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Wednesday, Sep 07, 2005

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Looking back on the Greenspan era

S. Balakrishnan

THE outpouring of praise grows louder and louder as we near the end. The last but one week-end saw central bankers assemble at Jackson Hole in the US for their annual reunion. (Wonder if Third World Governors get a look-in).

It was the last meeting Mr Alan Greenspan attended as US Federal Reserve Chairman. He lays down office in February 2006 after a 19-year stint.

If he does decide to pen his memoirs, it is sure to be a bestseller. Such is the awe and fascination with which Mr Greenspan is held not only in the US but also all over the world.

Appropriately, one of the main papers presented in the conference dealt with Mr Greenspan's handling of monetary policy during his tenure. Its conclusion is simple: no rules and constraints, restricting the freedom of policy and decision-making, characterised the functioning of the Fed in the period.

On the other hand, it was steered by changing economic and market conditions and headwinds (of which there were quite a few in his time). Mr Greenspan's Fed was not bound by crude inflation and money supply targets, which run the risk of irrelevance and being counterproductive in a fast changing economic, financial and technological environment.

Not for him the approach of ECB and Bank of England, whose almost sole focus is achieving pre-set price goals. None can describe it better than economists Mr Alan Blinder and Mr Ricardo Reis who say, "The Federal Reserve Policy under his chairmanship has been characterised by the exercise of pure, period-by-period discretion, with minimal strategic constraints of any kind, maximal tactical flexibility at all times, and not much in the way of explanation."

They go on to identify ten principles that have formed the basis for the conduct of monetary policy in the Greenspan era. Key among them seem to be keeping your options open, not getting caught in an intellectual straitjacket (monetarists, pay heed) and that recessions are bad, as is growth below potential.

The approach was one of navigating policy through the shifting sands of growth, inflation business and consumer activity and employment with heavy reliance on the constant stream of incoming data. Speeches, statements, Q&A sessions and shades of change in the language of post-meeting statements of the Fed provided insights into Mr Greenspan's thinking and enabled markets to gauge the future direction of policy and operate with less volatility. He has perfected the art of suspense and become a star in his own right with the world hanging on to his every word.

Before Mr Greenspan, who could have ever imagined that a central banker could achieve cult status?

The risk is that the system and the markets have become Greenspan-dependent. For his successor, it is a real class act to follow. Will he be up to the challenge?

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