Econ-Atrocity: The King is Dead! Long Live the King!

by Jonathan Teller-Elsberg, CPE Staff Economist

After eighteen years holding the reigns of power, Alan Greenspan has finally ended his career as chair of the Board of Governors of the U.S. Federal Reserve, as a result of legal limitations on the length of his term. As the person in charge of monetary policy in the U.S., Greenspan was, by some accounts, the single most powerful person in the world economy. His term as chair coincided with the early 1990s recession that contributed to George H. W. Bush’s loss to Bill Clinton; continued through the longest continuous period of economic growth in U.S. history; included the multi-billion dollar bailout of the Long-Term Capital Management hedge fund in 1998; persisted through the internet-inflated stock market boom and bust as the new century began; and has finished in the current period of feeble recovery.

It sometimes seems as though politicians from both major parties have worshipped the ground Greenspan walks on. There was never any question that he would be re-nominated by the president and re-confirmed by the Senate each time his chairmanship came up for renewal. With his large glasses and high, wrinkled forehead, he looks just this side of the evil genius. Whenever he would speak before Congress, his calm and confident voice would reassure lawmakers that our economic fortunes were in the hands of truly benevolent dictator—all-powerful, all-knowing, and surely committed to the well being of the country, down the last wee child.

As long as the child owned stocks and bonds, that is. As long as the child had no plans ever to work in the sort of job that the majority of Americans rely on for their livelihoods.

Though the Federal Reserve is charged with the responsibility to manage the country’s money supply (thus the term, “monetary policy”) in order simultaneously to hold down inflation and promote high levels of employment, Greenspan has been a part of the movement to focus primarily on the first priority. He has used the tools at his disposal to intentionally maintain unemployment at levels higher than it would otherwise have been. He once remarked, rather infamously, that the feelings of job-insecurity common among so many American working people were a good thing, because they prevented these workers from seeking higher wages (which, in theory, would lead to rising inflation). Though he half-heartedly suggested that the stock market in the late 1990s was entering into a situation of speculative “bubble,” he made no genuine attempt to prepare the ground for a soft landing when the bubble inevitably burst, taking trillions of dollars of phantom value with it.

In what may turn out to produce the longest-lasting impact, Greenspan broke what had been an unspoken rule preventing the chair of the Fed from practicing partisan politics. Greenspan told Congress that he supported the passage of President Bush’s (the younger) massive tax cuts. These cuts have contributed greatly to our recent large deficits and to the growing national debt. He maintained this opinion despite the fact that even the most mainstream of economic theories recognized these tax cuts as virtually useless for ending the recession of 2001. Fiscal conservatives, of which Greenspan is one, have traditionally argued against large government deficits as a drag on the economy with the potential to throw the monetary system into chaos.

Greenspan’s replacement is Ben S. Bernanke, until recently a professor of economics at Princeton University and chair of the Council of Economic Advisors to President Bush. In his academic writings, Bernanke is known to have supported the idea that the Fed should announce an inflation target (a specific low level of inflation that it seeks to maintain) and stick to it through thick and thin. The idea is that stability in the realm of inflation will give business leaders more confidence to make investments since they won’t have to waste energy guessing what inflation might be in the future. While this represents a mild change in tactics from Greenspan’s style, the two seem to share a basic conservatism that views inflation as the über-evil, and unemployment as a useful tool for social control.


The Center for Full Employment and Price Stability publishes interesting “Policy Notes” on monetary policy at

William Greider has written frequently on Alan Greenspan and the Federal Reserve, most expansively in his book Secrets of the Temple, as well as short pieces, many published in The Nation. See, for example, “The One-Eyed King” at

Doug Henwood at the Left Business Observer is a consistent source of insight and entertainment. His take on the late-90s stock market bubble is at

(c) 2006 Center for Popular Economics

Econ-Atrocities are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.