Current Federal Reserve Chairwoman Janet Yellen, now in her second year, will hold an important place in history no matter what happens during her tenure because she is the first woman to head the US central banking system. Former Fed Chairman Alan Greenspan holds an important place in history because of his 19-year tenure and his influence on the economy through Black Monday, the 1980s real estate boom and bust, the savings and loan crisis, the biggest economic boom in US history, and the ensuing dot-com collapse. Let’s take a closer look at some of the similarities and differences between these two major figures in US economic history.
Before being appointed Fed chairman, Greenspan worked as principal owner of the Wall Street economic consulting firm Townsend-Greenspan & Co. from 1955 through 1987. He also was a board member of several corporations, among them Aluminum Company of America (Alcoa), General Foods, J.P. Morgan & Co., and Mobil Corporation. Yellen taught at Harvard as an assistant professor from 1971 to 1976 and took 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 through 1980, when she began teaching at Berkeley as an associate professor. She became a full professor in 1985 and retained that title through 2006, even as she served on the Fed’s Board of Governors and the President’s Council of Economic Advisors.
“Janet Yellen is a lifelong academic who pivoted to being 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 consultant who pivoted into central banking later in life. The difference between being an academic economist and being an economic consultant to investors is huge.”
Academic economists are driven by researching problems, both practical and abstract, he explains, and their process involves gathering all available information and analyzing it in the most rigorous way possible. On the other hand, an economic consultant to investors is paid to investigate and solve a particular problem.
“I can’t say which skill set is better for the Fed chair because both have strengths: academics are more accustomed to digesting huge amounts of disparate information about the world, but private sector economic consultants are better at drawing concrete conclusions,” Schnidman says.
Economic Philosophy and Communication Style
Greenspan’s belief in laissez-faire capitalism and influence by objectivist philosopher Ayn Rand is well known, while Yellen is a Keynesian who believes in government intervention in the economy. Although these two viewpoints couldn’t be more different, Greenspan’s willingness to lead an interventionist organization for nearly two decades indicates that he wasn’t truly the staunchest of free-marketers. That said, their differing communication styles reflect their distinct philosophies.
“Yellen believes in academic collaboration and transparency, while Greenspan believed in efficient markets,” Schnidman says. “This means that Janet Yellen genuinely means it when she says she is seeking a more transparent central bank, whereas Greenspan only tiptoed toward transparency and continued to use cryptic language to obfuscate the true meaning of his policy statements.”
Indeed, Greenspan’s style of communication led to the coining of the term “Fed speak.” He intentionally avoided translating Fed speak into plain English because he didn’t want the Federal Reserve’s statements to jolt the markets. Arthur Levitt, who was chair of the Securities and Exchange Commission during part of Greenspan’s tenure, told PBS, “No one understood what he said, but he said it in such a way that everybody bought it.”
Yellen, on the other hand, is known for her intentionally clear and straightforward communication style. Check out one of her press conference speeches and you will understand it easily if you know the basics of how the Federal Reserve works.
“Yellen believes that the market needs this information to properly function, while Greenspan believed that this information was unnecessary because the market was already operating efficiently,” Schnidman says. “Yellen’s belief in transparency and serious concerns about employment mean that she will continue to be a highly communicative Fed chair whom many will deem dovish.” (For related reading, see Janet Yellen: Background And Philosophy.)
“One of the biggest differences between the two is who they succeeded,” says Harlan D. Platt, economist and professor of finance at the D’Amore-McKim School of Business at Northeastern University in Boston. Greenspan followed Paul Volcker, who served from 1979 to 1987 and was known for nearly doubling an already high fed funds rate, causing (according to some) a painful recession, bringing down high inflation, and contributing to a period of economic stability called "the Great Moderation." Yellen follows Ben Bernanke, who served from early 2006 through early 2014 and is best known either for saving us from the Great Recession or for setting a new precedent for massive government intervention in the economy, depending on whom you ask.
When Yellen took over Ben Bernanke’s Fed, the economy was the strongest it had been since mid-2009, when the Great Recession formally ended. She intended to stay the course by continuing to wrap up the third round of quantitative easing (QE). She also wanted to keep the fed funds rate target around 0% and increase inflation from 1.6% to 2%. When Greenspan took over Paul Volcker’s Fed, the stock market was having a tremendous run, but five weeks into his tenure, the US stock market experienced its largest-ever one-day drop, an event that became known as Black Monday. Thus, one of the first things Greenspan had to do as chair was manage a crisis. He responded by cutting interest rates, ushering in the era of the Greenspan put.
According to Platt, “Volker was a success in combating inflation. Arguably Bernanke was not a success since his QE programs have no empirical evidence of success stimulating the economy. Hence, initially Yellen has greater flexibility then did Greenspan. For the moment she is following his footsteps. Time will tell if she establishes a Yellen Board.”
Influence on the Economy
While economic problems and successes alike are often attributed to the Fed chair’s decisions, so many factors influence economic outcomes that it’s hard to say how much effect any Fed leader’s policy has on any particular event. Greenspan saw some of the US economy’s highest highs during his five terms, but critics have also faulted his interest rate policies with fomenting the housing bubble and subsequent crisis. Yellen might find herself similarly accused of inflating an asset bubble if she doesn’t tighten monetary policy.
The first year of Yellen’s term saw stock-market growth in the high double digits and real GDP growth of 2.4%, a bit below the 3% projection in the first Federal Open Market Committee meeting Yellen led last March. Unemployment has officially fallen to 5.6%, but we’ve heard plenty over the last year about how misleadingly low 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 significantly lower now than they were when Yellen took over, with 30-year Treasuries at 2.37% compared to 3.55%. While homeowners can take advantage of rock-bottom mortgage rates, investors seem to lack long-term confidence in the economy. Low yields in safe investments like Treasuries can also push more investors into higher-risk investments like stocks.
“As we now approach a closer-to-normal functioning economy, she will face new challenges about how and when to tighten policy,” Schnidman says. “In many ways, this is the mirror image of the soft landings that Greenspan engineered from the debt crises of the 1990s and the economic turmoil of 9/11. Yellen is seeking to avoid a market pullback as the Fed slowly tightens policy, while Greenspan used a loosening policy to avoid the ramifications from serious economic threats.”
The Bottom Line
We can only go so far in comparing Greenspan, the second-longest-serving Fed chairman, with Yellen, who has only served one year of her four-year term. Since the Federal Reserve’s founding in 1913, most chairmen have served much shorter terms than Greenspan’s 19 years in the Federal Reserve. If recent history is any indication, Yellen might serve closer to eight years like Bernanke and Volcker. We can’t know what political or economic events are in store for us and what influence 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 chair the Fed.