Greenspan's

Author: (USA) Raghuram Rajan
Publisher:
Publish Date: 2006-07-01
Features: Greenspan was a figure who could command the winds and rain in the world of finance. From 1987 to 2006, when he served as the Chairman of the Federal Reserve, his influence was unmatched. He was once hailed as "one of the most powerful people in the world." International media adored him, viewing him as a master, a hero, and a visionary. However, when you examine his actions closely, the halo that shrouded him begins to fade. Who was he really? Did the world truly understand Greenspan? The author, against the grain, begins by exploring his beliefs and actions before Greenspan took office as the Fed Chair in 1987, delving into the destructive consequences of his views and policies, and revealing a different side of the enigmatic Federal Reserve Chairman to the world.
On October 19, 1987, known as Black Monday, the New York Stock Exchange experienced the worst stock market crash in history. The shockwave from this event nearly reached every corner of the world. The Dow Jones Industrial Average (DJI) plummeted by 22.6%, nearly double the single-day decline of the 1929 stock market crash, which was widely known. From Toronto to Tokyo, from London to Sydney, from Buenos Aires to Brasília, stock markets were bloodied, as if mourning the collapse of the DJI. Wall Street and global investors waited in agony for a grim financial winter to arrive. Everyone had lost their ability to defend themselves, as no financial prophet had predicted this crash.
However, in one of the most ironic moments in financial history, Black Monday paved the way for the illustrious future of a man named Alan Greenspan. It was Black Monday that propelled him to great glory and reputation, granting him unprecedented influence over the global economy. Less than two months before the DJI crash, Greenspan, with strong support from both the Republican and Democratic parties, was appointed as the Chairman of the Federal Reserve (Fed), a committee of 12 regional banks that controlled the U.S. money supply lever. Before this, he had no banking experience, and some considered his identity as an economist rather ordinary. Yet, he possessed extraordinary forecasting skills and a keen commercial instinct—abilities that could not be cultivated solely through an academic career. While he did not produce any groundbreaking work in economics, at least none widely cited, he had a supernatural intuition for knowing when to open and close the money spigot, which controlled the money supply and influenced the entire financial market.
With his exceptional commercial forecasting abilities, he built his brand, making it easier for him to connect with major financial institutions on Wall Street. In reality, Wall Street did not initially choose Greenspan in 1987 but rather Paul Volcker, who had been appointed by President Jimmy Carter in 1979 as the Fed Chair. Volcker had achieved significant success in alleviating the global inflation that had plagued the world since the early 1970s and had completely earned the trust and admiration of the financial community. However, as a fighter against inflation, he never gained the favor of politicians, as he tended to keep interest rates high, which would exacerbate unemployment. Volcker failed to maintain a close relationship with the then-serving President Ronald Reagan, leading Reagan to choose his close friend and advisor—Alan Greenspan, the second choice of Wall Street.
After Greenspan took the oath of office as Fed Chair in August, President Reagan must have been deeply disappointed. By raising interest rates as a signal, Greenspan seemed to deliberately indicate that he had always been an anti-inflation fighter. This was clearly a move to appease Wall Street, as the street was already restless following Volcker’s departure. Within a few weeks of Greenspan’s appointment, Wall Street financial brokers had regained their composure. However, at that moment, the stock market suddenly crashed due to over-speculation since 1982, sending shockwaves through global investors. Everyone wondered: Could the newly appointed Fed Chair handle the arduous task of stabilizing the market?
As stockholders were in extreme turmoil, Greenspan took decisive action to prevent the economy from falling into another Great Depression like the one after the 1929 stock market crash. As Fed Chair, he had absolute authority in setting interest rates and influencing the behavior of commercial banks. He poured a large amount of money into the financial market, reducing borrowing costs for investors, and urged bank leaders across continents to respond actively to his policies. What followed has become history. Global stock prices stabilized within just a few weeks, and the disaster of the Great Depression was averted. In fact, the DJI, along with other global stock indices, even rose by the end of the year, effectively reversing the downturn caused by the October stock market crash.
Black Monday was the most severe challenge Greenspan faced as Chair, yet he effortlessly resolved it, rising to prominence in the process. From then on, he became the darling of Wall Street and global investors. Greenspan always maintained a calm demeanor in the easily agitated financial world. Alan Murray of The Wall Street Journal commented on Greenspan, saying, "He has passed the test." Later, Forbes and other influential magazines described his handling of the crisis as "This was Greenspan’s shining moment—he urged and persuaded bankers to lend money to Wall Street while lowering money market rates and long-term interest rates." Even later, the Associated Press recalled, "The 1987 stock market crash occurred just two months after Greenspan took office as Fed Chair, and his crisis management received widespread praise."