Alan Greenspan

American economist

• Born: March 6, 1926
• Place of Birth: New York, New York

As chair of the US Federal Reserve Board, the nation’s central bank, Greenspan worked to balance economic growth, employment rates, and inflation. His tenure spanned twenty years and also saw the stock market crash of 1987, the relatively mild recessions of 1990–92 and 2001–2, the dot-com bubble and subsequent crash in 2000, the economic fallout from the September 11, 2001, terrorist attacks, a ballooning federal deficit, and growing consumer debt.

Early Life

Alan Greenspan was born in New York City, the only son of Herman Herbert and Rose Goldsmith Greenspan. The couple divorced when Greenspan was six years old. From then on, he was reared by his mother, a furniture salesperson. Rose and her son moved in with her parents, Russian Jewish immigrants, in the Washington Heights section of New York. Alan attended the city’s public schools and, eventually, the renowned Juilliard School, where he studied saxophone and clarinet. After two years, he dropped out and toured the country with the Henry Jerome swing band.

Eventually, however, Greenspan decided that he could not excel in music professionally and left the ensemble. His insatiable love of figures and economics prompted him to enroll in New York University’s School of Commerce. There he earned a bachelor’s degree in economics, graduating summa cum laude in 1948. He obtained a master’s degree from the same institution in 1950 and, much later, a doctorate in 1977 after a stint at Columbia University. While there, he met the noted economics professor and public official Arthur F. Burns.

Greenspan proved to be more than merely an academic economist. With bond trader William Townsend he formed the economic consulting firm of Townsend-Greenspan and became the firm’s director following Townsend’s death in 1958. Greenspan maintained this connection until 1987, advising scores of the most important corporate entities on economic trends. He prospered as a business economist.

The year 1952 was a watershed in Greenspan’s life. He met Joan Mitchell, a Canadian art historian to whom he was to be married for a year between 1952 and 1953. Although their marriage was brief, she introduced him to one of the greatest influences in his life, best-selling novelist and social philosopher Ayn Rand. Describing her first meeting with Greenspan, Rand said, “He impressed me as very intelligent, brilliant, and unhappy. He was groping for a frame of reference. He had no fundamental view of life.”

Assisted by Rand, the author of best sellers such as The Fountainhead (1943) and Atlas Shrugged (1957), Greenspan seemed to have found that frame of reference, at least in his professional life. Along the way he espoused Rand’s objectivist philosophy of individual freedom, including freedom from government interference. According to this doctrine, unmitigated “rational selfishness” and its economic adjunct, sweeping laissez-faire capitalism, would lead to the best of all worlds. Greenspan acknowledged that Rand persuaded him that capitalism is not only efficient and practical but also moral.

Life’s Work

Greenspan first became connected with Washington in 1968, when he was named the director of domestic policy research for Republican presidential candidate Richard Nixon. After Nixon’s election, Greenspan served on other occasional assignments, yet he did not accept a regular government appointment until 1974, when President Gerald R. Ford made him chair of the Council of Economic Advisers. True to his conservative colors, Greenspan urged Ford to make curbing inflation his administration’s top economic priority. To Greenspan, holding price levels low was more important than keeping economic growth and employment rates high in the tradeoff. When Democrat Jimmy Carter won the 1976 presidential election, however, Greenspan returned to his consulting firm in New York.

Following Republican Ronald Reagan’s presidential victory in 1980, Greenspan once again began receiving assignments from Washington. His most notable public service during this period was as chair of the bipartisan National Commission on Social Security Reform in 1982 and 1983. This fifteen-member advisory panel recommended measures to prevent the projected bankruptcy of the Social Security system. He also appeared on lecture circuits and was recruited to serve on the boards of a number of corporate giants, including Alcoa, General Foods, and Mobil Oil.

Paul Volcker’s unexpected resignation as chair of the Federal Reserve Board of Governors (FRB), as of June 1, 1987, provided the opportunity for Greenspan’s appointment as Volcker’s successor. His anti-inflation approach and “hands off” philosophy harmonized well with Reagan’s policies, and he came highly recommended by Volcker, Secretary of the Treasury James A. Baker, and the business community. His nomination, announced on June 2, was easily confirmed by the US Senate. He was sworn in as head of the FRB on August 11, becoming director of the central bank of the United States and taking on primary responsibility for the Reagan administration’s monetary policy. Greenspan thus assumed a major role in manipulating money and credit in the US economy, taking actions that would have important effects on the nation’s income levels, interest rates, prices, and employment.

Greenspan’s overarching goal was to maintain the money supply at a level sufficient to support the total amount of goods and services produced by the economy but no more, so as to keep inflation under check. To achieve this objective, the FRB has a number of tools at its command, such as discount rates at which it lends to commercial banks, the latter’s reserve requirements also set by the FRB, and its open-market operations.

Greenspan and his fellow governors on the board largely fared well in achieving these contradictory goals. The response of the American public, as measured by a Fortune magazine poll in 1996, was that Greenspan had called the shots accurately and had set the monetary thermostat at the approximately correct reading during much of his first decade in office.

There were, however, a few challenges along the way. Greenspan’s first test came early in his tenure as head of the FRB. On October 19, 1987, the Dow Jones Industrial Average, an important index on the New York Stock Exchange, dropped by 508 points. That slide represented 22 percent of the value of stocks traded on that exchange. Earlier, Greenspan had raised the interest rate the FRB charges its member banks once, from 5.5 percent to 6 percent. However, following the crash, and under Greenspan’s impetus, the FRB quickly relaxed its anti-inflationary measures and added money to the economy to prevent further asset deflation. It reversed directions, and Wall Street recovered in short order. Inflation, however, flowing from the federal government’s growing budget deficit because of tax cuts and increased defense spending, threatened once more.

