[JPL] Did Alan Greenspan pore over economic minutiae in his bathtub while listening to a little light jazz music

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So long, Mr. Greenspan
 
By MATHEW INGRAM 
Tuesday, January 31, 2006  Posted at 3:43 PM EST
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Did Alan Greenspan pore over economic minutiae in his bathtub while
listening to a little light jazz music before his last meeting of the U.S.
Federal Reserve Board on Tuesday? According to his wife, that was how "The
Maestro" preferred to soak up the mind-boggling array of facts he used to
try and diagnose the ills of the U.S. economy over the last two decades.

In fact, it probably wouldn't be much of a stretch to say that Mr. Greenspan
saw the job of the Federal Reserve as being a little like jazz -- in the
sense that it was unpredictable, complex and yet somehow satisfying at the
same time. And as more than one person has noted, if it wasn't for his
interest in jazz, he might never have worked for Richard Nixon, a job that
started him on the road to becoming the world's most powerful central
banker.

A former bandmate from the group that Mr. Greenspan played saxophone with as
a teenager, the Henry Jerome Orchestra, happened to work for the future
president and introduced the two men in 1966. Mr. Greenspan was hired as a
consultant to the Nixon campaign, then later joined President Ford's council
of economic advisors, and eventually became the chairman of the U.S. Federal
Reserve in 1987, a few months before the stock-market crash.

Some music fans don't like jazz because it's too unpredictable, and tends to
jump around in ways that are hard to understand if you're not an expert. A
similar criticism dogged Mr. Greenspan through much of his Fed career --
that he was deliberately inscrutable to the point of being opaque, and that
this tended to distort the reaction of the U.S. economy to his various
pronouncements and Fed decisions.
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In his regular appearances before the U.S. Congress and Senate, Mr.
Greenspan became legendary for attaching so many provisos and qualifying
statements ‹ on the one hand this, on the other hand that ‹ to his
testimonials that it was almost impossible to determine what his views were
on a particular question, such as the federal deficit or higher interest
rates. The Fed chairman himself once joked that "If I seem unduly clear to
you, you must have misunderstood what I said."

Although many felt this was a deliberate attempt to avoid being held to
account for a particular decision, or to avoid taking sides in a political
question, for Mr. Greenspan it seemed to be almost as much about remaining
flexible, and not being tied to one course of action. That left the field
open for such dramatic moves as the Fed-orchestrated bailout of Long Term
Capital Management, the giant hedge fund whose failure in 1998 threatened
the stability of the global economy. And it allowed Mr. Greenspan to muse
about "irrational exuberance" in 1996 and yet continue to keep interest
rates low, which many critics believe exacerbated the tech-stock bubble in
the late 1990s.

As longtime Fed-watcher and journalist Greg Ip describes in the Wall Street
Journal, Mr. Greenspan's fans say "this absence of dogma has been essential
to his success; his refusal to become invested in any particular model of
the economy enabled him to shift gears whenever the prevailing model stopped
working." The Fed chairman has said he is a firm believer in what is called
the Bayesian method of decision-making, which involves coming to conclusions
when key elements of the situation are unknown. That's a pretty good
description of what the Fed has to do. As Mr. Greenspan put it: "Uncertainty
is not just an important feature of the monetary policy landscape; it is the
defining characteristic of that landscape."

In other words, it is arguably the perfect environment for a jazz
musician/economist. Some of Mr. Greenspan's critics, however, believe that
the Fed chairman spent a little too much time trying to keep the markets ‹
and government ‹ guessing about what his real intentions were, and that the
U.S. economy might have been better off if Mr. Greenspan's decision-making
had been a little less opaque. Among other things, they have suggested that
the Fed should have an explicit interest-rate target, which is something
that most central banks (including Canada's) have. Mr. Greenspan preferred
to remain flexible, and it was clear he thought that was one of the defining
principles of his chairmanship.

But was it the best way to run the U.S economy? Some believe that it was
not. Legendary free-market economist Milton Friedman, for example, has said
in the past that the Fed's job could be accomplished by a computer, one
which took note of patterns in the bond and currency markets and then set
the central bank rate based on those fluctuations. Others have said that Mr.
Greenspan's model focused too much of the market's attention on him and his
opaque pronouncements, and created a kind of cult of Greenspan. This in
turn, they argue, created what philosophers call a "moral hazard," where
investors were happy to take risks because they were confident that Mr.
Greenspan and the Fed would come along to bail them out.

And what can we expect from Mr. Greenspan's successor? Ben Bernanke has gone
on record in the past as saying he would prefer to have an explicit
interest-rate target like Canada does. On the other hand, he is also ‹ like
his predecessor ‹ a saxophone player. It's not clear whether he likes jazz
or not.

Mathew Ingram is the Globe and Mail's on-line business columnist. Feel free
to post a comment or e-mail Mathew at mingram at globeandmail.ca


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