Greenspan's four lessons: an important senior Tokyo financial strategist sizes up the last two decades of U.S. monetary policy.

AuthorUtsumi, Makoto

The curtain has finally closed on the eighteen-year tenure of Chairman Alan Greenspan, and we would like to draw some lessons from the policies implemented by this great leader of the U.S. Federal Reserve Bank.

FIRST LESSON. Always be ready to face an unforeseen crisis in managing monetary policy. Here's an example. Since June 2004, the Federal Reserve has been raising the fed funds rate by a quarter of a point at each FOMC meeting. Some in the markets questioned why it was necessary to create waves on flat waters against the backdrop of a looming economic slowdown.

Trying to read Chairman Greenspan's mind, one might infer that he wanted to bring monetary policy to a neutral position as soon as possible. If this could not be achieved, the Fed would not be able to play its role as a responsible central bank if any unforeseen risk arose, as monetary policy would not be effective.

Looking at the current monetary policy situation in Japan in the light of this thinking, one cannot help but feel frightened by the fact that the exit from the monetary policy measures necessitated by the darkest economic situation in the past years cannot yet be found, and no margin of maneuver is left for policy action in case of an unforeseen crisis.

Besides, Greenspan recently commented on the fact that long-term interest rates in the United States have been kept at abnormally low levels, hinting that he expected this situation to be corrected. The true thinking behind this, one suspects, is that Chairman Greenspan might be worried about the risk of a possible sudden rise in long-term interest rates in the wake of an event.

SECOND LESSON. Greenspan's second lesson is found in his response to asset inflation. During his tenure, stock prices rose far more than the historical average. Moreover, in recent years, land prices have gone up consistently, causing some to regard the situation as close to the bubble in some areas. On the other hand, the inflation rate has remained quite stable. The rise in asset prices against the backdrop of a stable inflation rate--a situation that to a certain extent resembles that of Japan in the late 1980s--has this author taking careful note of Chairman Greenspan's response.

The Fed Chairman's response was that the role of monetary policy was to control consumer inflation rates, not deal with asset inflation. While verbally blocking the sharp stock price increase by calling it "irrational exuberance," he did not accompany those words...

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