{"id":8806,"date":"2026-06-23T19:41:37","date_gmt":"2026-06-23T19:41:37","guid":{"rendered":"https:\/\/www.fintechpulse8.com\/?p=8806"},"modified":"2026-06-23T19:41:37","modified_gmt":"2026-06-23T19:41:37","slug":"the-man-who-invented-the-feds-magic-trick-just-died-his-successor-is-about-to-try-it-again","status":"publish","type":"post","link":"https:\/\/www.fintechpulse8.com\/?p=8806","title":{"rendered":"The man who invented the Fed\u2019s magic trick just died. His successor is about to try it again"},"content":{"rendered":"

<\/p>\n

Some of the most consequential decisions in the global economy of the 1990s were worked out in a bathtub.<\/p>\n

\n

Alan Greenspan, who died Monday at 100 from complications of Parkinson\u2019s, had a bad back. He soaked it at dawn in a deep tub at home, thinking through the economy before the day began, and it was there, said Peter Petre, the former Fortune<\/em> editor who co-wrote his memoir, where his best ideas were formed, including the famous phrase \u201cirrational exuberance.\u201d<\/p>\n

Greenspan died just as the U.S. stock market began another rout over \u201cirrational exuberance,\u201d but this time with a new target. The AI trade has left some AI-adjacent companies trading at valuations that Greenspan\u2019s longtime vice chair at the Fed (and once considered heir apparent), Alan Blinder, described as \u201cwild\u201d to Fortune<\/em>.<\/p>\n

\u201cThe question is, are they crazy?\u201d Blinder said. \u201cThis is very much analogous to the questions that Greenspan faced in the late \u201890s.\u201d<\/p>\n

When Greenspan presided over the bubbling internet age, he made an early bet that most economists, including Blinder, rejected: that the internet boom was allowing the economy to grow faster than official projections estimated. So, he kept interest rates low, even as inflation started heating up, to allow the boom to run.\u00a0<\/p>\n

That decision proved prescient: inflation stayed contained while the new technology delivered one of the strongest economic expansions of the modern era. Greenspan became a rockstar, hailed as the \u201cMaestro,\u201d the \u201cOracle,\u201d a man who could sense the economic shifts better than anyone else. Soon even his own colleagues at the Fed feared challenging him, for it felt, Blinder said, like \u201cchallenging Zeus on the mount of Olympus.\u201d <\/p>\n

But that forecast was really a creed, one that would sully his reputation just as fast as it made it. Markets, he believed, were self-correcting, and could price assets correctly. If there were bubbles, the Fed can\u2019t do anything about it without disrupting the natural balance of things. He made his comment about \u201cirrational exuberance,\u201d but never again tried to stymie the speculative fever that would soon boil over into the dot-com bust.\u00a0And then he famously stood by as the housing bubble grew. <\/p>\n

Now, as an AI boom drives asset prices to heights its productivity gains may not yet justify, it falls to Kevin Warsh\u2014a proponent of Greenspan\u2019s\u2014to decide whether to lean against it or let it run.<\/p>\n

\u201cIt has some eerie parallels,\u201d said Alan Blinder, Greenspan\u2019s former vice chair, of the moment underway now. \u201cHopefully, it won\u2019t end the same way.\u201d<\/p>\n

\u201cThe Undertaker\u201d<\/strong><\/p>\n

Greenspan spent 18 years running the Federal Reserve and came to be synonymous with the institution he headed; often cloaking his statements in a code that deepened his mystique, and turned the central banker into a kind of rock star in Washington and beyond. On his walks to and from the Federal Reserve admirers would flank him, asking for autographs on dollar bills.\u00a0<\/p>\n

\u00a0But the people who worked closely to him knew a second Greenspan. He was acutely aware of how he was perceived, amused by it, sometimes shy, sometimes somber ( The famous libertarian intellectual Ayn Rand, who had known Greenspan since his young adulthood, called him \u201cthe Undertaker\u201d for his dark fashion sense and demeanor).\u00a0<\/p>\n

