No more Superstar

Alan Greenspan closed his 18-year tenure as Federal Reserve Board chairman on January 31. Word is he already is working on a memoir and he is giving speeches at $150,000 a crack. Well, good for him.

During a period of unprecedented change, Greenspan navigated well, establishing credibility instantly with his deft handling of the Oct. ’87 stock market crash. Since that time, interest rates have come down, as have unemployment rates, while productivity has gone up. Should Greenspan be credited with these developments? Much of the financial press seems to be willing to give him the credit.

One thing I know for sure: We will never see another Fed chairman quite like the Maestro. The world has changed so much in the last 18 years that I doubt future Fed chairmen will be able to achieve the “superstar” status that some seem willing to give Greenspan. For the sake of his legacy, Greenspan may be getting out of the game at just the right time.

Consider first how much faster information flows today compared to the late 1980s. Remember the time before the Internet? Faster flows of information should lead to more accurate economic analysis, but it also requires greater transparency. It is much harder today for the Fed to operate in secrecy than it was in the 1980s. Today, the Fed is operating in a much more open fashion, telegraphing most of its interest rates moves, making the significance of individual FOMC meetings much less dramatic.

Second, think of how easy credit has disrupted classic economic patterns. For example, it used to be that people spent more money when they earned more money. Now they just spend more money, regardless of their incomes. The ease with which we can tap into our home equity, not to mention the atrocious spending example set by the federal government, has really skewed normal income and spending relationships. How do you control an economy when the normal rules don’t apply?

And third, the economy is a worldwide enterprise today, where international boundaries don’t mean much. As foreigners finance more of our debt, I believe we grow more vulnerable to foreign influences in our economy. We certainly see that with the long bond rate, which seems almost entirely immune to movements in the Fed Funds rate.

Ben Bernanke, who was sworn in as Fed chairman on February 6, has talked about inflation targeting. Many other countries already use a system where an acceptable level of inflation is articulated and the central bank works to keep interest rates at that level. It is an approach that gives more power to lawmakers and reduces the role of the Fed. I don’t know whether this will help or hurt our country in the long run, but I do suspect that it means we’ll never have another superstar Fed chairman.