I'm sure most here were aware of Alan's jazz proclivities. Here's hoping that the replacement chair will be as successful.
Ingram: So long, Mr. Greenspan
By MATHEW INGRAM
Tuesday, January 31, 2006 Posted at 3:46 PM EST
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Did Alan Greenspan pore over economic minutiae in his bathtub while listening to a little light jazz music before his last meeting of the U.S. Federal Reserve Board on Tuesday? According to his wife, that was how "The Maestro" preferred to soak up the mind-boggling array of facts he used to try and diagnose the ills of the U.S. economy over the last two decades.
In fact, it probably wouldn't be much of a stretch to say that Mr. Greenspan saw the job of the Federal Reserve as being a little like jazz -- in the sense that it was unpredictable, complex and yet somehow satisfying at the same time. And as more than one person has noted, if it wasn't for his interest in jazz, he might never have worked for Richard Nixon, a job that started him on the road to becoming the world's most powerful central banker.
A former bandmate from the group that Mr. Greenspan played saxophone with as a teenager, the Henry Jerome Orchestra, happened to work for the future president and introduced the two men in 1966. Mr. Greenspan was hired as a consultant to the Nixon campaign, then later joined President Ford's council of economic advisors, and eventually became the chairman of the U.S. Federal Reserve in 1987, a few months before the stock-market crash.
Some music fans don't like jazz because it's too unpredictable, and tends to jump around in ways that are hard to understand if you're not an expert. A similar criticism dogged Mr. Greenspan through much of his Fed career -- that he was deliberately inscrutable to the point of being opaque, and that this tended to distort the reaction of the U.S. economy to his various pronouncements and Fed decisions.
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In his regular appearances before the U.S. Congress and Senate, Mr. Greenspan became legendary for attaching so many provisos and qualifying statements — on the one hand this, on the other hand that — to his testimonials that it was almost impossible to determine what his views were on a particular question, such as the federal deficit or higher interest rates. The Fed chairman himself once joked that "If I seem unduly clear to you, you must have misunderstood what I said."
Although many felt this was a deliberate attempt to avoid being held to account for a particular decision, or to avoid taking sides in a political question, for Mr. Greenspan it seemed to be almost as much about remaining flexible, and not being tied to one course of action. That left the field open for such dramatic moves as the Fed-orchestrated bailout of Long Term Capital Management, the giant hedge fund whose failure in 1998 threatened the stability of the global economy. And it allowed Mr. Greenspan to muse about "irrational exuberance" in 1996 and yet continue to keep interest rates low, which many critics believe exacerbated the tech-stock bubble in the late 1990s.
As longtime Fed-watcher and journalist Greg Ip describes in the Wall Street Journal, Mr. Greenspan's fans say "this absence of dogma has been essential to his success; his refusal to become invested in any particular model of the economy enabled him to shift gears whenever the prevailing model stopped working." The Fed chairman has said he is a firm believer in what is called the Bayesian method of decision-making, which involves coming to conclusions when key elements of the situation are unknown. That's a pretty good description of what the Fed has to do. As Mr. Greenspan put it: "Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape."
In other words, it is arguably the perfect environment for a jazz musician/economist. Some of Mr. Greenspan's critics, however, believe that the Fed chairman spent a little too much time trying to keep the markets — and government — guessing about what his real intentions were, and that the U.S. economy might have been better off if Mr. Greenspan's decision-making had been a little less opaque. Among other things, they have suggested that the Fed should have an explicit interest-rate target, which is something that most central banks (including Canada's) have. Mr. Greenspan preferred to remain flexible, and it was clear he thought that was one of the defining principles of his chairmanship.
But was it the best way to run the U.S economy? Some believe that it was not. Legendary free-market economist Milton Friedman, for example, has said in the past that the Fed's job could be accomplished by a computer, one which took note of patterns in the bond and currency markets and then set the central bank rate based on those fluctuations. Others have said that Mr. Greenspan's model focused too much of the market's attention on him and his opaque pronouncements, and created a kind of cult of Greenspan. This in turn, they argue, created what philosophers call a "moral hazard," where investors were happy to take risks because they were confident that Mr. Greenspan and the Fed would come along to bail them out.
And what can we expect from Mr. Greenspan's successor? Ben Bernanke has gone on record in the past as saying he would prefer to have an explicit interest-rate target like Canada does. On the other hand, he is also — like his predecessor — a saxophone player. It's not clear whether he likes jazz or not.
Mathew Ingram is the Globe and Mail's on-line business columnist. Feel free to post a comment or e-mail Mathew at
mingram@globeandmail.ca
For past columns and a brief biography, click here
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