Michael Bordo, a pre-eminent economic historian of our time, does not miss a beat when he joins me on this historic day to discuss the legacy of former Federal Chair Alan Greenspan who at age 100 has died: “He was really a titan of a central banker. I mean, he was really great.”
Michael, a distinguished fellow visiting fellow at Stanford University’s Hoover Institution, joins me from Oslo, where he is spending time at the Central Bank of Norway. Over his long career he not only has written about Greenspan’s monetary policy during his 18-year tenure as Fed chair, he also got to know the him over the years.
”To me, he’s most remembered for really guaranteeing credibility for low inflation at the Federal Reserve,” he says. “So Paul Volcker broke the back of the Great Inflation and then he left… and Greenspan took over. And Greenspan had to make sure that this would continue.”
For starters Michael stresses that Greenspan instituted a policy to make sure that inflation would stay low and would be anchored at a low level: pre-emptive tightening.
”Back then they didn't talk about a 2% inflation target. So when he came in and inflation was a little bit more than 2%... more like 3%. But what he did was in periods where it seemed like inflation might spark up, periods when the bond markets were starting to worry about inflation, he would tighten. He didn't wait till the inflation came.”
Michael does not shy away from Greenspan’s shortcomings. “They talk about his big mistake of allowing the GFC <Great Financial Crisis> to take place by being much too liberal on financial regulation...perhaps he could have known that there were these big risks.” He points out that other top policy makers, including Robert Rubin and Larry Summers took the same position at this time.
What do Alan Greenspan and Kevin Warsh, the new Fed Chair who has mentioned the former Fed chair as his “mentor” on inflation-fighting and price stability, have in common?
Dive in and hear why Michael says that Warsh “is trying to sort of hearken back to that time, but the world has changed.”
Spoiler alert: he says “Greenspan was in a world where actually inflation was low and that wasn’t the problem…it’s a different world. And to say that AI is going to solve the problem, we don’t have to tighten. Ok. Maybe. It may be the case in the future. But right now you do have inflation.”
We lost a titan of a central banker 00:00:59:09
…He was really a titan of a central banker. I mean, I mean, he was really great. And it’s wonderful that he lived to a hundred. So, you know, I mean, everyone has their time.
Legacy: cementing Fed Credibility on low inflation 00:01:43:10
I mean, to me, he’s most remembered for really guaranteeing credibility for low inflation at the Federal Reserve. Okay. I mean, what he did was, in a sense, solidify the contribution of Paul Volcker. So Paul Volcker broke the back of the Great Inflation and then he left. It was it 1987. And Greenspan took over. Greenspan had to make sure that this would continue.
Persistent inflation vigilance and anticipatory policy 00:02:18:22
And what he did was he, you know, he followed policies to make sure that inflation would stay low and be anchored at a low level. Back then they didn’t talk about a 2% inflation target. So when he came in and was a little bit more than 2%... more like 3%. But what he did was in periods where it seemed like inflation might spark up, periods when the bond markets were starting to worry about inflation, he would tighten. He didn’t wait till the inflation came. And so you had these bond market scares. They used to talk about the bond market vigilantes. And he took it very seriously. And so he didn’t think about what this going to do to unemployment blah, blah, blah... He just said look inflation has to be low. There is some worry. This is 1994. There is some worry that inflation will pick up. I’m going to make sure that worry goes away okay. And he did this. And this story was well written by Marvin Goodfriend who died a few years ago, who was at Federal Reserve Bank of Richmond. And then he was at Carnegie Mellon, and then he was a member of the Shadow Open Market Committee, just like me.
The godfather of…implementing pre-emptive tightening? 00:03:40:24
Okay. So, in a sense, he did, in a sense, the intellectual idea about preemptive tightening came from Goodfriend. He’s the one that’s written about it as a concept. Volcker did. What Greenspan did was actually do it. Okay. Doing something like that in a sense, you know, let the markets know that he was very serious about inflation.
