US economic chief Greenspan bows out

The United States was gearing up today for a new chapter in its history when Alan Greenspan chairs his last meeting as chairman of the Federal Reserve.

The United States was gearing up today for a new chapter in its history when Alan Greenspan chairs his last meeting as chairman of the Federal Reserve.

Dr Greenspan will step down after 18 years at the helm and is widely credited with leading the US economy through a sustained period of economic growth.

Disruptions such as the stock market crash of 1987, the bursting of the dotcom bubble and the September 11 terrorist attacks have failed to derail the US economic juggernaut.

Economists expect Dr Greenspan’s final act in charge will be to raise US interest rates to 4.5% today to give successor Ben Bernanke some breathing space.

Interest rates have risen from 1.75% to 4.25% over the past 18 months and Wall Street is split over whether the cycle is almost at its peak.

Investec economist Philip Shaw noted the baptism of fire that Dr Greenspan – a former saxophone player – endured when the US stock market nose-dived in 1987, just months into the job.

He said: “His main legacy will be the trust he has created in central banking. He is recognised for being well-trusted, delivering price stability and also preventing excessive economic cycles in the US economy.

“He also led the way in developing central bank transparency and the Fed, under his leadership, has been at the vanguard in demystifying financial institutions.

“Dr Greenspan has also shown he has a tremendous gut feeling for what is happening in the US and global economy and how to react over the past 18 years.”

Despite further successes such as shepherding the US economy through a series of crises that included the collapse at hedge fund LTCM in 1998 and the 1990s Asian crisis, not everyone in the financial universe is convinced that Dr Greenspan is deserving of the mantle of best central banker ever.

The 79-year-old was criticised for not raising rates earlier during the boom years of the 1990s, which could have saved the US economy from a particularly hard landing.

When internet-based ventures started mushrooming around the turn of the millennium, low interest rates encouraged investors to borrow money cheaply and this helped to inflate the dotcom bubble.

More recently, Dr Greenspan’s focus on keeping inflation low through monetary policy has seen a flood of cheap foreign goods enter the US economy with the nation’s trade deficit hitting a record annual level of more than 600 billion US dollars (£340 billion) last year.

He came under fire for his support of President George Bush’s tax cuts in 2001, which have helped create a huge deficit in the US government’s current account.

Current concerns about whether house prices are overvalued may reflect his reluctance to tackle “asset bubbles” and could haunt his successor in future.

Dr Greenspan’s most famous phrase, “irrational exuberance”, came from a speech in 1996 which warned about the consequences of stock market bubbles but he has kept the focus of US monetary policy on keeping inflation under control rather than tackling such bubbles.

Simon Rubinsohn, chief economist at fund manager Gerrard, said: “By failing to deal with the tech stock bubble that built up in the 1990s, Dr Greenspan could be said to have failed to prepare for the collapse in technology values which led to a difficult period for businesses and investors across the world.

“However, overall he has managed to maintain a difficult balance of ensuring a period of growth while keeping control of inflation and there is always a danger from being too over-zealous in dealing with asset bubbles.”

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