Alan Greenspan died Monday at the age of 100, and the obituaries have already settled on the title he embraced for two decades. He was the Maestro, the economist who conducted American monetary policy through booms, busts, and panics under four presidents. The praise is not baseless. But a maestro improvises, and improvisation is the wrong standard for the institution that governs the dollar.
Greenspan arrived at the Federal Reserve in 1987 with strong credentials and a clear philosophy. He studied economics at New York University and Columbia, built a successful consulting firm, and chaired the Council of Economic Advisers under President Gerald Ford. In his youth, he was a member of Ayn Rand’s circle, and he carried into office a sincere conviction that free markets allocate resources better than planners do. On most questions, that belief served him well and helped shape a long and consequential career.
For much of that career, the results were impressive. Greenspan presided over the Great Moderation, a long stretch of low inflation and steady growth running from the mid-1980s to the 2007 financial crisis. He calmed markets within weeks of the 1987 crash, and steadied them again after September 11. Milton Friedman, no easy grader of central bankers, called him the “most effective” in the Fed’s history. By the time he retired in 2006, Washington treated his judgment as close to oracular.
Yet Greenspan’s legacy is complicated by a number of inconsistencies. The most notable was the tension between his theoretical belief in free enterprise and his practical faith in discretionary money management.
The Fed does not preside over a free market in money and credit. Its interventions in financial markets can have large effects on interest rates. The only real question is whether the Fed conducts policy by rule or by discretion. Greenspan chose discretion nearly every time. He kept interest rates low and held them there, most consequentially after the 2001 recession, when rates sat well below what the standard monetary rules of the day recommended. Cheap credit encouraged Americans to borrow heavily, and much of that borrowing flowed into housing.
He compounded the problem with a deliberate opacity.
Greenspan cultivated the impression that monetary policy was an arcane craft, intelligible only to insiders, and that the public should defer to the experts who practiced it. Friedrich Hayek, who shared the Nobel Prize for economics in 1974, had a name for this conceit. He called it the pretense of knowledge, the belief that a central authority can gather and act on information that is in fact scattered among millions of people. A Fed wrapped in mystique is a Fed that escapes scrutiny, which suits the Fed and its allies yet harms everyone else.
The deeper damage came from what markets learned to expect. Again and again — in 1987, in 1998, and after 2001 — Greenspan met financial trouble by cutting rates and flooding the system with liquidity. Investors drew the obvious lesson. If their bets paid off, they pocketed the gains; if the bets went bad, the Fed would arrive to cushion the fall. This was the famous Greenspan put, and it taught financial institutions to gamble. When the housing bubble burst, the cost of all that risk-taking fell on taxpayers and ordinary families.
Greenspan was too quick to wash his hands of the wreckage. He did concede, in his 2008 testimony, that he was wrong in his assumption that banks would police themselves. The admission was real but partial. Greenspan implicitly framed the crisis as a failure of capitalism, despite the fact that America had operated with a discretionary central bank for nearly a century. He continued to defend his interest-rate decisions and blamed the housing bubble on global forces beyond his control. Admittedly, the crisis had many authors, among them a federal housing policy that pushed relentlessly toward homeownership. But Greenspan carried his own share of the blame, and he never fully owned it.
None of this erases what Greenspan achieved. He got a great deal right.
His broader confidence in business over government was well-founded, and the country was better for it. His error was to exempt the one market the Fed strongly influences, governing it by his own judgment instead of a binding rule. Sound money depends on clear rules applied consistently, with little room left for improvisation.
We can acknowledge Greenspan as an accomplished public servant while recognizing his select lack of epistemic humility. There’s another of Milton Friedman’s opinions we would do well to remember: “Any system which gives so much power and so much discretion to a few men that mistakes — excusable or not — can have such far-reaching effects is a bad system.”
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