Current Federal Reserve Chair Janet Yellen, now occupying her second year, will hold an important place in history no matter what happens during her tenure, as she is the first woman to lead the U.S. central banking system. Former Federal Reserve Chairman Alan Greenspan has an important place in history because of his 19-year tenure and his impact on the economy through Black Monday, the boom and bust of the 1980s, the savings and loan crisis, the largest economic boom in U.S. history. And the subsequent dot-com collapse. Let's take a closer look at some similarities and differences between these two major figures in U.S. economic history.
Before Greenspan was named Fed chairman, he served as principal owner of the economic consulting firm Townsend-Greenspan& from 1955 to 1987 Co. on Wall Street. several companies, including Aluminum Company of America (Alcoa), General Foods, JP Morgan& Co. and Mobil Corporation. Yellen taught at Harvard as an assistant professor from 1971 to 1976, taking a brief break from academia to work as an economist for the Federal Reserve Board of Governors in 1977 and 1978. She then taught at the London School of Economics and Political Science until 1980 , when she began teaching as an associate professor at Berkeley. She became a full professor in 1985 and retained that title until 2006, even as she served on the Fed's board of governors and the president's Council of Economic Advisers.
"Janet Yellen is a lifelong scientist who became a central banker later in life", says economist Evan A. Schnidman, founder and CEO of Prattle Analytics, a financial data company whose core product, The Fed Playbook, analyzes central bank communications to generate quantitative data for portfolio managers and other large investors. "Alan Greenspan was a lifelong financial market advisor who moved into central banking later in life. The difference between an academic economist and an economic advisor to investors is huge. "
Academic economists are motivated by the study of practical and abstract problems, he explains, and their process is to gather all available information and analyze it as rigorously as possible. On the other hand, an economic advisor is paid to investors to investigate and solve a specific problem.
"I can't say which skills are better for Fed chair because both have strengths: Academics are used to digesting vast amounts of disparate information about the world, but economic advisors in the private sector draw better conclusions. "Schnidman says.
Business philosophy and communication style
Greenspan's belief in laissez-faire capitalism and the influence of Objectivist philosopher Ayn Rand is well known, while Yellen is a Keynesian who believes in government intervention in the economy. Although these two views couldn't be more different, Greenspan's willingness to lead an intervention organization for nearly two decades indicates he wasn't really the most steadfast of free marketers. That said, their different communication styles reflect their different philosophies.
"Yellen believes in academic collaboration and transparency, while Greenspan believes in efficient markets,", says Schnidman. "This means that Janet Yellen really means it when she says she is looking for a more transparent central bank, while Greenspan only slammed transparency and continued to use cryptic language to mask the true meaning of his policy statements. "
In fact, Greenspan's communication style led to the coining of the term" Fed speak. "He intentionally avoided translating Fed-speak into plain English because he didn't want the Fed to crash the markets. Arthur Levitt, who was chairman of the Securities and Exchange Commission during part of Greenspan's tenure, told PBS, "Nobody understood what he was saying, but he said it in such a way that everybody bought it. "
Yellen, on the other hand, is known for her deliberately clear and straightforward communication style. Watch any of her press conference speeches and you will easily understand if you know the basics of how the Federal Reserve works.
"Yellen believes the market needs this information to function properly, while Greenspan believes this information was unnecessary because the market was already functioning efficiently", Schnidman says. "Yellen's belief in transparency and serious concern about employment means she will continue to be a highly communicative Fed chair whom many will consider pliant. "(For related reading, see Janet Yellen: Background and Philosophy.)
" One of the biggest differences between the two is who they followed,", says Harlan D. Platt, an economist and professor of finance at Northeastern University's D'Amore-McKim School of Business in Boston. Greenspan succeeded Paul Volcker, who served from 1979 to 1987 and was known for nearly doubling his already high fed funds rate, which (according to some) resulted in a painful recession, brought down high inflation and contributed to a period of economic stability. Great moderation. " Yellen follows Ben Bernanke, who was there from early 2006 to early 2014 and is best known for saving us from the Great Recession or setting a new precedent for massive government intervention in the economy, depending on who you ask.
When Yellen took over the Fed from Ben Bernanke, the economy was the strongest since mid-2009, when the recession officially ended.She intended to stay the course by continuing the third round of quantitative easing (QE). She also intended to keep the fed funds rate target around 0% and raise inflation from 1.6% to 2%. When Greenspan took over the Fed from Paul Volcker, the stock market experienced a huge uptick, but after five weeks, the U.S. stock market had experienced its biggest one-day decline ever, an event that became known as Black Monday. Thus, one of the first things Greenspan had to do as chairman was crisis. He responded by cutting interest rates, ushering in the Greenspan era.
Platt says 'Volker has been a success in fighting inflation'. Bernanke was arguably not a success, as his QE programs have no empirical evidence of success in the economy. Therefore, Yellen has more flexibility than Greenspan to begin with. For now, it's following in its footsteps. Time will tell if it creates a Yellen board of directors. "
Impact on the economy
While economic problems and successes are often attributed to the Fed chair's decisions, so many factors influence economic outcomes that it's hard to tell how much influence a Fed leader's policies have on any given event. Greenspan saw some of the highest highs in the U.S. economy during his five terms in office, but critics have also faulted his interest rate policies with fueling the housing bubble and subsequent crisis. Yellen could be similarly accused of inflating an asset bubble if she does not tighten monetary policy.
The first year of Yellen's tenure saw stock market growth in the high double digits and real GDP growth of 2. 4%, slightly below the 3% -projection in the first Federal Open Market Committee meeting Yellen led last March. Unemployment officially fell to 5.6%, but we've heard a lot in the last year about how misleading the official unemployment numbers are and how many Americans are still out of work. The federal funds rate remains in the 0% to 0.25% range, where it has been since December 2008, but analysts expect it to rise later this year, with further increases in 2016 and 2017. Long-term Treasury yields have steadily declined and are now significantly lower than they were when Yellen was with 30-year Treasury bonds at 2. 37% vs. 3. 55% assumed. While homeowners can take advantage of rock-bottom mortgage rates, investors seem to lack long-term confidence in the economy. Low yields on safe assets like Treasuries may also drive more investors into riskier assets like stocks.
"As we now approach a more normal functioning economy, it will face new challenges in how and when to tighten policy", Schnidman says. "In many ways, this is the mirror image of the soft landings that Greenspan recovered from the debt crises of the 1990s and the economic turmoil of 11. September produced. Yellen is trying to avoid a market pullback as the Fed slowly tightens policy, while Greenspan used easing policy to avoid the impact of severe economic threats."
The Bottom Line
We can only go so far in comparing Greenspan, the second-longest serving Fed chair, to Yellen, who spent only one year of her four-year tenure. Since the Federal Reserve's founding in 1913, most chairmen have served shorter terms than Greenspan's 19 years at the Federal Reserve. If recent history is any indication, Yellen could serve closer to eight years like Bernanke and Volcker. We cannot know what political or economic events lie ahead for us and what impact Yellen's Fed will have, but no matter what happens during her tenure, Yellen will hold an important place in history as the first woman to head the Fed.