Remembering Alan Greenspan and a Return to Markets
Early experiences so often set the tone in life. Most of us have had formative teachers, mentors, coaches and co-workers. Sometimes these formative figures are personal relationships, other times certain public facing human beings can come to define an archetype. While I certainly did not know him personally, former, long serving Federal Reserve Chairman Alan Greenspan occupies one of these positions in my professional life. Mr. Greenspan passed away this week at the impressive age of 100.
Mr. Greenspan’s ascent as the 13th Chairman of the Federal Reserve coincided perfectly with the rise of my awareness of the Fed and how it impacts our lives. Taking office in 1987 at the exact time my understanding of macroeconomics was forming through classes at Andrean High School then Purdue, as I was becoming cognizant there even was such a thing as a Federal Reserve Chairman, Alan Greenspan was there looking exactly the part.
Intellectual, wonkish, older and slight, just as a college kid expects a government banker to look. Mr. Greenspan would be seen on TV rushing into Fed meeting with a briefcase stuffed with papers, he would come out of meetings to release statements so overly cryptic I thought I would never understand what he was talking about.
Fed Chair Greenspan would end up serving in his post for 18 and half years, not only setting the tone of discussions during the macro econ classes I came to enjoy and focus on during college, but his Fed also defined the first decade of my investing career as well. To this day, when I hear the term “Fed Chair” his image will flash in my mind. Now that’s an Icon.
By the end of his term, I did learn how to understand his “Fed speak”, but more importantly I also came to appreciate and understand the fallibility of the Fed, what it could do well, what it couldn’t do and how for better or for worse the central bank impacts markets and lives.
While Mr. Greenspan’s legacy will always be viewed positively, it was also burdened by frequent challenges, starting in 1987 with Black Monday when the Dow dropped 22% in one day, to the dot.com bubble in 1999-2001 and finally the monetary policy response to 9/11 which many market historians feel set the table for the 2008 financial crisis.
Perhaps the primary legacy of Mr. Greenspan, however, will stem from his fervent belief in markets. The “Maestro” as we came to call him, believed the Federal Reserve policy could contribute some stability to markets, but that markets functioned best when the Fed maintained a more laissez-faire stance and the government regulated less as opposed to more. His successors would not necessarily share these libertarian philosophies.
Following Mr. Greenspan, the Fed under next three Fed Chairs adopted a more activist policy approach, attempting to influence markets through policy, communication and regulation. While Mr. Greenspan’s Fed primarily focused on core policy tools such as short-term interest rates and bank liquidity lines, his successors would broaden the tool kit to quantitative easing, Fed balance sheet expansion, targeted bank reserves and a communication system of “forward guidance” designed to influence bond yields and fixed income markets.
This rotation away from a market based limited intervention, to an approach much more resembling central planning has had profound implications for investors, the government and the economy. Enter Kevin Warsh.
This last week also saw the first Fed Board of Governors meetings following the confirmation and assentation of Kevin Warsh as Fed Chair, and I for one am encouraged.
Gone is the forward guidance designed to sway markets. Gone is the use of obscure insider “Fed data” financial surveys to set policy, gone is the promise of unlimited liquidity support for financial markets. Life the Maestro, and unlike his predecessors, Kevin Warsh appears to harbor a deep belief in markets, for better or for worse, and investors are adjusting.
It’s been said in markets that history doesn’t repeat, but it does rhyme, and to me the Warsh Fed already “feels” more like the Fed I started my investing career under. There will be a lot to learn, and some things to remember from the last time the Fed was focused on staying out of the way, and markets are already adjusting. I for one am ready.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
All indices are unmanaged and may not be invested into directly.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
