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December 06, 2004

What Does Alan Greenspan Know that the Rest of Us Do Not?

All in all, given everyone's expectations of what would be possible twenty years ago, Alan Greenspan has done a remarkable job. He's been both very, very good and very, very lucky.

The New York Times's Edmund Andrews sums it up:

The New York Times > Business > Business Special > The Successor to Greenspan Has a Very Tough Act to Follow: Now in his 18th remarkable year as Fed chairman, the owlish and idiosyncratic Mr. Greenspan is required by law to step down in January 2006.... A big uncertainty is how any successor will extend Mr. Greenspan's approach to monetary policy, which has been as much an art as a science.

Though he is famous for poring over reams of often obscure data, Mr. Greenspan, 78, has been outspoken in his skepticism over econometric models. "Rules by their nature are simple," he said at a Fed symposium in August 2003. "Our problem is not the complexity of our models but the far greater complexity of a world economy whose underlying linkages appear to be in a continual state of flux." A devout believer in anomalies - trends that conflict with what standard models predict - he has defied conventional wisdom about the natural level of unemployment, the growth of productivity and the likelihood of inflation. And most of the time, he has been right....

He clearly knows something that the rest of us do not. But what?

Posted by DeLong at December 6, 2004 03:53 PM

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He knows what he actually knows and he knows what he means what he says when we don't and he knows what he actually thinks.

Posted by: tom at December 6, 2004 04:18 PM

I'd be a bit happier with Greenspan if he wasn't providing cover for Bush's hobbyhorses, beginning with the 2001 tax cut.

Posted by: RT at December 6, 2004 05:38 PM

I think a special few people can estimate econometric models with time-varying coefficients in their head--and know how to interpret limited dependent and independent variables in just the right way. The chief economist at the old First Chicago seemed to be able to do this for awhile.

Posted by: Richard Green at December 6, 2004 05:50 PM

Mr. Greenspan appears to know to not take anything for granted. But I think that there are probably any number of people who, with the trends and data accessible to the Reserve chair, could do as well, or better. His use of the world's investment to bankroll the American balloon-party may one day be unforgiven. And his betrayal of the payroll taxpayers is immoral by definition, because he wouldn't want it done to himself.

Posted by: Lee A. Arnold at December 6, 2004 06:11 PM

Given some of the major fuckups that Greenspan has been a part of, I can't understand why anyone thinks he has any special insights. He backed the ruinous tax cuts, failed to take any action (beyond uttering his "irrational exuberance" line) to quell the tech-stock bubble, finally jacked up interest rates just as the economy slipped into recession, fought mightily against Clinton's economic programs (and, thankfully, failed), and has in general been about eight months behind the curve.

Today, with the fiscal house falling around his ears, he's telling people that ARMs are a good deal and more tax cuts are a good idea.

What does Greenspan know? Apparently how to schmooze and politic. His track record as Fed chairman is, at best, not terribly good.

Posted by: Derelict at December 6, 2004 06:38 PM

He knows that it is better to be lucky than to be good.

Posted by: Ottnott at December 6, 2004 06:52 PM

Greenspan knows how to play Jazz Clarinet.

He also knows how to be obscure enough to sound wise.

The former is more important.

Posted by: Matthew Saroff at December 6, 2004 08:51 PM

So, they're already trying to build a legacy for Greenspan. Here's a different version you won't see in the NYT: he is our John Law. He is a master of hedonic adjustment, in concert with his cohorts. They did a beautiful job in 2004 leading up to the election.

About his special powers to see and manage his crystal ball, who cares. What he sees that matters to us is inflation. Maybe he'll complete his term as chair, maybe he won't. Lucky in his 18 years, sure, if you measure success by massive liquidity directed by the martket to inflate asset prices.

Look at the erosion in the purchasing power of the dollar over his tenure. Thanks, you creep!

Posted by: will renege at December 6, 2004 10:05 PM

Clearly, Mr. Greenspan knows a great deal, which the typical academic economist and/or "leading businessman" does not. The hype about poring over reams of obscure data was not misplaced. The man made it his business to know, follow and understand a great deal about the course of business cycles. Most economists know surprisingly little about the economy. A great many are wingnut ideologues, as is Mr. Greenspan, if you must ask. But, like a Creationist horse breeder, he let his detailed knowledge, and not his overarching political prejudices, guide him -- most of the time.

About all macroeconomic econometric models have proven to date is that third-rate mathematicians with little interest in, or detailed knowledge of, the economy are pretty worthless.

