Greenspan, the sorcerer’s apprentice of the great global financial crisis
Alan Greenspan, who served as Chairman of the Fed from 1987 to 2006, is a unique figure amongst central bankers, as he was always a hawk on monetary policy, and therefore in favour of deregulation, but from 2001 onwards he became a dove on monetary policy, implementing excessive interest rate cuts. This combination triggered the great financial crisis of 2008. Greenspan’s approach was that of a sorcerer’s apprentice. The worrying fact is that the current Chairman of the Fed, Kevin Warsh, appears to have adopted the same stance as Greenspan.
The starting point for describing Greenspan’s work is to highlight how, within the family of central bankers, there is a group that is less well-known than the hawks and the doves, but no less significant for that: the herons.
‘Herons’ are those central bankers who, during their time at the Fed, have changed flocks: from hawks they have become doves, or vice versa, even switching ‘species’ more than once. Statistically, the ‘herons’ have been a significant phenomenon, numbering almost as many as the ‘hawks’ and ‘doves’, who have always remained ‘loyal’ to their own flock. But above all: on at least three occasions, it was the ‘herons’ themselves who became the guiding force behind the Fed’s decisions. One such instance was at the start of the new millennium, when Greenspan, the Chairman, transformed from a hawk into a dove, taking the majority of the Board with him: monetary policy took an expansionary turn.
What had happened? The Governor-General launched a strategy – the ‘Greenspan recipe’ – whose two main ingredients were: on the one hand, a shift towards expansionary monetary policy; on the other, the continuation of the approach of financial deregulation in banking policy.
In terms of monetary policy, Greenspan effectively became a dove, whilst justifying his behaviour on hawkish grounds. The explanation was that the US economy was experiencing a period of exceptional productivity growth – the first pillar of the ‘recipe’ – thanks to the systematic and pervasive application of technological innovation. From the perspective of macroeconomic analysis, this constituted a so-called positive shock to aggregate supply, which translated into a series of positive developments: higher economic growth, higher employment and lower inflation.
