Who is Alan Greenspan?
Nearly every day, one can pick up the daily paper and read at least one article that mentions the name Dr. Alan Greenspan. As Chairman of the Federal Open Market Committee (FOMC), his utterings and the speculations of his next move are food for analysts, economists, business decision-makers, and anyone who plays a part in the economy (i.e. everyone). Under the umbrella of the Federal Reserve Bank, the FOMC is responsible for the monetary policy of the United States Government as well as the bank accounts of the Federal Government. Dr. Alan Greenspan, as Chairman, attempts to maintain the most efficient conditions for economic stability through his appointed powers.
President Woodrow Wilson signed the Federal Reserve Act, drafted largely by Carter Glass, into law on December 23 1913 (Carter Glass). However, the Fed as we know it now is largely the product of a handful of reform acts passed in the early 1930's. The original purpose of the Federal Reserve was to provide an elastic currency supply, serve as lender of last resort, provide a sound banking system, and improve the payment system (Kidwell). Additional regulations have been amended to these acts as presidential administrations have sought to further tweak the effectiveness of the Act in response to rapidly changing economic conditions. The Federal Reserve's Federal Open Market Committee (FOMC) is the most prominent result of this series of legislation and is made up of seven members of the Board of Governors and the presidents of the 12 Federal Reserve Banks. There are twelve voting members in this group: the seven Governors (including Greenspan as Chairman), the President of the New York Federal Reserve bank (as Vice-Chairman), and four rotating slots taken from the remaining 11 regional Federal Reserve Bank Presidents (federalreserve.gov). The FOMC meets eight times per year to set policy regarding the nation's money supply. Using the information brought to the meetings by each region's member, the board decides whether to use its powers to stabilize the economy through the use of one of its tools.
The major tools of the Fed are reserve requirements, open-market operations, and the discount rate policy. Unlike fiscal policy, based on the Federal Governments tax and spend policies, the actions of the Fed are attempts to manipulate short-term investments and thereby smooth out the peaks and troughs of the economic cycle. As this chart shows, the fed has been very successful in maintaining a stable, low rate of increase of the Consumer Price Index over the last several years. Of note, is that it took Chairman Greenspan a few years to get it right. Dr. Alan Greenspan took control of the wheel in 1987 and is currently serving his fourth four-year term. Born in 1926, Alan Greenspan's penchant for figures was evident at an early age yet he chose to pursue music by attending Juilliard after high school. When he was 19, he succumbed to numbers and enrolled at New York University (abcnews). His title of Ph.D. is an honorary one from the NYU. Greenspan dropped out of Columbia's doctoral program in economics in pursuit of earning, rather then learning. His first view of public life was as director of policy research for Richard Nixon's campaign in 1968 and after a hiatus from political endeavors, returned to Washington in 1987 on President Regan's appointment of Greenspan as FOMC Chairman (cnnfn.cnn.com). His position at the Fed is similar to any chairman at a large corporation but in this case, the world is the stockholder of record. Greenspan must wade through data from every major industry and each region of the country, as represented by the other members of the committee. Information such as the real Gross Domestic Product; Consumer Price Index; Employment figures from each major industry; Industry Production/Capacity Utilization; numbers on Durable Goods Shipments, New Orders, and Unfilled Orders; and Inventory Levels are considered in an attempt to gain perspective on the current and future movements and needs of the economy. The data and the opinion of the non-voting members are weighed and the committee decides on what actions to take or to stand pat on its current policy. If the committee decides the economy is growing too fast, it can contract the money supply by increasing the discount rate. This action cascades to the fed fund rates, the rate banks pay other banks to borrow excess reserves when their own are short. The FOMC can also contract the money supply by selling Federal securities. This action will cause bank reserves to drop as money flows from the banks to the Fed where it is no longer part of M1 and causes banks to increase their interest rates and reduce their investments to match the level of their reserves. Although this sounds like basic economic mathematics, it fails to take into account the sentiment of money.
Money, of course, feels no emotion. But those who hold money, and make decisions regarding money, do. Greenspan's demeanor has become just as legendary as the economic cycle he presides over. The embodiment of "walk softly but carry a big stick," Greenspan speaks when necessary and always remains vague enough to maintain the mystery and not cause economic turmoil. His usually quiet ways sometimes give way to a scolding schoolmaster repertoire that often does far more to change the direction of the economy and the stock market then do the numbers and policies that flow out of the Committee. Some news reporters have made a career out of speculating the next move of the FOMC. The personality (or lack thereof) that Greenspan brings to the table brings into question whether anyone will be able to fill the shoes of this intelligent man who chooses his words very wisely; rightly so for a person in his position.
Dr. Greenspan, although not the only one responsible, has the tremendous weight of not only the United States economy, but that of the world economy. To the economists, spenders, investors, and advisors of the world, Greenspan represents the fortuneteller for economic decision making. He must maintain the delicate balance between inflationary prices and unemployment. The question of who will succeed this seventy-four year old man is surely in the back of many people's minds. More importantly, is the system strong enough to be lead by someone else? Or is Greenspan truly the Merlin of economics. Although the initial reaction to the end of Greenspan's final term may be that of a mild panic, the FOMC and the unsung talent that serves with Greenspan will survive his exit, as will the economy. The seed that was planted in 1913 and nurtured through the difficult times of the early 30's has been put through its paces. Who ever succeeds Dr. Greenspan will have a difficult task but our economy will survive, learning lessons from the man who reportedly writes all of his speeches in the bathtub. I hope he uses a pen and not a computer.
Kidwell, Peterson, and Blackwell. Financial Institutions, Markets, and Money,
7th edition, Orlando: The Dryden Press, 2000.
Federal Open Market Committee. 4 Dec, 2000. http://www.federalreserve.gov/fomc/
Born of a panic: forming the Federal Reserve System. 26 Nov, 2000
Federal Reserve Bank of Minneapolis. http://minneapolisfed.org/pubs/region/reg888a.html
Carter Glass: A brief biography. 10 Dec, 2000
Federal Reserve Bank of Minneapolis.
Who's Who on the FOMC. 24 Nov, 2000
CNNfn - The Financial Network
Alan Greenspan. 27 Nov, 2000