By Anjan Roy
There are central bankers and central bankers. But Alan Greenspan, who died at the age of 100 four days back, was the central banker’s central banker. The chairman of the US Federal Reserve is always much more than the head of any such institution by virtue of its impact all over the world. Alan Greenspan occupied that position with such aplomb.
Stepping in after a legendary predecessor, Paul Volker, who had given the science of monetary management a series of rules to go by, Alan Greenspan had a formidable task to live upto the legacy of his immediate predecessor.
However, soon after getting to grips with his new position, Greenspan threw set rules for monetary policy management to the winds and pursued his own ideas of how to manage his charge.
Greenspan introduced the now-famous light touch regulation of the financial sector. He allowed the financial sector to expand and liquidity to flow easily to keep the wheels roll. It was a workable strategy as long as the overall incidence did not get out of control.
However, the system could too strained at some time when it all ended in huge collapse. The global financial meltdown of 2008-09 has been blamed upon him. But that was two years he had left the chairmanship of US Federal Reserve in 2006.
The process had begun much earlier. Greenspan believed in the markets and his faith had almost become a fetish. Immediate he took over there was a market crash and his approach was to let liquidity flow and activity level at a high pitch to get over the market gyration. It had worked.
At the time of 9/11 in America, Alan Greenspan was away to Europe attending some conclave of financial wizards. There were problems in Greenspan returning soon. Te Federal reserve and its monetary policy would have critical relevance in maintaining stability or for th time being maintaining faith in US financial system.
Greenspan’s formula was to tell the banks and the financial system to keep the money flow intact. If necessary, the Federal reserve as the lender of last resort would keep refinancing the banks through the crisis. After all, America had never seen such frontal attack since the days of Pearl Harbour.
Greenspan’s formula had won the day in the immediate after effects of 9/11 attacks and the markets regained confidence and poise. The experience had proved a point Greenspan had held dearly — his faith in the powers of the markets to correct and rejuvenate given the opportunity and time. Greenspan was vindicated in his faith in the capacity of American capitalism to rejuvenate itself.
The spirit of Greenspan had permeated the US banking system possibly and even after he left Federal Reserve, his legacy continued to flourish.
Although possibly while speaking Greenspan had recognised that the policy of inflating the financial system through a policy of accommodation and low interest rates could eventually result in an unsustainable bubble he was loath to either admit it or devise a policy stack to confront such a situation when it would arise.
Thus, Greenspan had allowed innovation in financial sector and opaque instruments for pushing ahead trading in securities and similar instruments. Some of the latest developments were secularisation and derivatives trading. While for a while these were within sustainable regions, soon the volume and extent reached uncontrollable proportions.
Thus when the subprime crisis had emerged in the US financial sector, the system was not primed up to handle the developments. The trading has reached clearly unsustainable levels. It was one of the contributions of Alan Greenspan from his unwavering faith in the powers of self-correction of a make system of American capitalism.
The policies and market philosophy of one by then defunct Federal Reserve chief — Greenspan had retired from Fed in 2006—had roiled the entire world and savings and financial security of the rich and mighty to the most humble small-saver in remotest parts a world apart from the glitzy world of Washington, DC. (IPA Service)
