The Gentle Persuader

The long shadow of Alan Greenspan.


"Under the gold standard," Alan Greenspan wrote in Ayn Rand's 1966 book Capitalism: The Unknown Ideal, "a free banking system stands as the protector of an economy's stability and balanced growth. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."

What happened? Why didn't Greenspan, upon taking control of the Federal Reserve in 1987, barricade himself inside the Fed's ornate temple to the dollar on the National Mall and put America back on the gold standard?

Probably because in the intervening 20 years Greenspan learned the importance of speaking more softly while wielding ever-greater influence in order to achieve your goals. It is this gentle art of persuasion that Ben Bernanke, Bush's nominee to succeed him, will have to master to be the Greenspan II some have already dubbed him.

Before Greenspan's long tenure it was assumed that the Fed has two buttons to push, one to increase inflation and one to increase unemployment. All it could do was move the economy along the so-called Phillips Curve. Greenspan invented a third option, a Jedi mind trick to convince the world, not to mention his fellow Fed governors, that he really did possess special insight into the U.S. economy and would fight even a hint of inflation to keep dollars the world's preferred currency and a store of value better than gold.

Greenspan got things rolling by proving his anti-inflation mettle and enduring nearly constant jawboning from Bush I Treasury Secretary Nick Brady to cut interest rates. Brady wanted the Fed to ease the country out of a mild economic downturn and thus save Poppy Bush from the fallout of breaking his "no new taxes" pledge. That gave Greenspan the leeway to settle into a respectful d?tente with Treasury Secretary Robert Rubin during the Clinton years and focus on the real keys to a stable and growing economy: sound money and rising productivity.

Then Greenspan endured criticism for not hiking rates faster in 1997, when conventional wisdom said the economy was "overheating," as evidenced by the low unemployment rate. No, Greenspan counseled, it is productivity gains brought on by improvements in technology that are producing the job growth, not raging inflationary pressures.

By 1998 he was being hit for not cutting rates faster, thereby either achieving a sort of parity sweet spot or managing to be doubly wrong. The last quarter of '98 told the tale: 5.6 percent growth, inflation nowhere in sight.

In that same year, Greenspan spoke up for Microsoft and Intel and against the prevailing D.C. notion that tech monopolies would stifle innovation in some robber baron repeat of the 19th century. Nonsense, Greenspan practically declared. "By the measure of what benefits consumers, such enterprises should not be discouraged," he circumlocuted.

Indeed, for many years Greenspan was virtually alone in Washington in looking past static bean counting and the politics of the moment and focusing on productivity growth and the transformative power of tech as key factors in economic growth. Part of his formula for growth–and left-wing critics of Greenspan still seem not to understand this–is that relatively low marginal tax rates boost productivity. That is why Greenspan could honestly tell Congress that cuts in taxes on capital formation and on labor are a good idea. The facts are indisputable: The wealthy have paid more in taxes as their rates have declined.

On the monetary side, Greenspan handled the markets' expectations with finesse, via cover-the-waterfront boilerplate that conveyed where the Fed was headed and why but still preserved a little wiggle room, so that nothing the Fed did could ever truly be termed a surprise. Stability and balanced growth remained the goals, even through occasional missteps such as trying to talk down the equity markets' "irrational exuberance" in 1996 and suddenly cutting short-term rates in half-point chunks in 2001.

For the most part Greenspan maintained the central banker's crucial illusion of omniscience by somehow prevailing on his fellow Fed governors–each wholly independent, in theory–to back his policies with almost unfailing unanimity. This feat may prove hard for Bernanke to duplicate in the coming years, as some dissent is to be expected in what is essentially a seat-of-the-pants operation.

Bernanke's toughest job will come when the data tell him it's time to ease. The Fed should be moving to a neutral stance on rates just as Greenspan leaves, which buys Bernanke time. But sooner or later the business cycle pendulum will swing back; it will be time to ease. If Bernanke conveys that shift in a low monotone–liberally spiked with modifiers such as likely, unlikely, and more or less–then he will have learned the lessons of Greenspan well.

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