairman soon after taking office. After the stock market crash on October 19, 1987, known as “Black Monday”, he opened the monetary gates to prevent panic among investors. He cut the key interest rate, which was around 7% when he took office. This made loans cheap, entrepreneurs invested, consumers spent and the economy started growing again.
They also lowered interest rates during subsequent crises – the recession of 1990–91, the Asian financial crisis of 1997, and the collapse of the Long Term Capital Management hedge fund in 1998.
His actions assured financial markets that the Fed would act decisively in times of crisis. This policy even got its name: the “Greenspan put.”
shock paralysis after 9/11
On September 11, 2001, when two planes flew into the World Trade Center in New York City, the world was shocked. The economy was in shock. Greenspan took his tried-and-tested approach and cut the key interest rate from 6% to 1% in several steps. Such a low had not been seen in the United States in 46 years.
It worked: the US economy boomed again and the Dow Jones index rose by more than a third between late 2002 and early 2004. Although the economy improved, the Fed kept interest rates at this low level for the next years. Only in 2004 did Greenspan apply the brakes and raise rates. It’s too late. Markets did not react to rate increases as usual and long-term rates actually fell further.
Because of those low rates, many Americans became heavily indebted. Banks bundled up these risky loans and sold them as securities around the world. Even higher rates could not prevent the inflation and eventual bursting of the US housing bubble in 2007. A year later, the world was shaken by the financial crisis.
Deregulation of the financial system in previous years had encouraged risky behavior by banks. Greenspan not only believed in the power of low interest rates, but also believed that markets would regulate themselves. In doing so, they helped transform the financial world from a tightly regulated post-war system to an unregulated market in which financial excesses became possible.
Reputation wavers after economic crisis
The financial crisis not only brought the global economy to the brink, but it also destroyed the good reputation of “Maestro”. Most experts agree that his policy of cheap money and support of deregulation helped create the conditions for the US housing crisis and the subsequent worldwide financial meltdown.
Stephen Roach, chief economist at Morgan Stanley, criticized Greenspan: Instead of reducing the bullishness, he “poured more punch into the bowl to keep the partygoers happy.”
Nobel laureate Paul Krugman wrote on his New York Times blog that Greenspan had denied the existence of the bubble and actively blocked efforts to introduce stronger financial regulation. Thus, Greenspan was seen as a co-instigator of the worst economic crisis since World War II.
Responsibility for managing the crisis fell to his successors, Ben Bernanke and later Janet Yellen, as Greenspan retired in 2006 and subsequently worked as a consultant for major financial firms. Greenspan did not see himself as a major driver of the financial crisis.
“70% of my decisions were correct; the remaining 30% contributed to the financial crisis,” Greenspan said, adding that he had repeatedly warned of excesses in the housing and credit markets.
However, before a Senate committee, he admitted that he was wrong about Wall Street’s desire to regulate itself.
He said, “Those of us who have witnessed the self-interest of lending institutions to protect shareholders’ equity – including myself – are in a state of shocked disbelief.”
jazz was his first love
Greenspan, who was known to be modest and shy, was not just a money man. His first love was jazz.
Born in 1926 to a Jewish family in New York City, he wanted to be a musician in his youth. In high school, he played clarinet and saxophone. He later studied at the renowned Juilliard School in New York City and toured with a band in 1944 and 1945.
In 1944, he turned to economics. He began studies at New York University in 1950, earning a master’s degree. He then worked for some years as a trader on the Commodity Exchange in Chicago.
In 1954, he founded the consulting firm Townsend, Greenspan & Company with a partner. The company quickly became successful and gave Greenspan contacts with many of America’s largest companies and their managers.
His second love was the artist Joan Mitchell, whom he married in the 1950s. He later lived with television presenter Barbara Walters. In 1984, he fell in love with famous TV journalist Andrea Mitchell, who was 20 years his junior. They married in 1997.
To be the ‘face of the Fed’
In the late 1970s, he advised Republican presidential candidate Ronald Reagan. After Reagan’s election victory in 1980, Greenspan became head of a commission that proposed reform of the Social Security system. Seven years later, Reagan appointed him Chairman of the US Central Bank.
Although Greenspan described himself as a conservative Republican, he also received support from Democrats.
Greenspan was particularly influenced by the writer and philosopher Ayn Rand, whom he met in 1952. Rand advocated strict individualism and pure laissez-faire capitalism, in which the state’s sole role was that of night watchman.
Greenspan served under Republican Presidents Reagan and George W. Bush for his radical tax cuts and related cuts in government services. Nevertheless, he stressed that the pursuit of profit should not be at the expense of others: “Material success is more satisfying when it is achieved without exploiting others.”
Greenspan continued to speak even into old age. During the pandemic year of 2020, American television stations aired monthly interviews with Greenspan and his wife, Andrea Mitchell.
Mitchell told NBC News on Monday that Greenspan died at the age of 100 from complications related to Parkinson’s disease.
This article was translated from German