\u201cIt was a magic trick\u2014acting the guru, but not really knowing,\u201d Petre said. \u201cIt probably pleased him to be able to play in both registers.\u201d<\/p>\n

But the trick outlived its originator. Greenspan understood early that in a market economy\u2014and especially one organizing around the capital demands of an internet revolution\u2014the central banker\u2019s words are a tool to match the federal funds rate. Donald Kohn, who spent 13 years at his side and later became the Fed\u2019s vice chair, told Fortune<\/em> that half their work together was calibrating exactly how Greenspan should speak, \u201cto make sure he was having the effect he wanted on people\u2019s attitudes on market prices.\u201d<\/p>\n

It fueled markets for two decades of prosperity, but it contradicted his own Randian principles. He had come up believing markets policed themselves, that people answered for their own risks; but the \u201cmaestro\u201d built a Fed that ran on faith on him and his ability to keep money easy for markets on the way up, and catch them when they fell.\u00a0<\/p>\n

A risky bet that made and then ultimately undid his legacy. He let the dot-com bubble inflate and was proven right when the economy shrugged off its collapse; he trusted the banks through the housing boom and was proven catastrophically wrong.\u00a0<\/p>\n

The \u201cman about town\u201d<\/strong><\/p>\n

Greenspan always had the same inner life: data-obsessed. As a boy growing up in Washington Heights, Petre said, he collected railroad timetables and memorized them; he could tell you exactly when the 12:02 out of Phoenix reached Wichita. A talented clarinetest, he trained at Juilliard as a teenager and toured the country with a popular be-bop band, but could usually be found reading about the economy rather than engaging with post-concert revelry. He told 60 Minutes he did his Julliard peers\u2019 income taxes. <\/p>\n

After obtaining a bachelor\u2019s in business and a PhD in economics from New York University, Greenspan spent three decades as an economic consultant. It was then he became more of \u201ca man about town,\u201d Petre said\u2014dapper, somewhat mysterious, dating widely, including a long stretch with Barbara Walters before he found his longtime partner, the journalist Andrea Mitchell.<\/p>\n

But even as his social circle broadened, there was perhaps no one more influential on Greenspan than Ayn Rand. <\/p>\n

As a young man, Greenspan was part of the social circle called the \u201cCollective\u201d that would convene in Rand\u2019s Midtown living room, arguing far past midnight on all matters political and economic. Rand, 20 years his senior, \u201ctaught him not only the way the economy worked, but that it had a moral dimension,\u201d Petre said\u2014that a market left alone wasn\u2019t just efficient, it was just, and the people inside it would answer for their own risks.<\/p>\n

Blinder watched what that faith became; Greenspan\u2019s vice chair from 1994 to 1996, he traces the chairman\u2019s lightest-touch instincts on the banks straight back to that living room. \u201cIt came from the Ayn Rand school,\u201d he said. \u201cHe believed that the markets would get it right\u2026 and there was no talking him out of it.\u201d<\/p>\n

The bet that made him<\/strong><\/p>\n

That belief led Greenspan to a now-familiar argument in the late \u201990s: that an economy being remade by computers could not accurately measure its own productivity revolution in real time. So he held onto rates and didn\u2019t cut. It was a risky bet that contradicted the much-loved Phillips curve. \u201cHe saw a genuine phenomenon before it was visible in the data,\u201d said Blinder, who was among the hawks who thought he was wrong at the time. Was it genius or luck? \u201cI\u2019m sure Joe DiMaggio had some luck\u201d hitting in 56 straight games, Blinder said. \u201cBut it was mostly skill.\u201d\u00a0<\/p>\n

The difficulty was that his insight fueled the speculation of the dot-com bubble. If the economy really could grow faster without inflation, stocks were worth more than the old models suggested. But how much more was the question. In December 1996, Greenspan gave that question its famous name, asking whether \u201cirrational exuberance\u201d had \u201cunduly escalated asset values.\u201d Markets recoiled for a moment, then kept climbing, the Nasdaq tripling before the decade was out.<\/p>\n

