Greenspan fiddled while the economy burned.

• Author: Rutherford, William D.
• Position: Economics - Alan Greenspan - Biography

HOW DID Alan Greenspan rise to become one of the most powerful men in America? How did he survive two decades as Federal Reserve Board chairman when practically every, president who reappointed him really wanted to replace him? How did the man who engineered the collapse of the greatest economy in history--ushering in the longest market decline since the Great Depression, costing 2,500,000 people their jobs, and destroying wealth equal to seven times the gross national product of China--keep his position, let alone achieve such a lofty status?

It is time for a reevaluation of the Greenspan myth. Even the chairman himself thinks so. In a number of recent speeches, he has displayed a new humility, admitting mistakes, and raising the question of whether the Federal Reserve trader his watch has served us well. With his 20-year reign as monetary czar coming to an end, Greenspan has shown an increased interest in his legacy. We should, too.

Greenspan was born on the upper west side of New York City. His parents' marriage ended in divorce and he was raised by his mother while living with her parents. Greenspan remained very close to his mother. Not so with Herbert, his father, a self-educated stock market analyst. Herbert Greenspan published a book in 1936 called The Recovery Ahead; in 1937, the market collapsed. Herbert made a gift of the book to his eight-year-old son with the following inscription: "May this my initial effort with a constant thought of you branch out into an endless chain of similar efforts so that at your maturity you may look back and endeavor to interpret the reasoning behind these logical forecasts and begin a life work of your own." Perhaps that gift set Greenspan on the course of economic study; perhaps it "also set the stage for "Fed speak."

After learning to play the saxophone and traveling with a be-bop band, Greenspan returned to academic pursuits, studying economics under Arthur Bums at New York University. He became an acolyte of writer Ayn Rand. Later. he formed Townsend-Greenspan and Co., an economic consulting firm.

Greenspan rose through the ranks of government agencies, He chaired the National Commission on Social Security Reform from 1981-83. where he authored a plan to raise Social Security taxes dramatically on working people and companies. He served as chairman of the Council of Economic Advisors under Pres. Gerald Ford. On Aug. 11, 1987, he was appointed by Pres. Ronald Reagan to be chairman of the Federal Reserve Board.

None of those around him thought he was destined for greatness. His former wife said she did not see it coming. He was viewed by some as "Woody Allen with math skills." Nevertheless, Greenspan is poised to become the longest serving Federal Reserve chairman in history. He arguably is the second most powerful man in the U.S. and certainly one of the most influential in the world.

Along the way, he presided over--and some say caused--several market calamities. In some instances, he did not appreciate the problems around him or what lay ahead; in other instances, he did not take sufficient action to head off trouble.

His history at the Fed begins with the Crash of 1987. which followed backroom dealings where he succeeded in getting the discount rate increased after having been rebuffed by the Federal Open Market Committee. At his first meeting with the FOMC. Greenspan insisted that inflation was a threat, but the committee disagreed. Not to be denied, he engineered a discount rare increase through the Board of Governors with a bare quorum while two members were out of town and with a vacancy on the Board. The market reacted negatively. Fear set in quickly, and, within days, a wave of unprecedented selling hit the market. Suddenly, U.S. stocks were in free-fall. It got so bad that IBM and other stocks stopped trading because all orders were to sell.

On Oct 19, 1987. a day that would become known as Black Monday, the Dow dropped 22.6%. the first time it ever had fallen more than 20%. An amount greater than the gross national product of France disappeared from the Exchange value in less than 24 hours. Greenspan had been chairman for 72 days.

Black Monday

In 1989, Greenspan told the FOMC that he felt the economy was "more balanced" than any he ever had seen. Nevertheless, within two weeks, he asked for--and received--two interest rate increases. These had a domino effect on the market. First, the junk bond market nose-dived. By October, the Dow had its biggest one-day drop since Black Monday. The performance of the junk bond market led to the collapse of the nation's Savings and Loan associations. (The S&L debacle eventually cost taxpayers over $150,000,000,000.)

One S&L in particular made Americans pay dearly: Lincoln Savings and Loan. run by Charles Keating. In 1985. Greenspan had lobbied Washington on behalf of Keating. He wrote a letter to Federal regulators in which he...