Tributes poured in for former Federal Reserve Chairman Alan Greenspan following his death on Monday. Greenspan led the Fed for 18 years, from 1987 to 2006, and is remembered by many as a transformative figure who guided investors. His tenure, however, is also consistently linked to the 2008-2009 global financial crisis.
Greenspan's prior colleagues commend him for his unwavering focus on inflation, building on his predecessor Paul Volcker's efforts. Under Greenspan's leadership, the inflation rate was intentionally and opportunistically reduced from 4% to 2% and even lower by the early 2000s. He also significantly changed the Fed's communication strategy, with the rate-setting committee issuing public statements after policy meetings for the first time in February 1994.
Investors also remember Greenspan for the prosperous financial markets during his chairmanship, with the S&P 500 Index nearly quadrupling and delivering an annual return above 10%. He developed a reputation for swift action to inject liquidity and defend markets, particularly after the October 1987 stock crash, leading to the coining of the term "the Greenspan put." Greenspan also became known for his December 1996 speech questioning "irrational exuberance" in asset values, and his belief during the 1990s productivity boom that new technology would prevent inflation spikes, allowing him to refrain from raising interest rates.
Despite these achievements, the credit crunch of 2007, which escalated into the near-global financial collapse in 2008, has stained Greenspan's legacy. Critics argue that he overlooked the growing housing bubble, leading to the most severe economic downturn since the Great Depression. Former Fed Governor Randall Kroszner noted Greenspan's trade-off to pursue years of growth, acknowledging the greater, unanticipated cost of the downside. Greenspan's philosophy of allowing markets to run their course and the Fed intervening to clean up afterwards has also faced significant scrutiny.
