Greenspan: best banker ever?

Federal Reserve chairman Alan Greenspan has begun his victory lap amid claims he may be the best central banker ever.

Princeton University economists Alan Blinder, a former Fed vice-chairman, and Ricardo Reis, say as much in a paper presented to last week's Fed conference in Jackson Hole, Wyoming.

Greenspan, 79, has been chairman for more than 18 years and his non-renewable term on the Fed board ends in five months with many people singing his praises for what he has accomplished in shepherding the US economy through several crises and a period of rapid globalisation and change.

Nonetheless, perennial critics continue to carp that he failed to burst the sharemarket bubble of the late 1990s and now refuses to slow the economy to halt escalating housing values.

Blinder and Reis don't agree with those criticisms, though they have some others.

"Much of the secret to Greenspan's success remains a secret," they said.

They would have liked him to be more open.

The "most important" bone Blinder and Reis pick with Greenspan is that he has functioned so much like a "one-man show" within the policy-making Federal open market committee, which has 19 participants. That means the committee "has eschewed many of the presumed benefits of decision-making by committee".

Greenspan has made several mistakes during his long tenure, including not leading the FOMC to cut interest rates as quickly as it should have after the 1990-91 recession. In that case, he expected the economy to snap back from the slump, and with inflation still higher than he wanted it to be, rates came down too slowly.

That recovery was greatly retarded by serious problems at many banks that caused a credit crunch. The critics are simply wrong regarding whether the Fed should target asset prices and set out to burst any developing bubbles. And, as Fed vice-chairman Roger Ferguson and Fed governor Donald Kohn have argued, setting a numerical target for inflation might create new problems for policy-makers while providing few if any benefits.

As Greenspan said at an earlier Jackson Hole conference, there is no evidence that small increases in interest rates in the late 90s would have prevented the surge in stock prices, particularly in high-tech stocks. In other words, bursting whatever bubble there was - and some knowledgeable economists said there was no serious bubble except in high-tech stocks - would have meant crunching the economy.

Taming the surge in housing prices would be even more problematical. Just what do the critics have in mind?

Apparently, whatever it takes to stop the rise in home prices, regardless of whatever else it does to the economy. The argument for that rests on the assumption that if the increase in home prices isn't stopped now, then the eventual bursting of the bubble - assuming there really is one - will do more damage to the economy than raising rates to burst the bubble now.

It's entirely possible there won't be much damage to the economy when housing prices stop going up. If interest rates were raised rapidly, such damage would be assured.

Blinder and Reis offer several arguments why a committee decision-making process may produce better results than those by an individual.

But they seem to overlook that there is a committee. There is a pooling of information in the presentations of each of the FOMC participants. And if a chairman were to get seriously off the reservation, the present committee could refuse to support him.

As for their other criticism - that "much of the secret of Greenspan's success remains a secret" - it is actually rebutted by a long list in their paper of the "principles" that underpin what they call the "Greenspan standard".

Those "principles" and the success they have helped achieve have given the Fed enormous credibility. That credibility ought not to vanish when Greenspan leaves. The rest of the FOMC will still be following Greenspan's principles when his successor arrives.

- BLOOMBERG