At the end of January Alan Greenspan ends 18 years as Fed chairman, the second longest term in office. It was an extremely eventful epoch, marked by a host of crises. The Fed strategy developed by Greenspan as we know it today can be described as a triad of transparency, activist stabilization policy and gradualism in the setting of key rates. However, the fundamental problems, which had led to the 2001 recession, have not been solved. They still exist, payment day has merely been deferred.
USA: The transition from Alan Greenspan to Ben S. Bernanke at the Fed
Greenspan's term of office saw for instance the 1987 stock market crash, the Tequila Crisis 1994/95, the Asian Crisis 1997/1998 and the bursting of the New Economy bubble in 2000 and 2001. It is probably Greenspan's management of these crises that will remain ingrained In the public mind rather than his shift towards greater transparency in monetary policy decision-making. This active crisis management is doubtless the most controversial aspect of the Greenspan era legacy. The Fed under Greenspan is frequently seen as reacting asymmetrically to developments on the financial markets, failing to curb steep rises in asset prices and not seeing its role as preventing bubbles but rather in mitigating the fall-out once a bubble bursts by swiftly loosening monetary policy.
Critics of Fed policy accuse it of tempting financial markets to take on greater risk,characterizing the policy as the "Greenspan put" (Miller/Weller/Zhang 2002) or "serial bubble blower" (Economist 2003). By contrast, the Fed stresses the difficulties in adequately identifying exceptional trends on the financial markets (Greenspan 2002). Should it transpire that the Fed's expansionary policy of 2002 and 2003 has fueled a further bubble, this time on the housing market - as a host of indicators suggest - Greenspan's successor will be confronted with exactly this problem. Ben Bernanke could be assuming a more difficult legacy than the extremely healthy rowth figures might suggest.
David F. Milleker
Tel.: +49.69.2 63 - 1 13 48
E-Mail: david.milleker@dresdner-bank.com