The U.S. economy is doing better than it has in decades. Inflation and unemployment are low, incomes are rising, and the stock market remains high.
You already knew that, you say? Well then consider this: Alan Greenspan should announce that he doesn’t want to be reappointed as chairman of the Federal Reserve Board when his current term ends next June.
There, I said it.
Lightning did not strike me, and the stock market did not crash.
Perhaps others will dare to say it, too. Greenspan has been the Fed chairman for more than 12 years. The consensus is that he has done a splendid job. He’ll be only 74 years old when his term expires, a stripling lad by the standards of the Supreme Court at the other end of the Mall in Washington.
So why should he step down rather than express his desire for President Clinton to reappoint him for yet another 4-year term?
The answer is that it would be good for his reputation and his place in history as a central banker. And it probably would be good for the U.S. and world economies.
Put another way, there’s more economic risk associated with him heading the board till mid-2004 than with his stepping down now.
Let’s look at the personal side first.
Greenspan was a very savvy and financially successful business economist, not an academic. No one would ever think of nominating him for the Nobel Prize, and he’ll never be elected President of the American Economic Association. He was also a very political economist, reportedly haunting the White House in the 1980s, keeping his hand in as a candidate for some high appointive office. His only shot at a place in history is as Fed chairman.
When Ronald Reagan appointed him to replace Paul Volcker in 1987, Greenspan had big shoes to fill. Volcker had slain the dragon of inflation that had bedeviled the world’s largest economy for much of two decades.
Though some nitpickers fault him for missteps in the summer of 1987, he handled the 500-point stock market crash that fall with aplomb. And while some Fed critics charge that overly tight monetary policy contributed to the post-Gulf War recession, the economy has grown steadily ever since.
At the end of the decade, the U.S. economy is fundamentally strong, and most groups in society are benefiting from its strength.
So if Greenspan were to decline another term, it would be a case of getting out while the getting is good. It’s highly unlikely that we will go another five years without a significant downturn of some kind.
Rhetoric about the “new economy” aside, there’s no evidence that economists have learned how to abolish the business cycle, a phenomenon that some have traced back for centuries. And despite overall economic strength, there is enough air in equity markets and debt on household balance sheets that the next downturn might be a more vicious one than the last one, eight years ago.
In central banking as elsewhere, nothing succeeds like success. If Greenspan would bow out now, he would undoubtedly enter the Pantheon of Great Central Bankers along with the Fed’s Paul Volcker, William McChesney Martin and Benjamin Strong, and the Bank of England’s Montagu Norman.
If he stays in, he runs the risk that his place in history will be tarred by an end-of-career debacle.
That brings us to the national interest as opposed to that of Alan Greenspan’s interest in his place in history. It’s clear that many people retain wisdom, good judgement and all of their faculties well into old age. But history also shows that the danger of great men losing their touch increases with age and years of tenure in one position.
General Douglas MacArthur is certainly in the U.S. hall of military heroes, but his reputation will always be besmirched by the way he fell apart when the Chinese crossed the Yalu River.
William O. Douglas was a great Supreme Court Justice, but even his most sympathetic biographers have to apologize for his last five years on the bench.
And FBI Chief J. Edgar Hoover hung on so long that his lasting public image is almost entirely negative. There’s little public memory of the great service he rendered early in his career in forging the FBI into the great institution it is.
Central bankers are not immune from the temptation to believe that no other person can do their job as well as they can. Marriner Eccles, the Utah businessman who created the modern Board of Governors of the Federal Reserve in 1935 and served as its first chair, stayed too long, as did Montagu Norman in England in the 1930s.
Financial markets and the media support this phenomenon.
The longer Wall Street and the press echo the myth that no one can replace Alan Greenspan, the greater the likelihood that his eventual replacement will take place in an atmosphere of crisis.
While Paul Volcker resigned at the end of a term under pressure from the White House and Treasury Secretary Jim Baker, he did so during a comparative lull in the turbulent economic times of the late 1980s. His successor, Alan Greenspan, benefited from this orderly change of power. He should do the same for whoever succeeds him.
© 1999 Edward Lotterman
Chanarambie Consulting, Inc.