Posted by: Bruce Wilder at December 6, 2004 10:12 PM

He knows what to kiss and when to kiss it.

Posted by: Chuck Nolan at December 7, 2004 05:07 AM

Meltzer is quoted in the article saying Greenspan's weakness is that his lack of orthodoxy means he cannot pass his abilities along to his successor. This is a very odd thing for somebody like Meltzer to say, both as a historian of the Fed and as somebody who often seems to think he could do a pretty good job as chairman. Was Greenspan the first good Fed chairman ever? Did Volcker rely on Greenspan for policy advice? This is silly. There are other good economists out there.

Greenspan's claim, that he is a risk manager (rather than a magician?) is very telling. If we look at the make-up of the Fed now, it looks very strong without Greenspan. Geithner, Ferguson, Yellen, Bernanke , Poole and the rest, are really impressive. No Wayne Angell in sight. No Lindsey, for that matter. If we take Greenspan at his word, that what he has done is assess risks and mold monetary policy accordingly, then he does leave a strong legacy. The next guy will have a great risk assessment team to help him make decisions along the same lines as Greenspan. Rubin...hmmm...Rubin's strong point was risk assessment, too. (That's the story anyhow, risk assessment and the ability to elicit good opinions and use them, to tamp his own ego down in meetings.) So if what we want to do is recreate Greenspan, Rubin would be an obvious choice.

But I'm not sure we want to recreate Greenspan. I think what we want to do is find somebody with a very strong grasp on short-to-medium term linkages in the domestic and global economy, an understanding of monetary policy from the ground up, and a willingness to listen to the advice of the Board and presidents. If we put too high a premium on getting another Greenspan, it might be at some cost to other qualities that a Fed chairman needs. Why not just look for somebody really good? Like those other Fed folks, perhaps?

Posted by: kharris at December 7, 2004 05:52 AM

He's knows better than to let his ego get in the way of his career and smart enough to know what his true function is. Serve the powers that be.

A.G. four thousand years ago -

"No, no. Sacrificing two lambs and an ox was excessive and has given Baal indigestion. Three doves would have sufficed at the time. Unfortunately, now your lovely daughter Bathsheba must...." yada yada

Posted by: JackNYC at December 7, 2004 10:26 AM

"Given some of the major fuckups that Greenspan has been a part of, I can't understand why anyone thinks he has any special insights."

Janet Yellen does. Which is good enough for me.

"No Lindsey, for that matter."

In fairness to Lindsey, he was warning about asset price inflation in Open Market Committee meetings in 1998. He's not totally ga-ga, even if he is a supply-sider.

Posted by: Urinated State of America at December 7, 2004 12:03 PM

I think one thing he knows is how to admit error. "Not nature but culture" is an astonishing statement for a former disciple of Rand's. Perhaps, also, he is brave in the face of change, unlike most of us.

Posted by: Randolph Fritz at December 7, 2004 01:11 PM

Partly, what he knows, and what most economists are trained not to know, is to make assumptions that conflict with real life. No steady-state analysis, no rational expectations, no if we have two goods only, no currency trades at purchasing parity levels. He is a very good observer who relies on hard data. Economists are snobs and value theoretical work over empirical research. Data then is used to fit theories instead of the other way around. I believe this is the difference between Greenspan and Volcker, who was more of a theoretical person and not so practical.

And while he has been blamed for many things, in the end, he is only chairman of the Fed, with limited powers and influence. Not to say he isn't powerful and influential, but there are limits, and people don't seem to recognize that. The whole bubble thing? Its biggest cause was investor ignorance, which Greenspan pointed out. Tell me how the chairman of the Fed can single-handedly get all the individual investors out there educated on basic finance, besides saying it over and over again in interview after interview? Furthermore, the recession after the bubble burst was exceedingly mild, and he should be given credit for that.

Posted by: chickensoup at December 8, 2004 09:33 PM

'I think one thing he knows is how to admit error. "Not nature but culture" is an astonishing statement for a former disciple of Rand's.'

I'm not familiar with this statement attributed to Greenspan. When did he say it, and what does it mean? Can you give some context? And a link?

Posted by: S.Anderson at December 9, 2004 09:36 AM

Oops, I forgot one important word in my post above. The first sentence should read:

"Partly, what he knows, and what most economists are trained not to know, is NOT to make assumptions that conflict with real life."

Posted by: chickensoup at December 9, 2004 07:06 PM

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