Greenspan's reign to end in January
The end of Alan Greenspan's reign at the United States' Federal Reserve is a highly significant moment for the world's financial markets and economy.
Everyone knew that 79-year-old Greenspan's fourth term was to expire at the end of January. It is just that for 18 years he has been in the hot seat of the world's most powerful central bank and that made it difficult to imagine life after Greenspan until it actually happened.
But, assuming the Senate approves US President Bush's nomination of Ben Bernanke, his chief White House economic adviser, to the role, then change there will be and Greenspan will head off into the sunset and perhaps pore less over economic data every month and worry less about irrational exuberance in the markets.
We do know that US inflation has been low on his watch averaging 3 per cent over 18 years while economic growth, particularly in the second half of his tenure, has been strong and remains strong. While not all of this success can be attributed to Greenspan alone, his shrewd operation of monetary policy will always be considered to have made a significant contribution.
But the flipside of the strong growth, which has sucked in imports and capital from around the world, is a giant current account deficit now heading for an unprecedented US$1,392 billion, or 6.5 per cent of gross domestic product.
Greenspan stands accused of allowing the dotcom bubble to inflate so far in the late 1990s that it burst spectacularly, at which point he slashed interest rates and allowed another bubble in housing to inflate.
That is happening alongside very little saving by Americans, who prefer to regard their rising house prices as a form of saving and extract money to fund consumption by re-mortgaging.
Into this situation, with its many potential pitfalls, steps 51-year-old Bernanke. Financial markets took the news of his appointment in their stride last week, and rightly so. He is one of the finest monetary economists of his generation and already has three years at the Fed behind him.
Upon his arrival at the Fed in 2002, he argued that the central bank must do everything in its power, including flooding the economy with money, to prevent the economy sliding into deflation a very real danger at that time.
This has led some economists to think that Bernanke is soft on inflation. He is not but he is prepared, as Greenspan always was, to consider any solution to potential problems.
His preparedness to keep inflation in check is amply demonstrated by his consistent support for a system of inflation targeting, such as that of the Bank of England.
The Federal's mandate is to pursue maximum growth and employment with stable inflation. Bernanke has argued, as does the BoE's governor, Mervyn King, that an explicit inflation target helps anchor people's expectations of inflation at that figure.
Bernanke has already stressed that he intends to continue in the Greenspan mould. While he may struggle to persuade his colleagues on the federal open markets committee, which sets interest rates, to adopt a specific target, he is likely to continue to increase the Federal Reserve's transparency about what it wants to see from the economy and how it plans to get there.
He has already made it clear that he considers inflation of 1 per cent - 2 per cent to be a "comfort zone" and is likely to be more vocal about that in the future.
He may try to depersonalize the role of the Federal Reserve chairman in setting interest rates, as King has tried with some success. It is unhealthy, as King has argued, that the health of the world's largest economy becomes inextricably linked with one person, with their every utterance studied under the microscope.
The most immediate problems confronting Bernanke when he takes control on February 1 are likely to be the booming housing market, in some areas at least, and inflation. Interest rates by then are very likely to be 4.25 per cent or 4.5 per cent, having already been raised 11 times since last summer from an ultra-low 1 per cent.
Bernanke may still face the same "conundrum" that Greenspan has spoken of: that long-term interest rates, which govern most Americans' mortgages, have remained remarkably low in spite of the successive rises in the Fed funds short-term interest rate. Normally, long rates would have risen sharply by now.
With a bit of luck something that all policymakers, no matter how smart, need the higher rates will cool the housing market and encourage more Americans to save more. If that happens gradually, then the Federal Reserve will have achieved the desired "soft landing" for the economy.
Lower spending by Americans should also start to shrink the US current account deficit.
Indeed, Bernanke has made it clear that he does not think that the current account deficit is a problem made in America. He blames other countries, especially in Asia but also Europe, for having an excess of savings that they deposit in the US looking for returns. He has called this a "global savings glut."
If domestic demand in those countries were higher, he argues, the current account deficit would be far smaller. This is a controversial view and will remain a live issue in the future.
Bernanke has also spoken in favour of a weaker US dollar as a method of reducing the deficit by making US exports cheaper and imports dearer.
There is, however, a world of difference between an orderly slide in the dollar, such as has been seen in the past few years, and a sharp fall. That could destabilize the US economy, causing interest rates to rise sharply and forcing the economy into recession. That would certainly cure the imbalances but it would be very painful.
Alan Greenspan's life
Alan Greenspan began a fifth term as chairman of the Board of Governors of the Federal Reserve System in June 2004. Greenspan also serves as chairman of the Federal Open Market Committee, the System's principal monetary policy-making body.
He originally took office as chairman and to fill an unexpired term as a member of the Board on August 11, 1987. Greenspan was reappointed to the board to a full 14-year term, which began on February 1, 1992, and ends on January 31, 2006.
The Fed chairman was born on March 6, 1926, in New York City. He received a bachelorship in economics (summa cum laude) in 1948, a master's degree in economics in 1950, and a PhD in economics in 1977, all from New York University. Greenspan has also undertaken advanced graduate study at Columbia University.
From 1954 to 1974 and from 1977 to 1987, Greenspan was Chairman and President of Townsend-Greenspan & Corporation, Inc, an economic consulting firm in New York City. From 1974 to 1977, he served as Chairman of the President's Council of Economic Advisers under President Ford, and from 1981 to 1983, as chairman of the National Commission on Social Security Reform.
Greenspan has also served as a member of President Reagan's Economic Policy Advisory Board, a member of Time magazine's Board of Economists, a senior adviser to the Brookings Panel on Economic Activity, and a consultant to the Congressional Budget Office.
His previous presidential appointments include the President's Foreign Intelligence Advisory Board, the Commission on Financial Structure and Regulation, the Commission on an All-Volunteer Armed Force, and the Task Force on Economic Growth.
Greenspan has also served as a corporate director for Aluminum Company of America; Automatic Data Processing, Inc; Capital Cities/ABC, Inc; General Foods, Inc; J.P. Morgan & Corporation, Inc; Morgan Guaranty Trust Company of New York; Mobil Corporation; and The Pittston Company.
Greenspan has served as chairman of the Conference of Business Economists, President and Fellow of the National Association of Business Economists, and Director of the National Economists Club.
Greenspan has received degrees from Harvard, Yale, Pennsylvania, Leuven (Belgium), Notre Dame, Wake Forest, Colgate, and Edinburgh universities. His other awards include the Thomas Jefferson Award for the greatest public service performed by an elected or appointed official, presented by the American Institute for Public Service, 1976; election as a Fellow of the American Statistical Association, 1989; decorated Legion of Honour France, 2000; recipient of the American Philosophical Society's Benjamin Franklin Award for Distinguished Public Service, 1998, and election as a member of the society, 2000; honorary Knight Commander of the British Empire, 2002; and the first recipient of the Gerald R. Ford Medal for Distinguished Public Service, 2003.
Source: China Daily
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