Greenspan raised Federal Reserve role to art form

AFTER 18 years as chairman of the US Federal Reserve, Alan Greenspan will retire on January 31, 2006, from the most powerful banking job in the world.

Views on how he acquitted himself are sharply divided.

For some he is a sort of folk hero who delivered solid economic growth over the 18 years with the exception of two mild recessions.

In some ways the easiest part of his legacy to assess is his actions following the dotcom bubble. At the time he slashed interest rates starting in January 2001 from 6.5% down to 1% in a succession of rate cuts.

Stock markets had peaked the previous March following the dotcom boom and it became clear to the Fed chairman that the fall out was going to be severe.

His action was well ahead of the sharp dip in the Nasdaq, the market on which the dotcom bubble was fuelled, which fell from a high of over 5,000 to under 1,000 at one point, and many marvelled at his foresight.

His supporters argue he was never an ivory tower or consensus central banker. He led and the rest of the board followed.

For Dr Dan Mclaughlin, chief economist, Bank of Ireland, Alan Greenspan kept the US economy from going off the rails in the post dotcom collapse. His action was decisive because he kept his feet very firmly on the ground. He spoke to people in industry and did not rely on statistics or rules like his counterparts in the ECB, said Dr McLaughlin.

For him Mr Greenspan had become identified very clearly in the minds of people as someone in whose hands the economy was safe and whom they could trust.

“For that reason he had become a prominent figure in the culture of the US in the way no other banker has,” said Dr McLaughlin.

Others argue that the jury is out on the Fed chair who many claim had the “midas touch” about him.

Niall Dunne of Ulster Bank Markets argues it is too early to say, which is not necessarily to imply that he will be judged harshly. He believes Mr Greenspan may have done no more that postpone the crash that many believe ought to have followed the dotcom boom. To prevent the crash he cut rates to the bone and allowed consumers to fill the gap left by the collapse in manufacturing in the US.

Some fear, as does Mr Dunne, that with consumers borrowed to the hilt and the savings culture part of US history, the US could face a severe recession in the years ahead, which would seriously damage his near God-like status at this stage.

At this stage America is living beyond its means and is facing a deficit of $600 billion in 2005. That’s in effect the amount of money being borrowed to fund the madcap spending US citizens have indulged in since the outgoing chairman slashed interest rates to 50-year lows. His critics say he gave consumers the power to borrow without giving them the means with which to repay that enormous mountain of debt.

For his very strong fan base Mr Greenspan raised the role of chairman of the US Federal Reserve to an art form which they argue will be his abiding legacy.