Greenspan’s Cult of Personality

Alan Greenspan was a legend in his time and there was no shortage of praise for him back then. For example, who can forget Bob Woodow’s 2000 book Maestro: Greenspan’s Fed and the American Boom. While I was aware of this Greenspan devotion, I never realized the extent to which it rose until I read David Wessel’s In Fed We Trust. In the chapter title “The Age of Delusion”, Wessel directs us to a paper delivered at a major economic symposium in 2005 that had this passage in the introduction:

No one has yet credited Alan Greenspan with the fall of the Soviet Union or the rise of the Boston Red Sox, although this may come in time as the legend grows. But within the domain of monetary policy, Greenspan has been central to just about everything that has transpired in the practical world since 1987 and to some of the major developments in the academic world as well. This paper seeks to summarize and, more important, to evaluate the significance of Greenspan’s impressive reign as Fed Chairman… There is no doubt that Greenspan has been an amazingly successful chairman of the Federal Reserve System. (pp. 11-12)

Pardon me as I reach for my barf bag. This 86-page paper praising Greenspan’s record epitomizes the cult of personality Greenspan had at this time and it is one reason why we got the economic debacle we are in now. Under Greenspan leadership, the Fed asymmetrically responded to swings in asset prices as they were allowed to soar to dizzying heights and always cushioned on the way down with an easing of monetary policy. While this approach probably contributed to the “Great Moderation” in macroeconomic activity it also appears to have caused observers to underestimate aggregate risk and become complacent. It is likely that it also contributed to the increased appetite for the debt during this time. These developments all helped spawn the current crisis. Greenspan’s cult of personality meant little-to-no questioning of his policies.

Now not everyone bowed to emperor Greenspan. There were a few who saw his record differently. Here is one such prominent economist writing also in the year 2005 in the magazine Foreign Policy:

U.S. Federal Reserve Board Chairman Alan Greenspan is credited with simultaneously achieving record-low inflation, spawning the largest economic boom in U.S. history, and saving the world from financial collapse. But, when Greenspan steps down next year, he will leave behind a record foreign deficit and a generation of Americans with little savings and mountains of debt. Has the world’s most revered central banker unwittingly set up the global economy for disaster?

Unfortunately, this view was the exception not rule. Let us never allow another cult of personality to develop within the Federal Reserve.