Alan Greenspan

The US Federal Reserve System enjoys an enviable reputation for credibility, independence and transparency. A combination of institutional strength and personal skill is behind this success.

Among the things I managed to do during the leisurely Lunar New Year holiday last week was to read two recently published books on Alan Greenspan -one entitled Maestro by Bob Woodward and the other The Quotations of Chairman Greenspan by Larry Kahaner. The mere fact that books are being written on the man while he is still in his job, and going strong, is an indication of how influential Alan Greenspan is. Although I have no way of judging the accuracy of the necessarily subjective comments made by the authors of these two books, or the details of events described in them, they fit well with my impressions of the man. I have the privilege of meeting Alan Greenspan many times when attending meetings on international finance among central banks, particularly those that take place at the Bank for International Settlements. He is indeed as impressive as he is reputed to be.

I enjoy listening to him, particularly when he is speaking on record, because he chooses his words so meticulously that it is always a challenge to try and decipher what he actually means. Over the years, I have developed the habit of finding a quiet moment to read his speeches as soon as they have been delivered. I also enjoy talking to him, not that I get many opportunities to do so. Often concealed in the monotonically delivered sentences are opinions and analyses that can be very enlightening. But understanding him is not an easy task and this is best illustrated by the following two quotes of what he has been reported to have said:

"I know you believe you understand what you think I said. But I am not sure you realise that what you heard is not what I meant."

"If I say something which you understand fully in this regard, I probably made a mistake."

But what I admire most is his ability, as a central bank governor, to build and sustain the credibility of the central bank that he runs and the policies that the central bank pursues. There is nothing more valuable to a central bank than the trust and support of the people it serves, and as the financial markets of a free economy are now global, this trust and support, rather demandingly, must extend to the international financial community as well. It is hard to build credibility, let alone sustain it, for you really have to do everything right, and it is so easy to have it destroyed. Furthermore, in managing monetary and financial systems, doing the right thing often involves inflicting pain on the majority of the people you serve. When your action means higher mortgage payments and higher costs of doing business, and possibly substantial wealth destruction as a sharp fall in asset prices is triggered, it is awfully difficult to say convincingly that this is all for the good of the community in the long run. Yet there is this admirable culture or understanding among the American people, which we see, even from afar, in which the Federal Reserve, under the leadership of Alan Greenspan, is clearly seen to be working for the public good. I believe that this is a reflection of how well the actions are transparently explained and justified, within a policy framework that is well understood. To be sure (to use a popular Greenspan term), there is often controversy about the appropriateness of the action or its timing, but the argument is always intellectual and not emotional. And there is always an abundance of materials that one can conveniently access if one cares to gain an appreciation on the work of the Federal Reserve.

I believe that the credibility also comes from Greenspan's ability to deal effectively with the inevitable political pressures that come with the job. It is true that the degree of independence the Federal Reserve enjoys helps tremendously, but whatever the formal arrangements for ensuring independence of the central bank, there is always interference for political purposes that has to be resisted. And it is often the subtle political interference rather than the blatant interference that is most difficult to deal with. A central bank can never be totally independent, because the authority for the appointment, and the determination of the terms and conditions, of the central bank governor inevitably lies, directly or indirectly, with those in political power. But what is interesting in the United States is that interference in the work of the central bank is seen to be a political liability -you tend to lose rather than gain votes when you interfere with the Federal Reserve. This is an admirable position to be in. Whatever they say about the need to focus on the system and the institution, rather than the people, it is clear that the skills and character of the people concerned matter a lot.

And when you do not have an individual who has the calibre of Alan Greenspan or an institution with the history and reputation of the Federal Reserve, it is all the more important that there is, in the management of the monetary and financial systems:

Joseph Yam
1 February 2001

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