The Greenspan Effect
The position of Federal Reserve Chairman isn?t one to be taken lightly. Mr. Greenspan is responsible for controlling monetary policy for our juggernaut of an economy. Everyone watches everything he does. The words that come off his lips are studied and dissected ? by hundreds of financial gurus in an attempt to gain an edge moving forward.
Let?s learn a little bit about this amazing man. He?ll be turning 80 years old on March 6, 2006. His father was a stockbroker and his mother worked in retailing in New York City. He is the 13th chairman of the Federal Reserve and served that post for 222 months ? the 2nd longest tenure of any Fed Chairman in the 93 year history of the Fed. He became chairman in 1987 and just 10 weeks after his appointment the US stock market suffered its worst one day loss in history ? October 19th 1987 ? the 20% decline of the S&P500. He was certainly challenged with the need to coordinate funds to maintain liquidity to handle the sell off.
He studied at the Juilliard School of Music in NYC for two years in the 1940?s. He played Jazz clarinet and traveled the country for 1 year with the Henry Jerome swing band. In his last year as Fed Chairman he was paid $174,500 in salary. He served as economic advisor to Richard Nixon in his successful presidential campaign. He was initially appointed by Ronald Reagan, reappointed by George Bush Sr., Bill Clinton twice, and lastly George Bush. He?s been married twice to women named Mitchell ? Joan in 1952 and Andrea in 1997. He?s been at the helm of the Fed for 5 terms ? 18 years overall.
During his tenure, the S&P 500 has advanced by 492% on a total return basis, equal to 10.1% compounded annually. At the same time, inflation has averaged 3% per year and stocks advanced in 15 of his 19 years running the show. Some of his more famous phrases are starting in 1996 ? ?irrational exuberance? describing the bullish performance of the domestic equity markets; 2005 the behavior of the world bond market as a ?conundrum?; 2005 seeing ?signs of froth? in the housing sector and just recently ?I worry incessantly that I might be too clear.? With Alan, you get an economist and a comedian in one package.
In 29 of the past 32 votes taken by the 12 member Federal Open Market Committee (FOMC) the votes have been UNANIMOUS supporting the position taken by Greenspan. The last dissenting vote was cast by Mark Olsen on 9/20/05. Under Greenspan rule, the Fed bailed out failed hedge fund Long Term Capital Management in 1998. Shortly thereafter the Russian Ruble collapsed and that countries central bank stopped supporting its currency. At the time of failure, the hedge fund had $27 of debt for every $1 of invested money ? leverage at its extreme.
The Fed initiated 11 separate rate changing cycles during Greenspan's 18 ? years ? the 10th of those cycles was a series of 13 rate cuts from 1/3/01 to 6/25/03 taking rates down to 1% from 6.5%. The 11th cycle took rates from 1% to the current 4.25% with 13 rate hikes. The US economy suffered 2 recessions in the same 18 year period and flourished from 3/91 ? 3/01 producing the longest period of economic expansion in our countries history. He did a lot for this country ? I worry more about the next Fed Chairman than the next President. Good luck to Mr. Ben Bernanke moving forward. He?ll put that MIT education to the test in the coming years.