Alan Greenspan has left incoming Federal Reserve Chairman Ben Bernanke plenty of work—managing the floods of liquidity coursing throughout the globe, addressing huge structural imbalances, keeping on guard for signs of inflation —not to mention the hardest part of the job. How will Bernanke undo Greenspan's intellectually authoritarian legacy?
For people who have come of age financially in the past 20 years, Chairman Al is the only leader we've ever known. As the stock market and interest rates replaced the Cold War and the civil rights movement as objects of popular attention, Greenspan became a genuine popular-culture figure, in a way none of his 12 predecessors ever was. Even casual readers of the business press, or People, know all about Greenspan's hobbies (tennis), his youthful passions (the saxophone, Ayn Rand), and his love life (in 1997, he married Andrea Mitchell). But beyond knowing that the Fed sets short-term interest rates, the public has little more sense of what the Fed does than it did in 1987. For the markets and the public at large, there's a sense that Le Fed, c'est Greenspan.
Greenspan has been able to run the Federal Reserve the way Louis XIV ran France (and the way President Bush wants to govern the country): with great deference from other leaders, something close to absolute power, and with near-daily showers of adulation. In today's Wall Street Journal, Greg Ip has a fine article about the mechanics of the Greenspan Fed and Greenspan's remarkable ability to forge consensus among the Fed officials who vote on monetary policy. A chart demonstrates that the number of dissenting votes cast at Federal Open Market Committee meetings declined rapidly over the Greenspan years. Ip chalks up the results to the "increasingly democratic decision-making process," that has been a feature of Greenspan's administration—everybody gets heard and debates are hashed out, so virtually nobody dissents from the final votes.
But is the lack of dissent evidence of Greenspan's powers of persuasion? Or is it evidence of tamping down dissent and stroking egos? Has decision-making become too concentrated in one man?
Fixing monetary policy should be contentious, because it's complicated. That's why there are seven Fed governors, not just one *. Every meeting presents a different conundrum. Sometimes, it's clear what should be done—cutting rates after 9/11 was a no-brainer. But it's not always so simple. Would raising rates earlier in 1998 and 1999 have prevented or softened the 2000 stock market debacle? (Throughout 1998, Cleveland Fed President Jerry Jordan, frequently a lone dissenter, effectively voted for higher rates because he thought they would choke off excessive speculation.) These Fed debates aren't just about dollars and cents, but about worldviews, and, ultimately, elections. (Here's the complete history of rate increases and cuts.) The highest number of dissenting votes during Greenspan's tenure came in 1989 (11), 1990 (10), and 1992 (11), a period when raging debates about interest rates spilled over into politics and the administration of Bush the Elder continually chided Greenspan for not cutting interest rates quickly enough.
While Greenspan was second-guessed frequently by colleagues in his early years, such dissent faded away as the 1990s—and the economic expansion—wore on. The public, too, lost whatever skepticism it ever had. When he appeared before Congress to testify about the state of the economy, congressmen from both sides of the aisle would pour on encomiums the way Cancun bartenders serve tequila shots. The apotheosis came with the publication of Bob Woodward's Maestro in 2000. In the past six years combined, there have been only seven dissenting votes—this at a time when the conduct of the Fed should have led to more questioning. In 2000, as the orgy of speculation built to a fever pitch, there wasn't a single dissent. After the bust, Greenspan & Co. took the Federal Funds rate to 1 percent in June 2003 and left it at the low "emergency" rate for a year—the emergency apparently being that there was an unpopular Republican president. Again, in 2004, not a single dissenting vote was registered. The only dissent in the past two years came on Sept. 20, 2005, when Gov. Mark Olson said the Fed should defer action until it received more information about the effect of Hurricane Katrina on the economy.
The growing equanimity within the Fed has coincided with a growing sense of anger and disbelief on the outside. Over the past two years, optimistic supply-siders like Larry Kudlow and Brian Wesbury, as well as the charter members of the Doom and Gloom Caucus—James Grant of Grant's Interest Rate Observer, Alan Abelson of Barron's, and Steven Roach of Morgan Stanley—have all argued that the Greenspan Fed was reckless in keeping rates so low for so long and ignoring signs of inflation. Now, it could be that the Fed policy-makers are all correct and the rest of us are wrong. It could also be that one man's consensus is another man's groupthink.
Either way, Bernanke won't have it easy. He won't instantly enjoy the deference Greenspan earned by virtue of his record and longevity. If the Fed is a simmering cauldron of dissent that Greenspan managed to tamp down through the force of personality, Bernanke could find his leadership challenged. (To take an extreme example, Yugoslavia, a unitary whole when Tito was in charge, dissolved into a group of warring fiefdoms once he passed from the scene.) And the global economy has a way of springing surprises on new central bankers. Just four months after Paul Volcker gave way to Greenspan, the stock market crashed. Will Bernanke get a similar baptism? Après Al, le déluge?
Correction, Jan 31, 2006: Because of an editor's mistake, this article wrongly claimed that there are 14 Fed governors. There are seven Fed governors. There are 12 members of the Federal Open Market Committee, which sets interest rates: the seven Fed governors and five regional Fed bank presidents. Return to the corrected sentence.