The maestro and his limits

Alan Greenspan is dead at 100, according to the Washington Examiner, and the occasion demands more than obituary courtesy. He was, by any measure, a commanding figure — chairman of the Federal Reserve under four presidents, the man the markets watched as a priest watches the altar, whose briefcase weight on the steps of the Eccles Building was once read for augury. He deserved better than hagiography in life, and he deserves better than caricature in death.

Let me begin with what he got right, because intellectual honesty requires it. Greenspan understood, at least in practice, that central bank credibility is a genuine public asset, and that the psychology of inflation expectations matters quite as much as the mechanics. He navigated the 1987 crash, the 1998 Long-Term Capital Management implosion, and the dislocations that followed the technology boom with a pragmatism that I, as someone who always distrusted rigid rules in the face of radical uncertainty, can only respect. Markets are moved by narratives and confidence, and he understood this — even if his framework never quite gave it its proper theoretical weight.

And yet. The great vulnerability of the Greenspan era — and I mark this as inference from the record rather than personal recollection — was its faith that price stability and financial stability were essentially the same thing, and that monetary policy alone was sufficient to the task of macroeconomic management. This is precisely the error I spent my working life trying to correct. An economy in which private investment is soaring on borrowed confidence is not an economy in equilibrium; it is an economy storing up a reckoning. When that reckoning arrived in 2008, as I understand it did, the response required exactly the kind of fiscal intervention that the Greenspan consensus had spent decades treating as a relic.

The deeper trouble with what became "Greenspanism" — the doctrine, not the man — was that it handed monetary policy a burden it cannot carry alone. Interest rates are a blunt and lagging instrument. They cannot direct resources; they cannot invest in the things the market will always underprovide; they cannot sustain demand in a slump when the animal spirits of private investors have fled the field entirely. When the zero lower bound arrives and the monetary ammunition is spent, what remains? Only fiscal policy, which is to say, the government. To have spent a generation telling the public that fiscal policy was reckless and monetary policy was sufficient was to arrive at the crisis with one hand tied behind the nation's back.

Greenspan himself, to his credit, expressed a degree of public regret — what I understand he called a "flaw" in his worldview. That is a rare and honourable thing for a man of his stature to admit, and it should not be forgotten. The lesson for those who inherit his world is not that central banking is unimportant — it is indispensable — but that it was never designed to be the whole of macroeconomic policy. Full employment is a moral commitment, not merely a by-product of low inflation. The state has duties the central bank cannot discharge. A man as intelligent as Greenspan knew this at the end. The question is whether his successors, and the politicians who deferred so gratefully to his authority, have truly learned it.