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Alan Greenspan, Fed chair 1987–2006
Chair 1987–2006· Economist or figure
Fact, law or dataA rule, statute, definition or measured number.
Fed chair for almost 19 years under four presidents, celebrated for steady growth and later blamed for the housing bubble.
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Appointed by Reagan in 1987, Greenspan steadied markets two months in, after the Black Monday crash, by promising liquidity. In the 1990s he bet that rising productivity allowed growth without inflation and kept rates moderate; in 1996 he warned of 'irrational exuberance' in stocks. After the dot-com bust and 9/11 he cut the fed funds rate to 1% by 2003 and favored light regulation of derivatives and mortgage lending.
Why it matters
His tenure gave rise to the 'Greenspan put', the belief that the Fed will rescue falling markets, and is a central exhibit in arguments over what caused the 2008 crash.
Legacy
FOMC transcripts, his speeches, his memoir The Age of Turbulence (2007), and his October 2008 testimony admitting 'a flaw' in his free-market view of lenders.
Debates and risks
How much his low rates of 2001–04, versus lax lending standards, global savings or weak regulation, inflated the housing bubble is still argued.
Connections (2)
▸Alan Greenspan, Fed chair 1987–2006 warned of 'irrational exuberance' before Dot-com bubble and bust (2000)Fact, law or data
The connection
In a December 1996 speech, Greenspan asked how one could know when 'irrational exuberance' had unduly inflated asset prices. Markets dipped, then soared for three more years. He declined to raise rates to deflate stocks, arguing bubbles are hard to spot in advance; the Fed did hike to 6.5% in 1999–2000.
When and why
American Enterprise Institute dinner, Washington, December 5, 1996; the Nasdaq peaked on March 10, 2000.
How we know
The speech text is on the Fed's website; stock markets in Tokyo and Europe fell sharply the next day.
Debates and risks
Whether central banks should lean against asset bubbles with rates, or clean up after they burst, as Greenspan argued, remains debated.
▸Alan Greenspan, Fed chair 1987–2006 is partly blamed for Subprime mortgages and the housing bubbleExperts disagree
The connection
After the dot-com bust and 9/11, the Greenspan Fed cut the federal funds rate to 1% by June 2003 and held it there a year. Cheap short-term money made adjustable-rate mortgages attractive. He also resisted tighter rules on mortgage lenders and derivatives, trusting lenders to police themselves.
When and why
Federal Reserve, 2001–2006; in October 2008 Greenspan told Congress he had found a 'flaw' in his belief that self-interest would protect lenders.
How solid is the link?
Rate history and his 2008 testimony are on record. Economist John Taylor argued rates were too low; Greenspan and Bernanke blamed global savings and lending practices.
Debates and risks
Economists disagree how much low rates, versus loose lending standards, foreign savings and weak regulation, inflated the bubble.