The Fed after Volcker-Greenspan
| Author | Prakash Loungani |
| Position | IMF External Relations Department |
| Pages | 65-75 |
Page 65
Alan Greenspan's term on the U.S. Federal Reserve Board is set to expire in January 2006 and is already fueling speculation as to whether a new chair could possibly fill the big boots of Greenspan and his predecessor, Paul Volcker. Three new books examine the Fed's record and recent leadership, suggesting that personal qualities have done much to burnish the Fed's reputation, but key institutional changes may have a greater say in its future.
Page 74
The successful performance of the U.S. Federal Reserve' the Fed'over the past 25 years owes much to Paul Volcker and Alan Greenspan, the two men who have headed the institution over this period.Will Greenspan's eventual successor be able to follow in their footsteps? According to three new books, the Fed's strong track record and institutional changes in recent years will do much to ensure that the Fed remains effective.
If the Federal Reserve had "retired" in 1978 at the age of 65, its career would have been considered fair-to-middling at best. The Fed is almost universally blamed for worsening, if not causing, the Great Depression of the early 1930s by applying the brakes when it should have been stepping on the accelerator.
Then, just as things were finally beginning to improve, the Fed nearly brought the economy crashing down again by doubling reserve requirements in 1936-37.Much later, in the 1970s, the Fed again made a serious misstep when it failed to keep U.S. inflation in check.
That the Fed now enjoys a solid reputation despite these failures is due in large part to Volcker's conquest of inflation in the early 1980s. The personal qualities of the man who whipped inflation are the focus of New York Times columnist Joseph Treaster's book, Paul Volcker: The Making of a Financial Legend.
Treaster notes that finding the right person to tame inflation was a tough task. David Rockefeller had already turned down the job, later commenting that "I would have been responsible for implementing a set of draconian policies to wring inflation . . . .As a wealthy Republican with a well-known name, and a banker to boot, it would have been extremely difficult for me to make the case for tight monetary policy and sell it to a skeptical Congress and an angry public."
Volcker, a Democrat, was considerably...
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