Can We Bank on the Federal Reserve? Was Greenspan a Bubble Blower? Should Bernanke Stay the Course? Five Experts Judge the Powers and Perils of the World's Mightiest Central Bank

By Doherty, Brian | Reason, November 2006 | Go to article overview

Can We Bank on the Federal Reserve? Was Greenspan a Bubble Blower? Should Bernanke Stay the Course? Five Experts Judge the Powers and Perils of the World's Mightiest Central Bank


Doherty, Brian, Reason


EARLIER THIS YEAR, the Federal Reserve--that citadel of inscrutable power, able to goose conspiracy theories as quickly as interest rates--lost a chairman. Alan Greenspan, whose tenure lasted almost two decades, is the most celebrated Fed chief in the bank's nearly century-long history. His successor, Benjamin Bernanke, has big shoes to fill--and many possible hazards to sidestep.

Established in 1913, the Federal Reserve is America's central bank, run by a board of seven governors who are nominated by the president and confirmed by the Senate; they supervise a system of 12 regional Federal Reserve Banks, with many branches around the nation. The Fed has the power to expand or contract the money supply through various means, most of them opaque to the general public, thus adding to the institution's aura of mystery.

One method is "open market operations," that is, buying and selling U.S. government securities. Another is regulating the amount of its financial reserves a bank must hold, as opposed to being able to lend out. Yet another is setting the federal funds discount interest rate, also known as the overnight rate--the rate at which Fed branch banks loan money to each other (generally overnight). The federal funds rate affects the amount of money banks lend to the public, and it influences other interest rates, such as those for mortgages, home equity loans, and consumer credit.

Adjusting interest rates is the chief method the Fed uses to manage the national economy these days. That's why nearly all the public chatter about Fed activity involves interest rates, and hardly any deals with the money supply per se. The Fed also serves as chief regulatory overseer for the nation's banking system and the "lender of last resort" that can be relied on to bail out other big systems if their own money supplies get too low.

Greenspan, former chairman of President Gerald Ford's Council of Economic Advisers, served as head of a Social Security reform commission during the first Reagan administration, then took over the Fed from the great inflation buster Paul Volcker. Greenspan became chairman less than two months before the stock market crash of October 1987, when the Dow Jones Industrial Average lost 23 percent of its value in a day. He proved his mettle early, calming turbulent markets by vowing that the Fed stood ready to provide all the liquidity--i.e., extra money--the economy might need.

Greenspan marched from victory to victory, enjoying a reputation as the greatest wizard of finance the world has ever known. His 19-year reign saw 72 percent growth in GDP, 31 percent growth in employment, and a quadrupled Dow average. Greenspan helped guide the U.S. economy through two of the longest economic expansions in its history, his record tarnished only by two mild recessions, lasting just 16 months combined.

Greenspan collected a Presidential Medal of Freedom here, a British knighthood and a French Legion of Honor there. But not everyone admired his performance. He is often blamed for being too indulgent toward what in retrospect was clearly an unsustainable bubble in stock prices in the late '90s. The Economist lamented on his departure that his legacy--even, or perhaps especially, his reputation as a deft manager of crises--may be harmful to the economy in the long term: "Investors' exaggerated faith in his ability to protect them has undoubtedly encouraged them to take ever bigger risks and pushed share and house prices higher." That reputation wasn't entirely deserved: Greenspan didn't deserve all the credit for taking the decisive policy lead in navigating such crises as the Mexican peso collapse of 1994, the East Asian bust of 1997, and the failure of Long-Term Capital Management in 1998.

Now all the power and peril inherent in the Fed's ability to control the money supply lies in the hands of 52-year-old Ben Bernanke, a former member of the Fed's board of governors (from 2002 to 2005), former chairman of the economics department at Princeton, and, like Greenspan, former chairman of the president's Council of Economic Advisers. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Can We Bank on the Federal Reserve? Was Greenspan a Bubble Blower? Should Bernanke Stay the Course? Five Experts Judge the Powers and Perils of the World's Mightiest Central Bank
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.