Alan Greenspan was on a pedestal until everything crashed
A deeply trusted, highly regarded central banker, Federal Reserve Chairman Alan Greenspan's every move was scrutinized. He is seen on Capitol Hill in 2009, a few years after leaving the board. Credit: Getty Images / Mark Wilson
It was May of 2005, and Long Island's housing market and the broader economy were roaring. But some saw trouble on the horizon.
So, when Alan Greenspan — then chairman of the Federal Reserve and one of the most powerful economic voices in the world — spoke at a gathering of the Economic Club of New York in Manhattan, he had a rapt audience of more than 1,000 business leaders, financial analysts and journalists — including me.
"There are a number of things which, I think, suggest, at minimum, that there's a little froth in this market," Greenspan said that day.
The crowd laughed, nervously. Even in 2005, most of us knew that was an understatement. As it turned out, that "froth" was an enormous and dangerous bubble, about to burst.
I've been thinking about that Waldorf-Astoria Hotel luncheon this week after Greenspan passed away at the age of 100. That afternoon displayed both the best and worst of the man who served as Fed chair from 1987-2006.
For decades, he was a celebrity, a folk hero for economic geeks like me. A deeply trusted, highly regarded central banker who importantly tried to maintain his independence, Greenspan's every move was scrutinized. His use of the phrase "irrational exuberance" in 1996 to question when market values moved too high generated a global investor sell-off. More broadly, he led the Fed and the nation through periods of relatively strong economic growth, low inflation and few trouble spots. Even when he hit rough waters, he found ways through — from the 1987 stock market crash shortly after he took on the chairmanship to the dot-com bust to the aftermath of the Sept. 11, 2001, terrorist attacks.
Throughout much of his tenure, Greenspan was put on a pedestal. It seemed he could do no wrong. Sen. John McCain, while running for president, famously suggested he'd not only reappoint Greenspan, but if Greenspan died, McCain would "do like we did in the movie 'Weekend at Bernie's.' I'd prop him up and put a pair of dark glasses on him and keep him as long as we could."
That aura carried into that hotel ballroom in 2005, as Greenspan easily displayed his incredible aptitude, intellect and ability to distill and evaluate complicated economic terrain.
But Greenspan was far from perfect. His words were often deliberately unclear, to avoid previewing big moves, and he'd often cast even problematic situations in a positive light. On that May day, Greenspan showcased one of his most significant shortcomings: his inability to recognize, foresee or try to prevent the coming 2008 financial crisis. He instead said a drop in home prices wouldn't hurt homeowners with equity, that the national housing market wasn't in a worrisome bubble, and that there was "a very considerable unlikelihood" of a significant downturn.
With hindsight, it's easy to highlight just how much Greenspan missed the mark. He didn't discuss predatory subprime mortgages, speculative property investment, complicated financial contracts or the lack of regulation and oversight. His vague language didn't do anyone any good.
Greenspan retired less than a year later. A massive housing market collapse and financial system meltdown followed. The damage was extensive.
Greenspan's legacy contains tremendous highs and lows. For new Fed Chairman Kevin Warsh and those who follow, there are lessons to be learned. Start with being thoughtful, independent, straightforward, honest and willing to look ahead at what might come next. And take housing bubbles seriously. They're likely more than just "a little froth."
Columnist Randi F. Marshall's opinions are her own.
Randi Marshall is a member of the Newsday editorial board.
