Greenspan proved a steadying force

Fed chief saw in = ation sink during tenure

As chairman of the Federal Reserve for 18 years, Alan Greenspan has steered the U. S. economy through times of great prosperity and periods of great duress.

Throughout most of the 1990s, he presided over the longest period of uninterrupted U. S. economic growth since the end of World War II. He also was a steadying force during such crises as the stock market crash of 1987, the bursting of the stock market bubble in 2000 and the terrorist attacks on Sept. 11, 2001.

While Greenspan has been criticized for not doing more to pop the 1990s stock market bubble — and for possibly helping foster a housing market bubble by keeping interest rates low — his record is such that Princeton economists in a paper in Augustsa id he had a legitimate claim to being the greatest central bankerwho ever lived.

On Monday, President Bush named Ben Bernanke, chairman of the Council of Economic Advisers and a former Fed governor, to take over as chairman when Greenspan’s term ends Jan. 31.

During his nearly two decades as chairman, Greenspan builtup on the progress of his predecessor, Paul Volcker, in bringing down in= ation and — perhaps his biggest legacy — in recognizing that a sharper gain in productivity growth in the 1990s meant the relationship between employment and in = ation had eroded.

Thatr ealization enabled the Fed to keep a looser grip on the economic reins and to allow the unemployment rate to fall far below the level that previously was considered a trigger for in = ation. The economy enjoyed the longest expansion on record as workers enjoyed a strong job market and higher standards of living.

Greenspan took of @ ce Aug. 11, 1987, and quickly faced the @ rst of whatt urned outt o be many challenges during his career att he central bank. On Oct. 19, 1987, the Dow Jones industrial average plunged 508 points, or 22.6%.

After canceling a speech in Texas and heading back to Washington, the newly minted chairman issued a one- sentence statement before the markets opened the next day, assuring that the Fed would continue to keep the @ nancial system liquid. In the next days, the Fed pumped money into the economy at breakneck speed. By Thursday, banks were lowering their prime lending rate. The markets quickly stabilized, and a major downturn in the economywas avoided.

The events established Greenspan’s reputation as an aggressive policymaker, a reputation reinforced by many Fed actions throughout his tenure. In the midto late- 1990s, a new challenge — perhaps Greenspan’s biggest— arrived: a soaring stock market fueled by the Internet boom.

The Fed chairman addressed the issue in a speech on Dec. 5, 1996.

“ How do we know when irrational exuberance has unduly escalated assetv alues?” Greenspan asked. “ We should notun derestimate or become complacent about the complexity of the interactions of asset markets and the economy.”

While the signi @ cance of that speech was not obvious to some, others, especially traders, knew Greenspan meant one thing: The marketwas overvalued.

But, surprisingly, the now- famous “ irrational exuberance” speech elicited little reaction. The Dow closed down less than a percentage point from the previous day and rose on the next business day.

It became clear that the stock market might be beyond even Greenspan’s control. During Greenspan’s watch, in = ation reached the lowest level in decades. With growth in productivity — worker output per hour— high, Greenspan argued, price pressures could remain contained because companies did not have to jack up prices to cover increased labor costs.

At a Senate hearing in June 2004, Greenspan was asked of which accomplishments at the Fed during his tenure he was most proud.

One of the achievements he cited was the Fed’s increased openness. Under Greenspan, not only did Fed policymakers begin to announce their decisions, but they also released public statements about their thinking on the economy.

Such openness has made it easier for @ nancial markets to forecast Fed moves, smoothing outwhat often had been sharp reactions to Fed policy. Greenspan said that although the Fed had made progress on the issue of openness, “ We have away to go. We’re not there yet.” On hisway in: President Reagan congratulates Greenspan after he was sworn in as Fed chief.