For many economists, Alan Greenspan’s death marks the passing of a master technocrat and perhaps the most successful central banker in American history. Yet his life contains one of the great ironies in modern economic thought. Before becoming “The Maestro,” Greenspan was known as a defender of the gold standard. In his 1966 essay Gold and Economic Freedom, he argued that sound money constrained government expansion, fiscal irresponsibility, and inflationary finance. He would later spend nearly two decades presiding over the very system that essay criticized.

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The conventional account of Greenspan’s tenure is likely to emphasize low inflation, long expansions, falling unemployment, and the apparent macroeconomic stability of the Great Moderation. To many observers, these outcomes demonstrated the success of modern central banking. To critics of central planning, and specifically of the monetary variety, those outcomes suggest something different. Credit expansion and monetary intervention do not eliminate economic imbalances; they typically relocate them. Inflation appeared subdued, yet asset prices soared. Recessions became less frequent, but leverage amassed throughout the financial system. Stability increasingly existed at the surface while fragility and vulnerability grew beneath it.

The financial crisis of 2008 was not merely an unfortunate interruption of an otherwise successful era. It was, at least in part, the delayed manifestation of risks that had been building for years. The Great Moderation increasingly resembles a period in which volatility was suppressed rather than eliminated and in which apparent tranquility was purchased at the cost of future resilience.

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Greenspan’s legacy is therefore less likely to be any particular interest-rate decision or speech than a transformation in how markets view central banks. (Even his famous “irrational exuberance” warning of December 5, 1996, failed to halt the dot-com boom, which continued for more than three years thereafter.) Following the Federal Reserve’s response to the 1987 stock market crash, investors increasingly came to believe that severe market declines would eventually elicit monetary support. The resulting “Greenspan Put” altered expectations and incentives throughout the financial system. Market participants learned to incorporate anticipated intervention into their decisions, encouraging greater leverage, more aggressive risk-taking, and a growing dependence on monetary authorities during periods of stress.

This development carried consequences extending beyond finance. Greenspan himself acquired an almost sacerdotal status. Considerable resources were expended parsing his opaque statements for hidden meanings; markets reacted to subtle changes in his phrasing choices, and politicians sought the appearance of his approval. On February 17, 1993, Greenspan sat beside First Lady Hillary Clinton during President Bill Clinton’s first televised address to Congress, a carefully staged signal of Federal Reserve support for the administration’s economic agenda. Such moments reflected a broader intellectual shift: increasing confidence that a complex economy could be successfully guided by exceptionally talented policymakers armed with sophisticated models and vast quantities of data.

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It is precisely this belief that economists such as Friedrich Hayek warned against. Economic knowledge is dispersed among millions of individuals and continuously changing. No central banker, regardless of intelligence or expertise, can fully possess or process it. The notion that an economy can be steered through discretionary adjustments of interest rates rests on an ambition that vastly exceeds the capacities of any individual or institution, regardless of the amount of data or concentrated brainpower at their disposal.

None of this diminishes Greenspan’s intelligence or influence. But his ultimate legacy is likely not to be the prosperity associated with his tenure. It may instead be the institutional framework that he was instrumental in creating: a world in which markets habitually look to central banks for guidance, reassurance, liquidity, and support. The questions raised by that framework — about moral hazard, distorted incentives, and the limits of economic management — remain unresolved. In fact, they have become all-the-more pressing. Greenspan was one of the most consequential policymakers of the modern era. His time at the helm of the Federal Reserve serves as a reminder that short-term tranquility and enduring stability may be worlds apart. Rest in Peace, Alan.

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Image: Public domain.

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