Alan Greenspan and the Federal Reserve

Princeton professor Alan Blinder served as vice chairman of the Federal Reserve in the mid 1990s. He offers his insights on the career and legacy of retiring Fed Chairman Alan Greenspan.

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JOHN YDSTIE, host:

The stock market fell sharply yesterday. The DOW Industrial Average shed nearly 213 points, almost 2 percent of its value. The S&P 500 was down almost as much in percentage terms.

A number of things riled a market. Maybe most unsettling is the growing tension with Iran, which sent oil over $68 a barrel, approaching the $70-a-barrel record reached after Hurricanes Katrina and Rita.

The volatile energy scene is just one of the potential challenges that will face the new chairman of the Federal Reserve, Ben Bernanke, when he takes over from Alan Greenspan. The current chairman, something of a legend in his own time, steps down January 31, after more than 18 years at the helm.

Princeton Professor Alan Blinder served as the Fed's vice chairman under Mr. Greenspan in the mid-1990s. He says Mr. Greenspan is among the best, if not the best, Fed chairmen ever.

Professor ALAN BLINDER (Princeton University): He's a terrific tea leaves reader. And I think very few, if any, people have ever figured out, to this day, how he does it.

Secondly, he sets high aspirations. There's a term that's used in economics often as a derogatory term: fine tuning, in the sense that that's a silly thing to try because you can't achieve it. But I think Greenspan was a fine tuner. He tried it, and he was pretty good at it.

YDSTIE: What would you say have been his most important contributions?

Prof. BLINDER: I think, frankly, the expert steering of the economy, the promotion of growth, the near absence of recessions during an 18-year period -- there have been recessions, but they've been short and mild --while at the same time managing to inch down the inflation rate despite a quite strong growth record. We haven't seen anything like that in our history up until recently.

YDSTIE: What about mistakes? Some would suggest he made a mistake by not addressing the stock market bubble or at least taking action to burst the stock market bubble sooner.

Prof. BLINDER: That remains controversial. And you're quite correct. Some people do say that we a mistake, and he should have burst -- or tried to burst, I guess I should say -- the stock market bubble. I don't agree with that for a variety of reasons, not the least of which is the Fed didn't have any nice surgical instruments that could have burst the stock market bubble without bursting the economy.

I actually think his biggest mistakes as Fed chairman have been in taking some opinions on non-Federal Reserve issues. Most prominent is the pretty enthusiastic, really, endorsement of tax cutting in 2001, which went way too far and has led to the budget problem that we're now in. As you'll remember, Greenspan was pretty much onboard for the Bush tax cuts and, you know, more or less said so publicly.

YDSTIE: Well, let me ask you about that. Let's talk about his relationship with presidents, and what did that tell us about his political acumen and ability to navigate the political waters of Washington?

Prof. BLINDER: They've been remarkably good with very few exceptions. I think the biggest exception, actually, was with Bush the father. They got almost nasty.

YDSTIE: And there was, there was some reason for that, though. He was holding interest rates high as we ...

Prof. BLINDER: Yep.

YDSTIE: ... moved into the election year, right?

Prof. BLINDER: The president and the president's men thought that the high-interest rate policy of the Federal Reserve was going to cost their guy, President George H.W. Bush, reelection and...

YDSTIE: Did -- were they right? Was Greenspan holding interest rates too high?

Prof. BLINDER: I think they were, in large measure, right. With a better economy, the first President Bush might well have gotten reelected.

Other than that, relationships with all the presidents, including Clinton, have been very good. It does tell you that Greenspan understands better than almost anyone how Washington ticks and knows how to play the game, has been extremely shrewd throughout his 18-and-a-half years.

YDSTIE: What about the celebrity and cult of personality? Was there any way to tell by the size of his briefcase or the tilt of his glasses whether interest rates were going to go up or down?

Prof. BLINDER: No, that was all an act. It didn't have anything -- it had no meaning.

(Soundbite of laughter)

What you really want from a social point of view is confidence in the Federal Reserve. What's been built up to a great extent over the last 18-plus years, and we'll see what happens now, has been confidence in Alan Greenspan. And those are not quite the same things. Now, this is not to say that Alan Greenspan hasn't merited it. As I said repeatedly to you and in many other venues, he has merited it. His performance on the job has been fabulous. And hopefully some of it did it rub off on the institution rather than inure entirely to the person.

YDSTIE: A tough act to follow. How difficult will it be for Mr. Bernanke?

Prof. BLINDER: It's an extraordinary act to follow. I've likened it to being the man the Yankees sent out in center field after Joe DiMaggio and Mickey Mantle.

Equaling the Greenspan performance is going to be hard for anybody, very hard.

YDSTIE: Well, thanks very much.

Prof. BLINDER: My pleasure.

YDSTIE: Princeton Professor Alan Blinder served as the Fed's vice chairman under Alan Greenspan in the mid-'90s.

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