Alan Greenspan is a New York economist born in 1926. Greenspan is remembered for his extensive career leading the Federal Reserve of the United States (1987-2006).
Alan Greenspan was born in Manhattan, New York, in 1926. He comes from a Jewish family of Romanian and Hungarian origin. Already from an early age, Greenspan showed great interest in mathematics and music. All this would lead him to play the clarinet and saxophone and go through the famous Juiliard music school.
Career and PhD
His ability with data and figures led him to graduate in Economics from the University of New York in 1948. Arrived 1977, Greenspan would obtain a PhD in Economics also from the University of New York.
In his thesis he addressed issues such as the increase in housing prices, and its effect on consumption or anticipated the emergence of a growing real estate bubble. All these degrees were obtained at the University of New York.
Before obtaining a doctorate from the University of New York, he tried it at Columbia University, although he ended up giving up. In this period he coincided with Benjamin Graham, who taught, and Warren Buffet, who was a student. Among the influences he received at this stage are the ideas of Arthur Burns, which were based on a radical opposition to the budget deficit due to its relationship with inflation.
Shortly before the Watergate scandal splashed the Nixon administration, he was appointed chairman of the White House council of economic advisers, until 1974. He held this position with Nixon and Gerald Ford.
Alan Greenspan as President of the Federal Reserve
In 1987, Alan Greenspan was appointed president of the Federal Reserve, replacing Paul Volcker. A short time later the great crisis of 1987 would unleash. In this context, it gained fame and importance since its role was considered fundamental to achieve American financial consolidation. One of his main skills was his ability to reach agreements with politicians of the two main American parties: Republican and Democrat. At the same time, he was able to reach important consensus with other members of the Federal Reserve. He remained in office with Ronald Reagan, George HW Bush, Bill Clinton and George W. Bush.
In this way, Greenspan took command of the body responsible for banking supervision and monetary policy , having the capacity to modify interest rates .
Now, the arrival of Greenspan did not occur at a precisely easy time. He had barely been named president when the Wall Street stock market collapsed 20%. Faced with the worst fall the US stock market had suffered, it was imperative to react quickly. And, there was the possibility that the financial system would collapse.
Greenspan responded very quickly, stating that the Federal Reserve would provide the necessary liquidity to guarantee the continuity of the financial system.
Likewise, Greenspan’s decisions on interest rates always had important repercussions in the markets. Hence, always assess the impact of their decisions on the stock exchanges.
The president of Reagan was also succeeded by Republican George HW Bush. One of the most important decisions during the term of George HW Bush was the entry of the United States into the Gulf War. The economic cost of that war was colossal for the Americans and, to make matters worse, the country was entering a period of recession . Faced with such a complex situation, Greenspan advised cuts in public expenditures and tax increases.
Precisely, economic management cost President George HW Bush a second term. Despite the electoral victory of Democrat Bill Clinton, Greenspan, who had always served Republican presidents, continued at the helm of the Federal Reserve.
Greenspan and the tequila crisis
During his time as president of the Federal Reserve in the Clinton mandates, Mexico had to suffer one of its worst economic moments. In 1995 a financial crisis had broken out in Mexico, known as the tequila crisis .
Well, the monetary authorities of Mexico had carried out an excessive rise in interest rates to avoid the massive outflow of dollars. Thus, from Mexico it was decided to devalue the currency, which meant a colossal fall in the value of investments in the country. The risk not only affected Mexico, because the Mexican economy maintained an important relationship with the US economy. A great economic threat was planned on the United States and the intervention of Greenspan and the Treasury Department was necessary.
In view of the hurried situation, Greenspan chose to resort to the Exchange Stabilization Fund. In this way, the Americans granted a loan to their southern neighbor so that he could take care of his debts.
Greenspan is known for his position on inflation . And it is that, the American economist is in favor of maintaining stable price levels even when it means damaging economic growth . All this led him to announce various increases in interest rates.
In that same year, he did not hesitate to affirm that “It is not only that each financial institution has become less vulnerable to the shocks caused by the underlying risk factors, but also that the financial system as a whole has become more resilient ». Thus, he understood that the problems that could arise in financial markets were not inherent in a free market system, but in the greed with which economic agents operated .
Thus, the New York economist would conclude his presidency of the Federal Reserve in 2006.
Critics launched against Greenspan
Alan Greenspan, despite his abilities to gain support and sympathy in different political sectors of the United States, received harsh criticism for his role as President of the Federal Reserve. Especially in relation to the financial crisis that would ensue from 2008.
For some, the lack of regularization and the belief that market forces, acting freely, would generate economic improvement, are at the base of the crisis. Thus, in the face of their bitter defense of derivative products, some, such as banker Felix G. Rohatyn, have already pointed out the potential dangers of these products. However, Greenspan maintained its line, coming to defend derivative products before the Senate, in 2003.
In addition, he was blamed for being one of the main culprits of the bubbles created, as a result of maintaining the reference rate between 0% and 2.5% for a too long period, which meant an increase in the money supply .
In spite of everything, in 2008 he publicly acknowledged that his excessive faith in the ideology of the free market was wrong. As a consequence, he pointed out that the entire intellectual structure on which his philosophy was based and his professionalism had collapsed.
Regarding trade, Greenspan has been against the increase in tariff barriers . According to Greenspan, trade wars erode the purchasing power of citizens and make all countries lose out. If free trade causes job losses in less competitive sectors, affected workers can recover thanks to unemployment benefits and reorientation of their professional career.