Exit Greenspan, the Economist’s Rock Star
This past week, Alan Greenspan stepped down after 18 years as Fed Chairman. This was not only a story that was on the front page of the business sections, it was on the front page of the newspapers and one of the lead stories on the nightly newscasts. The Great Greenspan had steered the country through crises, and was now riding off into his emeritus sunset, a true economic hero.
I believe that Greenspan was the last, great Fed Chairman in the traditional mold. The definition of success has changed. Bernanke, and those that will follow him, have a new dynamic that will be part of the effectiveness and measurement of the job: the success they have in the area of global cooperation as it affects monetary supply and other Fed instruments.
This first popped into my mind during the run up in short term interest rates that Greenspan led in the last three years. When the constant quarter point raises in the Fed rate was underway, the consensus, based on history, was that, after a lag time, the long term interest rates would also rise. The primary focus was the mortgage market, as historically those rates went up.
Something happened: they didn’t really move up that much. What was going on? Greenspan himself stated that he was surprised. When he couldn’t put the skids on the heated housing market by waving the raising interest rate wand he started to sputter about the ‘housing bubble’ in a way similar to his ‘frothy exuberance’ comments regarding the stock market in the 1990s. The Fed didn’t seem to affect the mortgage market much, people were flipping houses and Greenspan was on the sidelines with a certain sense of moral indignation.
My instinctive reaction was there was some macro reason for this, some dynamic flowing from the fact that the global economy had taken root. This point of view was heightened when looking at the general, slow, spotty post-recession recovery. Economists couldn’t quite put their fingers on it. Was it a ‘rolling recovery’ moving through the economy sector by sector? Was it a service industry recovery with a dark manufacturing problem at its core? A general wringing of economists hands, as the Fed, under the tall shadow of Greenspan, no longer seemed astride the horse of recovery and managed interest rates.
Well, lo and behold, what emerged? All that money that the U.S. has been shipping over to China and Saudi Arabia bundled up in record trade deficits was being reinvested in interest bearing investments in the U.S. The Chinese were taking our money and lending it back to us as mortgage loans and to such a great degree that the supply of their money more than kept pace with the heated housing demand.
This all came about as I was doing some preliminary research for some speeches which take a quick look back before taking a deeper look forward as to what might unfold for humanity in the years and decades ahead. One thing was clear, the Global Economy has irrevocably taken root, there is no turning back, global is a dynamic flow that is rearranging all nation state economies. What does this mean? It means that Greenspan is the last Fed Chairman to preside over, and adjust the economic levers, of the U.S. as a nation state economy. His tenure basically was simultaneous to the birth and growth of the global economy in the Information Age.
So what lies ahead for Ben S. Bernanke? The specifics are certainly not known at this time, but he is the first Fed Chairman whose tenure started with the new Global Economy in place. What that means in terms of the Fed’s operation tactics remains to be seen. What it does mean in the largest sense is that the definition of success for Bernanke and all his successors will forever in part be how the incorporate the dynamic flow of global and the global economy into what they do and how they analyze the metrics they look at.
The news coverage of the transfer of power from the Rock Star to the Rhythm Guitarist from Princeton all played on the ‘hard act to follow’ theme. As in ‘poor Ben, he has to follow a living legend’. Well, that is in fact true, but what BB now has is a chance to define “Outstanding Performance by Fed Chairman” with a new songbook, written, and performed on the new global stage.