The following year, 1988, was a presidential election year. Incumbent presidents or their hand-picked successors typically try to run in an expansionary, job-creating economic climate reflecting a good rate of growth and employment. Off-the-record pressures on the FRB were reported and were generally denied.

An unusual bank-induced credit crunch in 1990 and the Persian Gulf War in 1991 led to the recession of 1990–1991. Considering incumbent president George H. W. Bush’s defeat in the 1992 election, critics hold that the FRB on this occasion was not fast enough in creating an economically “winning” climate. Even though the business cycle was on an upswing by the election date in November 1992, the electorate’s perception, especially in the light of the extensive corporate downsizing under way, was that things were bad. Presidential candidate Bill Clinton’s slogan “It’s the economy, stupid!” played to wide and receptive audiences to secure his electoral victory. By 1994, the business community itself was openly critical of Greenspan’s characteristic tight-money policy, especially in the absence of conclusive indicators suggesting overheating of the economy.

Disagreements on inflation levels and thus on appropriate interest rates were now connected with other fundamental structural matters. For example, increasingly permeable borders and globalization raised the question of whether the US economy was less subject to inflationary pressures from monopolizing trends in domestic sources, given greater exposure to a more competitive world economy. Economists had long held that a growth rate of 2.5 percent per year could be sustained without inflation. Would that rate still be realistic? No one knew for sure. Greenspan tended to answer these and other economic questions conservatively, arguing that monetary growth must be kept low. He was not, however, a hard-boiled ideologue. On his earlier appointment to the Council of Economic Advisers in 1974, he had described himself as “not a Keynesian . . . not a monetarist . . . [but] a free enterpriser.” Even though he was one of Rand’s early enthusiasts, he conceded that her utopia may be impossible to achieve. Rather, Greenspan summarized his policies as heading for “no recession, no inflation, no voodoo.”

In December 1996, in the face of a steadily rising, record-breaking stock market, and then again in February 1997, in blunter and more detailed language, Greenspan warned the investing community against “irrational exuberance.” The stock market responded with decreases in the Dow Jones Industrial Average, but it was not immediately clear to what extent the expected “Greenspan effect” had cooled the stock market’s frenetic rise, which continued unabated in the dot-com era of the late 1990s.

Despite the pressures of his job with the Clinton administration, Greenspan continued to find time to maintain a personal life. He enjoyed tennis and music, and in April 1997, he married his second wife, National Broadcasting Corporation television reporter Andrea Mitchell (unrelated to his first spouse).

Two years after his fifth and final reappointment, this time by President George W. Bush, Greenspan retired as FRB chair on January 31, 2006, following eighteen years of service under four presidents. He was succeeded by Ben Bernanke. Greenspan had held the position longer than any of his predecessors (the FRB was established in 1913) and received significant recognition for his service, including honors from the British and French governments and, most significantly, the Presidential Medal of Freedom, the highest American civilian award. During his tenure, the United States witnessed only two mild recessions, compared with four more severe ones in the previous eighteen years, and Greenspan steered the financial system through the stock market crash in 1987, the domestic savings and loan crisis shortly thereafter, and the emerging Asian market collapse in 1997.

The last few years of Greenspan’s tenure were marked by the FRB’s response to the terrorist attacks of September 11, 2001, and their economic fallout; the United States' military involvement in Afghanistan and Iraq; the housing boom; and the ballooning federal deficit, which Greenspan characterized as unsustainable. Greenspan was criticized for his seemingly partisan support of Bush’s 2001 tax cuts as well as his siding with the chief executive’s unsuccessful efforts to privatize parts of the Social Security system. The FRB’s historically low interest rates in 2002–3, which were set to cope with the recession following September 11, were blamed for the housing market bubble of 2007 and for soaring levels of consumer debt, which ultimately contributed to the global financial crisis that began in late 2007.

In the years following his retirement from the FRB, Greenspan was active on the public-speaking circuit (commanding six-figure fees) and began writing his memoirs after receiving a reported $8.5 million advance from Penguin Press; The Age of Turbulence: Adventures in a New World was published in the fall of 2007. Also, he returned to private consulting work with his firm, Greenspan Associates, and served as a consultant or adviser to various prominent firms, including Deutsche Bank and the Pacific Investment Management Company. Greenspan continued to weigh in on economic current events over the following years, including the impact of the COVID-19 pandemic that began in 2020 and the Federal Reserve’s decision in 2022 to begin raising interest rates in a bid to lower record levels of inflation.

Significance

Greenspan was generally successful in juggling the various and often contradictory aggregates of monetary policy while chair of the FRB. He had a democratic management style, which gave others, even junior advisers, a voice in the decision-making process. A former Wall Street economist, Greenspan was more concerned with protecting the value of investors’ assets than with maintaining, through government action, a high level of economic growth and employment. Greenspan’s relatively consistent anti-inflationary stance sensitized several administrations, both Republican and Democratic, to the value of putting a reasonable brake on growth in the interest of a more balanced government budget and the resulting stability of the economy. During the global financial crisis that began following his retirement, some commentators argued that the FRB’s policies during Greenspan’s tenure had played a significant role in enabling the crisis to occur, and Greenspan himself admitted that his antiregulation policies had been flawed.

In a Wall Street Journal interview, Greenspan offered the following overview of his own achievements: “[T]here is a vague disillusionment with economists we are not going out of style, but we are retrenching from what had been an unrealistic position about what we could accomplish.” This encapsulates Greenspan’s oft-voiced opinion that a painless solution to economic woes is beyond the means of any economic theory or individual.

Bibliography

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