‘Greenspan Put’ Era Is Over — And Not A Millisecond Too Soon

In Asian economic circles, few western figures have been more polarizing these last 25 years than Alan Greenspan.

Not that Asia enjoyed Donald Trump’s bonkers 2017-2021 U.S. presidency. The trade wars, Twitter tirades and disastrous Covid-19 response dented this region’s trajectory in the short run. Yet the fallout from Greenspan’s 1987-2006 run as Federal Reserve chairman haunts leaders from Jakarta to Tokyo to this day.

One lasting scar: the Greenspan Fed’s aggressive 1994-1995 tightening cycle, which sent the dollar skyrocketing. By 1997, currency pegs became impossible to defend in Bangkok, Jakarta and Seoul. It also helped send Mexico into crisis, Orange County, California into bankruptcy and Wall Street securities giant Kidder, Peabody & Co. into extinction.

The bigger one is a quarter century of central banks taking the lead in controlling economies. The dark side of this Greenspan-pioneered model is becoming all too apparent today.

Here’s the backstory. By the mid-1990s, the larger-than-life Greenspan had become a bona fide celebrity, both in financial circles and pop culture. He was the closest thing the economics game had to a Marvel-like superhero.

Greenspan’s notoriety grew year after year to the point where he started showing up on “most intriguing” lists of magazines like People along with Leonardo DiCaprio, Oprah Winfrey and members of the Spice Girls.

It was a truly bizarre moment. One where presidents swooned, Wall Street genuflected and lawmakers jumped to attention at Greenspan’s every utterance.

Take the events of 2001. At the time, outgoing President Bill Clinton had just passed successor George W. Bush a budget surplus. Greenspan, Washington’s top libertarian at the time, wasn’t having it. Instead, he favored a giant tax cut—and he got one. And an ill-timed one, too. Two post-Sept. 11 wars on top of a tech crash later, and the U.S. was swimming in red once again.

Asia is still grappling with the side effects of the model that the Greenspan “halo effect” created. With a supposed genius at the controls of the world’s most powerful economic engine, Congress was all too thrilled to leave things to Greenspan. Or to the “Maestro,” as Bob Woodward titled his gushing 2000 Greenspan book.

The model caught on fast. Officials in London, Frankfurt, Paris, Tokyo, Sydney and elsewhere sensed that it worked swimmingly. Over time, either by design or policymaking osmosis, the U.K., Eurozone, Japan and other major economies passed the keys and steering wheels to unelected monetary officials.

For one thing, leaving fine tuning to central bankers freed politicians from the messy work of reforming and recalibrating economies. Why take risks upending the status quo when you can outsource maintenance duties to central bankers armed with credit printing presses?

That gave rise to the so-called “Greenspan put.” Greenspan came to the Fed as a free-market evangelist. Over the years, he pivoted hard in the direction of rescuing markets in times of turmoil.

The Greenspan Fed did it amid the 1997 Asian financial crisis. It deployed the “put” again in 1998 when the Long-Term Capital Management hedge fund imploded. It came to the rescue a couple of years later after the Dot-com crash.

Similar monetary responses became commonplace in Frankfurt and Tokyo. In recent years, the People’s Bank of China developed its own reputation for enabling markets in turbulent times. Chatter about a “PBOC put” often pops up in Shanghai market circles.

As time went on, central banks in Hong Kong, Jakarta, Manila, Mumbai, Seoul and beyond assumed more and more control over economic management than their mandates envisioned. By the time Greenspan left Fed headquarters in 2006, the central bank industrial complex he created was the dominant growth model.

Economist Louis Gave at Gavekal Research notes that “not long afterwards, Alan Greenspan retired and was followed by a new generation of central bankers who felt sure that by manipulating both the price of money and its quantity, they could get better results” than conventional economic policymaking.

Things got supersized amid the 2008 Lehman Brothers crisis, when central bankers played fire brigade at a scale never seen before. Covid-19 had monetary officials racing to fortify economies in even more unprecedented ways.

Yet 25 years of central banks in control left the global economy frailer and less productive. Though it’s hard to generalize too much, the arrangement deadened the appetite for disruption, reinvention and economic muscle building. A quarter century of treating the symptoms of economic troubles, not the underlying causes, will do that.

The all-liquidity-no-reform matrix that Greenspan, now 96, bequeathed us is creating headwinds Asia didn’t see coming. Take Japan, which has been walking in place for two-plus decades. With the Bank of Japan dutifully in ATM mode year after year, decade after decade, the ruling Liberal Democratic Party has little incentive to raise the nation’s competitive game.

Now, though, government officials from Tokyo to Jakarta and from New Delhi to Manila have little choice but to roll up their sleeves and generate growth organically.

This 12-step program is sure to prove challenging. But it’s high time the proverbial punch bowls central bankers have been refilling and refilling take a backseat to structural changes. Only bold and innovative policymaking can cut bureaucracy, increase innovation, strengthen workforces and empower women to spread the benefits of growth.

The good news is that as the “Greenspan put” loses relevance, Asia is well positioned to devise ways to grow better, not just faster. There’s not a millisecond to waste.