That became the pattern for Greenspan. He had chosen those words\u2014literally, in the bathtub\u2014to send the market a signal: that as real as the promise of a technological revolution was, so were the signs of speculation. But he didn\u2019t believe he could use interest rates to stop it safely, because a hike big enough to deflate the bubble would have taken the rest of the economy down with it. \u201cYou may bring the whole economy down in an effort to deflate what you believe is a bubble,\u201d Blinder said.\u00a0<\/p>\n

And he didn\u2019t think it was worth trying again. The lesson he drew, Blinder said, was that \u201cFed chairs almost never talked about what\u2019s the right value of the stock market, and probably I shouldn\u2019t either.\u201d He never repeated himself.<\/p>\n

After the dot-com bubble burst in 2000, Greenspan seemed vindicated: the broader economy didn\u2019t collapse with the market, even as companies liquidated overnight. The Nasdaq lost nearly four-fifths of its value from its peak, but eventually recovered.\u00a0<\/p>\n

That\u2019s the trap that awaits Warsh. He\u2019s hinted at a desire to replicate a Greenspan-like-bet; that AI will eventually be disinflationary, so the Fed should refuse to hike rates even as the economy overheats, as its shown signs of doing. When his Board meets next month to decide what to do, he will almost certainly try to sway them from their now-Hawkish bias. But if the productivity improvements come too late\u2014or never arrive at all\u2014he could be blamed for a much deeper crisis than dotcom.\u00a0<\/p>\n

The bet that failed him<\/strong><\/p>\n

That sort of crisis found Greenspan.<\/p>\n

In Greenspan\u2019s final years, housing lenders began to write \u201cNINJA\u201d loans; loans made to borrowers with no income, no job, and no assets, often signed off without checking any paperwork. Certainly Greenspan knew something was awry, Blinder said. The Fed \u201cknew plenty,\u201d he said\u2014enough that it \u201ccould have cracked down more as the bank supervisor, never mind interest rates.\u201d It didn\u2019t. Greenspan held back, trusting that institutions risking their own money would not risk too much, Blinder said. \u201cStern words from the Fed go a long way,\u201d Blinder said. \u201cAnd the banks didn\u2019t get them.\u201d<\/p>\n

When those loans expired, with no money repaid, the facade finally gave way. The housing market collapsed, the banks with it, leading to the crisis known as the Great Recession.<\/p>\n

In October 2008, called before Congress, Greenspan conceded he had found a flaw in the worldview that he\u2019d held for 40 years, since those times in the living room salons. The self-interest he had trusted to safeguard the system had failed, he said, leaving him in a state of \u201cshocked disbelief.\u201d<\/p>\n

It was, Petre said, perhaps the most traumatic moment of his life, and it took a career\u2019s worth of nerve. \u201cHe could admit his mistakes,\u201d he said.\u00a0<\/p>\n

Yet even with Greenspan\u2019s reputation sullied, the market psychology he helped create kept thriving with every crisis. Through the dot-com bust, the financial crisis, the pandemic crash and every rescue that followed, investors learned to trust that the Fed would not let a bust become fatal.<\/p>\n

That is the inheritance now facing Warsh, who has openly cast Greenspan as a model for his own chairmanship. In some ways, AI has handed markets another version of the 1990s dream: a technological revolution that could make the economy more productive without setting off inflation.<\/p>\n

But in other ways, the moment could hardly be more different. The disinflationary tailwinds Greenspan enjoyed\u2014cheap imported goods, a shrinking deficit\u2014have all reversed. And where Greenspan\u2019s productivity surge eventually showed up in the data, AI\u2019s has not yet, leaving the Fed to decide whether the boom is the kind that cools prices or the kind that overheats them. Greenspan made his bet and was proven right. Whether Warsh is that lucky, no one can say for sure.<\/p>\n

\u201cI\u2019d love to talk AI with Alan Greenspan,\u201d Petre said. \u201cThere\u2019s something new going on.\u201d<\/p>\n<\/div>\n

#man #invented #Feds #magic #trick #died #successor<\/p>\n","protected":false},"excerpt":{"rendered":"

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