Fed chief tapped to serve 4th term

Greenspan credited with near-record economic expansion

Business applauds move

January 05, 2000|By William Patalon III | William Patalon III,SUN STAFF

Federal Reserve Chairman Alan Greenspan, whose disciplined approach to monetary policy has helped the nation enjoy near-record expansion, was nominated yesterday by President Clinton to a fourth term as head of the nation's central bank.

The move, though expected, was nevertheless a welcome one to the financial community, which has come to depend on Greenspan's ability to use interest rates as a throttle and brake to keep the economy from moving too quickly or too slowly. President Clinton said as much in commenting on the reappointment.

"The chairman has [a] rare combination of technical expertise, sophisticated analysis and old-fashioned common sense," Clinton said. "He was one of the very first in his profession to recognize the power and impact of the new technology on the economy."

Though Greenspan has warned against the "irrational exuberance" of investors who were pushing stock prices far above their true worth, the Fed chairman has also recognized the technology-driven productivity growth that's allowed the U.S. economy to grow so briskly -- with unemployment low enough to spark a labor shortage -- and yet not spark inflation.

Before that, it was generally believed that fast-paced growth in an economy had to lead to inflation because shortages of labor, raw materials and factory capacity would drive up costs. But productivity -- the ability to turn out more products and services with the same amount of people -- was the wild card, because it held down costs and inflation. That's what Greenspan understood that policy-makers before had not.

"That hadn't dawned on people before," said Pradeep Ganguly, director of the Office of Business and Economic Research in the Maryland Department of Business & Economic Development. "This is his biggest contribution."

Greenspan, 73, will see his current four-year term expire on June 20. However, he can continue to serve until Congress acts on the nomination.

The Fed chairman thanked Clinton "for the confidence you have shown me over the years," singling out the president's commitment to fiscal discipline that helped give the country its first back-to-back budget surpluses since the 1950s. Those surpluses have helped prolong the boom by creating an environment that nurtured low interest rates.

The expansion, now in its ninth year, will next month set a record as the longest on record -- peacetime or wartime.

"If you had to pick out one single person for the economy's remarkable performance, [Greenspan's] name is atop that list," said Richard Yamarone, senior economist at Argus Research in New York. "He's responsible for this historic economic expansion."

Yesterday, however, the market seemed to disregard the announcement. Interest-rate concerns and capital gains-related selling sent stocks spinning downward. The Dow Jones industrial average dropped 359.58 points, or 3.17 percent, while the technology-heavy Nasdaq composite lost 229.46 points, or 5.6 percent, in its biggest point-drop ever.

The reappointment of Greenspan will be good for the markets over the long haul, experts say.

"The markets like Greenspan," said Robert Sweet, chief economist for Allied Investment Advisors in Baltimore. "Greenspan is good for the markets, and I think Greenspan is good for the economy in general."

First appointed by President Reagan, Greenspan took office on Aug. 11, 1987 -- and faced a crisis almost immediately with the 508-point stock market crash that October, a decline that remains the largest drop in points ever.

An avid student of history, the new Fed chairman dodged the mistake that helped transform the Great Crash of October 1929 into the Great Depression: Instead of squeezing the money supply, as had been done in 1929, he pumped it up -- and, in doing so, also pumped up the all-important confidence of investors. That made Greenspan a Wall Street hero and helped make sure the expansion before the current one would continue until Saddam Hussein invaded Kuwait in 1990.

Some economists say Greenspan was in part responsible for the recession of the early 1990s, overtightening credit to slow the economy and to keep inflation at bay. Nonetheless, he has helped keep the markets calm and the economy chugging through the savings-and-loan crisis of the late 1980s, the Mexican peso crisis of 1994-1995 and the global slowdown caused by the collapse of several Asian currencies in 1997. It was his deft handling of that crisis that likely secured his place in financial history.

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