Alan Greenspan: champion of neoliberal finance
With the passing of Alan Greenspan, an era is over. Greenspan was at the helm of the Federal Reserve (the Fed) in the United States
With the passing of Alan Greenspan, an era is over. Greenspan was at the helm of the Federal Reserve (the Fed) in the United States between 1987 and 2006, the second longest chair in the Fed’s history. He presided over what is considered to be the period of “Great Moderation” — low inflation with relatively stable growth — in the U.S. In policy terms, this was the polar opposite of stagflation — high inflation with a stagnating economy — in the U.S. of the 1970s. Such was his stature that it would not be an exaggeration to say Greenspan was to monetary policymaking what Milton Friedman was to monetary theory. It is another matter that both of them got it wrong. One bank collapsed, but the world paid the price. Read to know more... Greenspan was a free market enthusiast, who believed monetary policy can, and should, manage both growth and inflation in an economy. According to this approach, if growth falters, a lower interest rate can revive the economy, and if inflation raises its ugly head, increasing the interest rate could arrest this overheating. Government has no business to be in business. In fact, its role is to enable the markets to function efficiently. One of the most controversial actions of his tenure was repealing the Glass Steagall Act that was enacted in the aftermath of the Great Depression of the 1930s. Simply put, the Act separated commercial banking (dealing with loans and deposits) from investment banking (stock trading, securities brokerage etc).
It was put in place to control speculative activities and insulate common depositors from failures originating in investment banking. Greenspan supported the campaign against this Act arguing that such a separation was an anachronism in the era of modern finance. In fact a much more diversified financial institution, he argued, would be more competitive and efficient. This was in line with his general support for market deregulation and market-based finance. This repeal combined with his belief in the omnipotence of monetary policy were responsible for what is considered to be the biggest economic crisis since the Great Depression. The stagflation of the 1970s and the pushback by capital against Keynesianism of the post war era resulted in aggressive market deregulation, including of the labour markets, with capital relocating to emerging markets, all of which tilted the balance of power against labour. Wage shares went south, which meant a downward pressure on demand since workers constituted the bulk of the domestic market. The other aspect of globalisation was to tame inflation since the threat of job flight seriously undermined the working class’ bargaining power in negotiating for wages. It is not surprising therefore that even with very tight labour markets during certain years in this period, there was never a threat of inflation. Therefore, the Great Moderation was an accident and not a result of his assiduous policy of inflation targeting. Weakened labour provided both an opportunity in the form of stable inflation, and a hurdle in the form of low demand.
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