“I guess I should warn you. If I turn out to be particularly clear, you’ve probably misunderstood what I’ve said”

Six presidents

Count ‘em. Greenspan’s early campaigning work for Richard Nixon (1968) was followed by a post on Gerald Ford’s Council of Economic Advisers (1974-77), before Ronald Reagan signed him in as Fed Chairman in 1987 during his second presidential term. George H W Bush, Bill Clinton and George W Bush also kept him on. Indeed, the only president to keep him at arm’s length was Jimmy Carter.

That’s a pretty big spread of policies

It certainly is. Although he was an instinctive monetarist with Republican leanings, Greenspan could turn his hand to loose money as well as tight-money policies. His generous expansionism under Bush senior gave way to deficit reduction in the 1990s under Clinton’s Democrats, then back to expansion under Bush junior. At which point it all came disastrously unwound….

The budding musician

History might have gone a different way if the Fed Chairman had stuck to his scales. Greenspan played sax with Stan Getz and Woody Herman before studying the clarinet at the Juilliard, but he decided only with reluctance that economics and not jazz was his personal way forward. Instead, it was his fascination with the essentially libertarian ideas of his friend Ayn Rand that determined his thinking. Whatever else, Greenspan remained a firm fan of unrestricted capitalism and a practical minimum of regulatory constraints.

“Irrational exuberance”

Greenspan’s most famous one-liner, delivered in December 1996, is also the most frequently misquoted. His very public worry was not that too much optimism had unduly escalated asset values, as was widely reported at the time – but that it might then produce unexpected and very damaging contractions. For which insight he should really have been congratulated instead of pilloried.

As indeed he would have been, if only he hadn’t then changed his mind. As the S&P rose from 700 to 1,500 in the next three years, the Chairman forgot his worries and started to collect the credit for the boom which was to end so catastrophically in 2001/01 and then peak in 2007 on a tide of easy money before plummeting again in 2008. Since when his reputation has never really recovered.

Blamed for the bust

Although Greenspan had already quit in January 2006, it was the implosion of the US subprime mortgage market in 2007 that finally destroyed his halo. It wasn’t just that Greenspan’s laisser-faire credit boom had encouraged many millions of low earners to extend their stake in the capitalist system of ownership, beyond their probable ability to pay. And it wasn’t even that the man himself had presciently talked about a 2007/2008 recession, as early as February of that year.

It was also that the ex-Fed Chairman had spent a considerable amount of time since 2004 on persuading home-owners to decouple from the traditional fixed-rate mortgages in favour of variable-rate loans. And that the subsequent rise in the fed funds rate from 1% to 5.25% in 2006 had broken a lot of backs. Time magazine subsequently declared him the third most eligible culprit for the financial crisis of 2007-2008. Oops.

A hard act to follow?

Well, that’s what the press used to think. During his latter years, Greenspan developed a sophisticated language of heavy hints about future policy trends which was clear to the cognoscenti but conveniently obscure to everyone else. It took his successor, Ben Bernanke, several years to match his sophistication. Or shall we call that, with hindsight, his tactical evasiveness?