Subject File 01: Greenspan, Alan

A working dossier of the Center for Intergenerational Settlement. Subject Files are issued under the authority of the Standing Committee on Cohort Liability and supplement the Center’s general findings on demographic balance-sheet settlement.

Summary

The Subject inherited, in August of 1987, a central bank whose mandate was the value of the currency. He bequeathed, in January of 2006, a central bank whose mandate was the value of equities. The conversion was not announced. It was performed in installments, each of which the Subject described, at the time, as a regrettable but necessary response to an exceptional circumstance.

The Subject’s first act in office was to cut the federal funds rate in response to the October 1987 equity-market crash, on the operating theory that asset-price stability is a precondition of macroeconomic stability. The theory was untested. The theory has, in the intervening four decades, been tested. It has not survived the testing. What has survived is the policy.

In 1996 the Subject observed, in a speech, that the equity market exhibited “irrational exuberance.” In 1997 he stopped saying so. In 1998, when the failure of Long-Term Capital Management threatened to mark equity portfolios to a price the Subject considered unhelpful, he organized the bailout. In 1999 he signed the regulatory commentary that contributed to the repeal of Glass-Steagall. In 2000 he raised rates into the dot-com bust; in 2001 he cut them, in fifty-basis-point increments, to one percent, where they remained for three years. During those three years, the median American home doubled in price. The doubling was not earned. It was issued.

The Harm

The Subject’s principal contribution to the cohort balance sheet was the formalization of the asymmetric monetary reaction function — hereafter the “Greenspan put” — under which the Federal Reserve would respond aggressively to drawdowns in financial assets and tolerate, without symmetric response, increases in their price. The cohort holding those financial assets is now retiring. The cohort that did not hold them, because they had not yet entered the labor force, is now paying the bill in the form of housing it cannot afford, equities it cannot accumulate at sensible multiples, and yields on savings that have not exceeded inflation in any sustained period since 2008.

The Subject’s secondary contribution was the public-relations construction of central-bank infallibility. Magazine covers issued in the late 1990s named him “The Maestro.” Books were written. The construction obscured, for a critical decade, the asymmetry of the policy and the identity of its beneficiaries. By the time the construction was dismantled — in 2008, when the Subject acknowledged, before a congressional committee, that he had “found a flaw” in his model of the world — the housing market had bequeathed its losses to the public balance sheet, and the cohort had retained the gains.

The Subject was succeeded by his protégé, who continued the policy under a different name, and by the protégé’s successor, who continued the policy under a third name, and by the current Chair, who has continued it under a fourth. The policy is now older than the median worker entering the labor force. The Subject is responsible for its founding.

Chart

Figure 1. Real S&P 500 (1987 = 100) and real US median wage (1987 = 100), 1987–2025. The two lines diverge in 1995 and never reconverge.

Citations

• Federal Reserve, Federal Open Market Committee minutes, 1987–2006.
• Greenspan, A. (2007). The Age of Turbulence: Adventures in a New World.
• Greenspan testimony before the House Committee on Oversight and Government Reform, October 23, 2008.