The Fed Turns a Page: Warsh and Greenspan

Kevin Warsh’s first meeting as Fed Chair last week and the death of longtime Fed Chair Alan Greenspan yesterday signaled that the Federal Reserve is embarking on a new chapter in its history. The Fed is now turning a page as it leaves its policies for the first quarter of the 21^st Century behind. Under Warsh the Fed is abandoning its policy of forward guidance and with that the so-called “dot plots” that were introduced in 2012 which presented the forecasts of individual members of the Open Market Committee will soon go by the wayside. As a result, the Fed Put that worked as a floor underneath the stock market since 1987 has been removed. Look for more volatility in stock prices. As if on cue, the stock market is responding today. Over the longer term the four task forces authorized by Warsh, which will include outside members, may end up having a far more lasting effect on the Fed.

 

Ten years ago, I reviewed Sebastian Mallaby’s biography of Alan Greenspan so there is no need to recount his remarkable career here. (See: https://shulmaven.blogspot.com/2016/10/my-amazon-review-of-sebastian-mallabys.html ) In a nutshell a kid from the Washington Heights neighborhood of Manhattan rose to become the conductor of the global economic orchestra as I wrote then. Both Henry Kissinger and Henry Kaufman, my old boss at Salomon Brothers came from the same neighborhood. Something must have been in the water.

 

I met Alan Greenspan twice as an outside consultant to the Federal Reserve Board. The first time was in December 1991, when the Fed invited a group of real estate experts to discuss the then ongoing meltdown in commercial real estate. Greenspan listened and maintained a sphinxlike expression. Two days later he announced an inter-meeting 100 basis point cut in the discount rate and a 50-basis point cut in the federal funds rate. He obviously took seriously my comments and those of others on the gravity of the situation.

 

The second time was in December 1996 when the Fed called in several Wall Street equity strategists and few academics including Robert Shiller. The topic was whether or not the roaring bull market in stocks was getting out of control. A few days later Greenspan gave his famous “Irrational Exuberance” speech. When the formal meeting was over, I sat with him and a few others at a small table over lunch. There he gave me a marked-up copy with his autograph on “Comments on Credit,” Salomon Brothers weekly publication on the credit markets and the economy. He noted a small error. When I got back to the office I gave the copy to Robert DiClemente, the author of the report. Bob was flabbergasted that Greenspan read his work in such detail and he immediately had it framed. One of the secrets to Greenspan’s success was that he was very meticulous. He knew every data point in most economic series, both current and historical.

 

Under Greenspan’s leadership the Fed helped lead the U.S. economy into an extended period of moderate growth, with low unemployment and low inflation. Along the way he rescued the stock market after the 1987 crash giving rise to the Fed Put, organized the rescue of Long-Term Capital Management 1997, the Asian crisis of 1998. The whole period form 1982 -2007 was known as “the great moderation.” Unfortunately, it came crashing down with the financial crisis of 2008. Just as in the days of ancient Rome, a slave in the chariot of a conquering general would warn that all glory is fleeting, the ghost of Hyman Minsky should whisper in the ear of every Fed chair that “stability leads to instability.” I think Warsh understands that and let us hope he won’t be a slave to President Trump.

 

All that said, Alan Greenspan was a giant in the world of central banking. May his memory be a blessing.