The Volcker Greenspan Doctrine supplants dual mandate 00:04:08:00
He took low-inflation as the most important thing. So we did have the dual mandate back then. But his view and his view following upon Paul Volcker. And today it’s called the Volcker Greenspan doctrine was that if you keep inflation low and if the markets believe that you are credible in doing so, that unemployment will stay low and the economy will expand at its maximum.
Just do it: keep inflation low/ Mentor to Warsh 00:04:44:09
Okay. So he believed that you didn’t you didn’t have to sort of keep talking about the dual mandate by just keeping inflation, low, the dual mandate would work itself out okay. That’s what his that’s when I think of him of that. And that’s what Warsh is talking about. Okay. That was that’s the that’s the backstory of why Kevin Warsh mentions Greenspan as his mentor in the Fed.
Inflation so low it’s out of the everyday business decision 00:05:44:23
That’s right, that’s right. It’s like when something you don’t worry about. You just know that. You know that you go to the grocery store every week and that prices are going to be pretty similar. They might change a little bit for things like fruit and vegetables and stuff that are sold in seasonal markets. But generally, you know, you’ll have you’ll be able to, to buy things and know those prices.
Persistently low inflation has benefits 00:06:10:22
And also, most important, you’ll be able to engage in contracts, long-term contracts like, you know, signing rental agreements. Okay. Like getting a mortgage okay. Like buying a car, financing a car, the big kinds of investments that people make. Okay. And you want to be sure that that the interest rates, anchor inflation low.
Low inflation promotes: certainty, predictability, reliability 00:06:41:21
And the normal interest rate is what you’re paying for to do these contracts. And so you really want to make sure that next year. There won’t be some change that comes along. You won’t have it. You won’t have a surprise. And that’s what he did. And so to me that’s his most important contribution. Okay. There’s a lot of other things...
And Greenspan has his critics, too 00:07:04:11
They talk about how he communicated. They talk about his big mistake of allowing the GFC (Great Financial Crisis) to take place by, in much too liberal regulation, financial regulation. And so, a lot of people will focus on that. They’ll focus on what happened, you know, that led up to the Great Financial Crisis. Okay. And sure. Maybe he was too liberal and maybe he and a lot of other people at that time, had too much trust in the financial markets and into innovation in the financial markets and derivatives and all those things that were coming on stream back then.
Many missed the GFC risks 00:07:53:21
And he was very optimistic. And perhaps he could have known that there were these big risks. I’m not saying he didn’t. He wasn’t culpable in that. They all were, okay. Summers, the whole gang from that time. Rubin. They all were. And sure, there were people like Brooksley Born who sort of warned about it. And these and the powers that be did not listen to her.
His greatest contribution was on cementing Fed credibility 00:08:18:14
That all that’s true. But in a sense, it’s his legacy for giving credibility to the Fed, which I think is going to be his long term. What’s what we’re going to mention about that in the future.
Greenspan’s views underwent change 00:09:41:02
…he was the one that started doing press releases. And he’s the one that, you know, they start, they release the minutes a lot faster under him okay. He didn’t go as far as Bernanke went.
Bernanke opened the door on communication 00:10:02:18
Bernanke was the guy that really went for the communications. Okay. And Bernanke, in a sense, was coming at coming from a from a place in monetary economics that was, in a sense, focusing on based on rational expectations, focusing on information and the importance of conveying a message of what you’re going to do in the future, which would be, in a sense, would cement your credibility if you could, if you could convey, you know, the policies that you’re going to follow < and then follow them>.
Policy declarations can reduce policy actions 00:10:38:08
And so the markets believe you, that the argument was that you could actually achieve your results without doing as much act of monetary policy as otherwise. So there was a philosophy that was being written about in the 90s. … there were people talking this language. I mean, I did a paper once, it’s still an active paper, I co-authored..
