Jury remains out on Greenspan’s legacy

IT’S a little early to be writing eulogies since the changeover won’t actually take place until next February, but last week, US President George W Bush announced that Ben Bernanke will succeed Alan Greenspan as chairman of the Federal Reserve in 2006.

The head of America's central bank arguably has the world's second most powerful job, after the president himself, since the chairman of the bank is charged with ensuring the world's largest economy grows at a trend rate, enjoys full employment, and benefits from stable prices. It's no easy task when you consider the scale of the US economy one state can easily experience a recession while another booms.

So what can we say of Alan Greenspan, who secured his place in history by holding his powerful post for almost 18 years?

First of all, Greenspan's fans (and there are many) will argue that he solely is responsible for America's economic boom in the 1990s. In part this is true Greenspan gave Wall Street an unprecedented degree of confidence in the Federal Reserve, a sense that monetary policy would be managed to aid growth but Greenspan was also very fortuitous in his timing. His predecessor, Paul Volker, had fought a prolonged and successful fight to control inflation in the US, and unlike the Bush administration, the Clinton White House actually ran budget surpluses, which made Greenspan's job easier.

Other will argue that Greenspan prevented the US economy from sliding into recession in the late 90s following the dotcom collapse. The Fed slashed borrowing costs in the US, from 6.5% before the crash, to 1% after the crash, in an effort to keep the US afloat. And the initiative worked.

The subsequent recession proved to be one of the shallowest in US history.

But did the Fed only defer the hangover of "irrational exuberance"? By slashing rates in the late 90s to kick-start the economy, Greenspan's Fed arguably just replaced one asset market bubble with another in the US property market. Annual inflation in the US property market is now running at a 25-year high of 8.8% per annum and worryingly, household savings rates in the US have fallen to post-war lows. As debt servicing costs rise, the indebted US consumer might find the next few years difficult.

So has Alan Greenspan left the US economy in good shape for his successor? Interest rates will probably rise to a neutral 4.5% before Greenspan retires, which will give Bernanke a clean slate with which to begin. But Greenspan didn't object sufficiently to the record fiscal deficit amassed by the White House in recent years, a deficit which will burden the US for many years to come.

Somebody once said it's still too early to fully asses the impact of the French revolution, so it's certainly too early to write Alan Greenspan's eulogy. Only time will tell how his tenure is to be remembered, but if the US property market collapses any time soon, Greenspan might well be glad that his retirement has finally been announced.

The views and opinions expressed in this article are those of the author and do not necessarily correspond with those of Ulster Bank or any other member of the RBS Group.