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U.S. Central Bankers: Yellen vs Bernanke vs Greenspan

Janet Yellen, Chair of the Federal Reserve had a tough act to follow after Ben Bernanke, but then again, Bernanke faced the same situation when he took over from his predecessor, Alan Greenspan.

Bernanke and Greenspan were two of the acknowledged heavyweights central bankers in the world of American and global finance, Yellen is still facing challenges formulating the American financial policy as the legacy of Bernanke works, but with her track record as deputy chair of the Fed together with her short time as the Chair, how is she shaping up against Bernanke and Greenspan?

Alan Greenspan was the second longest serving Chair of the Federal Reserve in its history, holding the position from 1987 to 2006. He served under four presidents; Reagan, Bush Senior and Junior and Bill Clinton.

Prior to his tenure at the Fed, he was a director of several major US companies as well as a consultant working with Wall St and Washington based organizations.

Appointed by Ronald Reagan, he took over the reins from Paul Volcker and was almost immediately faced with a crisis in October 1987 when world stock markets crashed. To settle market fears he immediately announced that the Fed was prepared to supply liquidity to support the US economic and financial system. His comments allowed sentiment to settle and markets recovered.

Through the nineties he supported Bill Clinton’s deficit reduction program despite being largely monetarist in beliefs.
The remainder of his term was marked by crises brought the event to worldwide significance. Some said it have been caused by his action or inaction.

In 2000, he presided over the bursting of the dotcom bubble and again, it is said by some to have caused it through his monetary policy. Others refute this but instead say that his response to it – increasing interest rates, which was also a mistake, was a vain attempt to clean up a mess caused by his own past inaction or lack of foresight.

2001 saw the attack on the Twin Towers which was predicted to have a major impact on the US economy. In response, Greenspan lowered interest rates to an eventual rate of 1% to spur growth. He foolishly expected the mortgage lenders to self regulate but in the greed for profits, lending criteria were overlooked and new mortgage products were sold which contributed to a major housing bubble. When rates began to rise, millions were were left unable to pay their mortgages. Additionally, two of the biggest lenders, Fannie Mae and Freddie Mac which held a quarter of US mortgages were lead to a catastrophic collapse of both companies when the sub prime bubble burst.

Interestingly, Greenspan had predicted a housing bubble and the problems that would be caused when it burst, but he failed to act to control it. As far back as his time in university, he had been aware of the possibility of a housing bubble dependent on fiscal policies and had written on the subject in his dissertation which had been suspiciously removed from the university archives before a copy was obtained by the Barron’s newspaper in 2008.

He’s also been criticized for failing to support regulation of the derivatives market which led to the collapse of major banks prior to the banking crisis of 2008/9.

Greenspan left the Fed in 2006 at the age of eighty, only a few months later the housing bubble burst and just eighteen months later the sub prime mortgage crisis erupted, capping a career at the Fed that was blighted by a lurch from one crisis to the next.

When the time came for Greenspan to hand over the reins it was to Ben Bernanke who had already sat on the Board of Governors at the Fed for the previous four years, stepping down to become the President of the Economics Advisors Group for George Bush, which served as a preparatory measure to judge his competence to take over from Alan Greenspan.
His early days were marked by lapses of judgement with the markets thriving on his openness over fiscal policy. Eventually Bernanke learnt to remain guarded in his speech. He was credited with using sagacity and patience in dealing with the 2008 financial crisis and was credited by Obama with having been instrumental in steering the US away from another depression.

His remaining years were spent defining a fiscal policy. His intentions were to kick start the US economy and drag it out of recession. He reformed the regulation of the banking system and introduced a major quantitative easing program which saw the US exit recession before many of its counterparts in the G8. The funding from the QE program also helped economies around the world where dollars flooded in to take advantage of high returns on investment. In his last year, he recognized that the work of QE was nearly over and began tapering. At the same time he groomed Janet Yellen, a supporter of his policies, ready to succeed as Chair of the Fed.

Janet Yellen had an inauspicious start to her reign as in-fighting between the Republicans and Democrats led to the late confirmation of her tenure, although the financial world knew it was a formality.

Coming across as a little tentative, she has committed to follow through the policies of Bernanke but realizes that part of her remit will be to choose the right time to begin control of the economy through increasing interest rates. Whether deliberately or otherwise, she surprised the markets by naming a likely date when interest rates would begin to rise, only to try to subdue the excitement over the prospect in the following weeks.

Only a few months into her term as Fed chief, many are still looking for the Janet Yellen who isn’t the reincarnation of Bernanke. It won’t be until interest rate hikes start the next we will see what Yellen is made of, however, her qualifications and experience should convince the financial world that the US economy is in safe but maybe not exciting hands.

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