Rules credibility and time consistency, new language 00:11:08:03
And what we did was we looked at the scripts of the, of the FOMC going all the way back to Volcker and up through Yellen. And we wanted to see about the extent to which the FOMC members used the rules versus discretion language. And by that we meant the language that came out of Caitlin and Prescott’s paper on rules versus discretion. And they were talking about how important it was to, in a sense, follow a rule which for them meant not being time inconsistent. In other words, that men if you’re going to if you’re going to come up with a policy, you’re going to commit to keeping that policy over time and not changing your mind the next quarter or the next year.
His terms spanned new talk and new policy ideas 00:11:56:10
And so that literature was coming along in his time. And the people who were in the, in the FOMC were using that language. Okay. He was in the room. He didn’t use that language, but a lot of people were there were bright people. Okay. Like Alan Blinder was there, but there were a whole bunch of other people who in a sense, we’re talking the new talk.
Greenspan: a data guy not a model guy 00:12:20:21
And he didn’t suppress it, okay? He wasn’t a model guy, and he didn’t he really didn’t like technical economics much. Okay? He was he was a data guy. And he had he liked to make things simple. So he’s harking back to that time because I don’t think is that crazy about macro models either.
Not an obstructionist Open minded in the end 00:12:41:10
But the point is that this was what was going on and he was going along with it. So to as the as his term went on, he was becoming more receptive to communications and improving his communications.
Greenspan and Irrational exuberance 00:13:40:16
I mean, look, right now we’re in a situation where his he could use that term today. Okay. You’ve got an asset price boom going a big one okay. It’s got to do with the new technology. And this was a story back in the 90s, okay? So 90s was the tech boom okay. In the internet and all that. And so the question is will this asset price boom <last>. This exuberant asset market, the stock market. Is that a good predictor of a technology that will be that will have great innovative effects on the economy? That’s what he meant. And there’s always the risk that there could be a bust. And so he was taking a stand. He was saying you know booms can lead to busts.
Exuberance, busts, and bubbles 00:14:26:03
He also in that in that term was thinking not just about busts but about bubbles. And if it’s a bubble, okay. Which means that in a sense, people are pricing based on the expectation that prices will continue to rise without necessarily having anything to do with the fundamentals. Okay. Then you know, it’s going to bust. So he was basically raising the possibility that this boom could bust and it could be a bubble.
…and he was right 00:14:52:06
And he was right okay. And people who were there cry about that. They said what’s your evidence? What do you know. ET cetera. Etc.. And for him it’s a gut feeling that he had he was very familiar with markets and he knew economic history. And he knew that we’ve seen these things before. Okay. Not that many in his lifetime, but he did have the stock market crash in 87.
…and exuberance deflates 00:15:17:05
That’s exactly when he started…. He started in 1987. Isn’t that correct? Okay. I think 1987 is when Greenspan came in. And so he was the one that managed he managed that that that stock market crash. And they did a very good job of sort of heading off the markets. So he was just thinking out loud in a sense we could be coming into a situation like that.
Greenspan helped by McTeer saw productivity ramp up 00:16:52:08
I mean, yeah, that was one of one of of Alan Greenspan strokes of genius. And he didn’t I mean, he looked at the data. Okay. So he didn’t just, you know, take this out of his, you know, just out of some, you know, flash in his brain. I mean, he looked at the data. That was one of his strengths. He was a data maven. He looked in the details. Okay. He came from an old tradition. The NBR had that tradition where you look at freight car loadings, you look at the store sales, you look at, you know, you look at movie sets, you know, you know, bookings to theaters. And he looked at all that stuff, okay.
Knowledge and judgment led to forbearance 00:17:37:14
And he was very familiar with the markets and the asset markets. And he just thought, you know, you know and he did have a he talked to a lot of people okay. And he was very attentive. And so he guessed he took a guess like a bet that indeed were coming into a productivity boom. And I don’t have to hike.
Warsh faces a similar dilemma 00:17:58:10
And he was right. Okay. He got it right. But he could have gotten it wrong. Okay. So, Warsh is taking the same thing and saying he thinks he’s got that too. And he might be right. It’s a question of timing.
