President Bush has endorsed Alan Greenspan for another term as chairman of the Federal Reserve System (or, the Fed). I truly believe that Greenspan has become one of a handful of the most powerful people in the world. Who else can move markets by simply uttering a phrase? (Remember “irrational exuberance?” Your stock portfolio certainly does.) Fortunes change hands when he decides or declines to recommend an interest rate movement, at times even when the inflection in his voice moderates a bit. Moreover, the largest economy in the world is under his guidance.
The Federal Reserve System is made up of regional banks which are responsible for auditing banks, clearing payments from banks to other banks through an automated system, distributing coins and bills, and so on. In addition, the Fed has power over monetary policy through its ability to influence the rates of interest banks pay each other or the Fed to borrow money. Banks and other financial institutions are constantly borrowing money from each other and from the Fed to meet reserve requirements (which also happen to be set by the Fed). If banks’ costs of borrowing go up, they in turn will generally raise the interest rates they are charging. Eventually, a change in the federal funds rate will influence interest on mortgage loans, credit cards, and virtually every other form of debt.
In essence, Greenspan is the key individual in any decision to raise the federal funds rate. Theoretically, he is looking at the state of the economy and trying to fulfill the Fed’s role of maximizing economic growth while maintaining stable prices and moderate interest rates. Based on his perceptions, he makes a recommendation regarding interest rates. One of the nice things about monetary policy is that it is somewhat removed from the vagaries of political parties and approval ratings. The Fed is a sort of check and balance for other policy related to the economy. The better the person at the helm, the better this works.
Mr. Greenspan has been chairman since 1987, when he was appointed by Ronald Reagan. Another term sets a record for longest tenure in the chairman’s position. Through the first President Bush’s term, both of President Clinton’s, and the current President’s time thus far, he has stayed true to the course of keeping a tight lid on inflation. Growth through the period, while not without its share of cyclical fluctuations, has been nothing short of remarkable.
I haven’t always agreed with Mr. Greenspan’s policy decisions. I have often felt, for example, that he focused too much attention on inflation to the unnecessary detriment of economic growth. But that’s beside the point. There is no doubt about the fact that he knows his way around the process. It’s astounding the amount of attention his every move garners on Wall Street. With a less-experienced person in such a position with today’s volatile markets, the market would have seen even greater difficulties. One poorly worded comment could lead to untold gyrations. I can’t imagine anyone more appropriate for the job.
In a time plagued by uncertainty, it is clear that we could do far worse than to continue under his leadership. As the war in Iraq goes on, the terrorist threat remains, energy prices surge, and a presidential election looms, it’s a very good thing to keep consistency in the Fed leadership.