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A fifth term for Greenspan means more monetary uncertainty.


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Larry Kudlow

“I think Alan Greenspan should get another term,” said President George W. Bush in a meeting with financial journalists this week. So there you have it. The 77-year-old Federal Reserve chairman could have a fifth term. This would even surpass the 18-year tenure of William McChesney Martin, who ruled the central bank roost during the good ol’ days when the dollar was tied to gold and price stability reigned amidst post-war economic prosperity.

Greenspan has since said that he will accept another term if he is formally nominated and confirmed. Despite a non-cancerous prostate operation this week, there’s no reason to believe he’s not physically up to the task. Sources report he still plays a sprightly game of tennis. On the Washington social circuit, rumor has it that it’s Greenspan who drags his younger wife, NBC correspondent Andrea Mitchell, to all the cocktail parties — not the other way around.

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And why wouldn’t he accept? It’s an excellent job with many perks, including a free parking spot and a tennis court on the roof. It’s also the most powerful financial position in the world. We’re talking real power here — the power to create money. And not just at home. The dollar has become global money on demand worldwide. Today, when Alan Greenspan sneezes, at least half the planet’s financial population catches cold. Just ask anyone living in Buenos Aires, Rio de Janeiro, Bangkok, or Baghdad.

One of the hallmarks of Greenspan’s tenure has been his ability to keep everyone guessing — no one really knows what targets the central banker uses to guide his all-powerful money-creating activities. Does he watch interest rates? Commodities? The money supply? The unemployment rate? The pace of economic growth? The stock market? It’s tough to tell. And it’s highly doubtful his real monetary target will ever be revealed.

Nevertheless, Greenspan’s mysterious monetary ways have worked to keep the financial system in relatively good stead over these past fourteen years. That’s no mean feat, even though investors and businesses have occasionally experienced roller-coaster swings from clinical depression to optimistic euphoria during this period.

But is the Greenspan standard — as it has become known — a benchmark worth preserving?

One of the best measures of a central banker’s job performance is domestic price stability — or, put another way, sufficiently low inflation that removes price worries as a day-to-day economic concern.

This was the hallmark of Greenspan’s predecessor, Paul Volcker, who did not exactly remove inflation expectations from daily decision-making but did succeed in lowering the inflation rate from over 10 percent to nearly 3 percent during the 1980s.

In the 1990s, Greenspan continued Volcker’s trend, bringing broad-based price gauges down from around 4½ percent to slightly above 1 percent. This miniscule inflation rate surely constitutes domestic price stability. Hence, the Greenspan standard can be classified as a success.

Still, numerous supply-siders — including myself — have fretted in recent years about the threat of deflation. This is another pernicious form of monetary instability, one that contributed mightily to the longest and deepest stock market plunge in 60 years.

For these and other reasons many economists would prefer a price-rule standard of monetary conduct. Such a rule would rely on real-time market indicators, like commodities (including gold), bonds, and the international exchange value of the dollar. These price indicators would tell policymakers how well the volume of money created by the central bank is calibrated with the amount of money demanded by financial markets and the economy.

But without such a rule in place, we are subject to the prescriptions of a single person — the Fed chairman.

Here’s a case in point. A year and a half ago, the Greenspan Fed decontrolled its interest-rate target and poured huge buckets of new liquidity into a financial system reeling from the after-shocks of 9/11. These actions saved the day. During the next six months the economy increased at a 4 percent rate and the stock market surged by 25 percent. It was a phenomenal monetary policy success.

Then the Fed went back to its old ways, resuming a straight-jacketed interest-rate targeting approach that prevented the bank from providing adequate liquidity to maintain economic recovery. Stocks and the economy sagged.

With the ongoing threats of terrorism, war, energy-price fluctuations, and corporate misdoings, no one can be sure about much these days. Should our 77-year-old central banker — with a success rate that usually beats his failure rate — sign on for a few more years, we can add monetary policy to this list of uncertainties.

Let’s keep our fingers crossed.

Mr. Kudlow is CEO of Kudlow & Co.



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