Lots of Warsh-Greenspan differences 00:19:09:17
Okay. So I mean, there are a lot of differences. In fact, I think the differences are greater than the similarities. I mean, Warsh is trying to sort of hearken back to that time, but the world has changed. We do have communications. Okay. We also also in an environment where we have inflation, okay. And inflation has not been licked.
Greenspan faced low inflation/Warsh faces inflation 00:19:34:04
And Greenspan was in a world where actually inflation was low and that wasn’t the problem. So, it’s a different world okay. And to say that AI is going to solve the problem, we don’t have to tighten… Maybe it may be the case in the future. But right now you do have inflation. And so I think that, you know, that’s a bit of a stretch to sort of say that I’m going to be like Greenspan.
Greenspan eventually embraced communication/ has it gone too far? 00:19:59:02
Secondly, in a sense, Greenspan’s in a period where he’s being criticized for not communicating, economic theory is basically stressing communications, and he’s gradually sort of saying, okay, I’m going to go along with it, okay. And now we’ve got Kevin saying communications have gone too far. They made a huge mistake with QE, et cetera, etc., etc.. Okay. And he’s probably right about some of this stuff okay. But in a sense it’s a very different environment. And you can’t just go back to Greenspan’s world, given that you’ve already got this huge infrastructure. And given that the entire world of central banking is built on communications and some other countries like Norway right now, and they are a much better at this game than fed. So I, I think that that I think that that Warsh has to be cautious on this and the fact that he has a commission going.
Michael D. Bordo
Michael D. Bordo is the Duncan Stewart Distinguished Visiting Fellow at the Hoover Institution. Bordo is a Board of Governors Professor of Economics and director of the Center for Monetary and Financial History at Rutgers University, New Brunswick, New Jersey. He has held academic positions at the University of South Carolina and Carleton University in Ottawa, Canada. Bordo has been a visiting professor at the University of California at Los Angeles, Carnegie Mellon University, Princeton University, Harvard University, and Cambridge University, where he was the Pitt Professor of American History and Institutions. He is currently a distinguished visiting fellow at the Hoover Institution, Stanford University. He has been a visiting scholar at the International Monetary Fund; the Federal Reserve Banks of St. Louis, Cleveland, and Dallas; the Federal Reserve Board of Governors; the Bank of Canada; the Bank of England; and the Bank for International Settlement. He is a research associate of the National Bureau of Economic Research, Cambridge, Massachusetts, and a member of the Shadow Open Market Committee. He is also a member of the Federal Reserve Centennial Advisory Committee. He has a BA degree from McGill University, an MSc in economics from the London School of Economics, and PhD from the University of Chicago in 1972.
He has published many articles in leading journals including the Journal of Political Economy, the American Economic Review, the Journal of Monetary Economics, and the Journal of Economic History. He has authored and coedited fourteen books on monetary economics and monetary history. These include (with Owen Humpage and Anna J Schwartz), Strained Relations: US Foreign Exchange Operations and Monetary Policy in the Twentieth Century (University of Chicago Press, 2014); (with Athanasios Orphanides), The Great Inflation (University of Chicago Press for the NBER, 2013); (with Will Roberds), A Return to Jekyll Island (Cambridge University Press, 2013); (with Ronald MacDonald) Credibility and the International Monetary Regime (Cambridge University Press, 2012); (with Alan Taylor and Jeffrey Williamson), Globalization in Historical Perspective (University of Chicago Press for the NBER,2003). He is also editor of a series of books for Cambridge University Press: Studies in Macroeconomic History.
He is currently doing research on a Hoover Institution book project The Historical Performance of the Federal Reserve: The Importance of Rules, a project on “Bank Lending and Policy Uncertainty”; a project on “Financial Globalization and Financial Crises”; and a project on “Central Bank Credibility and Reputation: A Historical Perspective.”
