Remembering Former Fed Chairman Alan Greenspan

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1:34Carol Massar:Make more of what's yours. Accounts subject to credit approval. Restrictions and limitations apply. Cards are issued by JPMorgan Chase Bank N.A., member FDIC. Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Business Week Daily. reporting from the magazine that helps global leaders stay ahead with insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Business Week Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. Well, Alan Greenspan, the Federal Reserve Chairman, proclaimed a wizard for guiding then-record U.S.

2:20economic expansion, only to see his luster dimmed by the financial crisis that erupted less than two years after he stepped down, has died. He was 100 years old, 18 years as Fed chief, 1987, all the way, Carol, until his retirement at the start of 2006. Stock market, boom, low unemployment is what we saw over that time.

2:39Carol Massar:Yeah, some remarkable cycles, certainly, in the market environment. We should point out that more so than four presidents or more than four presidents he served under, or the seven Treasury secretaries he worked alongside. I mean, Greenspan was really seen as the maestro who kept the economy humming. And there were so many things that you think about. We watched, we monitored with him, we parsed his words like we do with any Fed chair. But there are things that he said that have stayed with us even until today. I want to bring in Betsy Duke, former governor of the Federal Reserve. She was nominated to that position by President George W.

3:15Bush in 2007. She served until 2013. She's also the former chair of Wells Fargo, the former chair, too, of the American Bankers Association. She joins us from Virginia Beach. Betsy, welcome. You were also on the board of directors of the Richmond Fed from 1998 to 2000. That time, of course, overlapped when Alan Greenspan was chair of the Fed. Just today, as you remember his legacy, what is it to you and to us? So a couple of things for Chairman Greenspan. And this is both a sad day, but a day to celebrate certainly a life well lived. I think the two things when I think about him remarkably, first one is communications and not in the way you might think, because he was so famous for that sort of doublespeak that nobody could understand.

3:59But he really pioneered Fed communications and the communications that we're used to today in hearing from the committee after the meetings. And then the other piece would be his crisis management. He oversaw a number of crises and, again, shepherded the economy and the country through them in ways that had not been necessarily normal operations for the Fed.

4:24Carol Massar:Yeah, you know, it's interesting when we think about his legacy and his standing, and he really did make a mark. I mean, what, you know, I was curious about things he said more recently in terms of the market environment. And I do wonder how he was thinking about the environment where we are in today, where we question so much whether or not we will have an independent Fed. It's hard to believe that, you know, the most revered U.S. central bank globally is having these kind of thoughts or people around it are having these thoughts. Well, you know, in Greenspan's day, nobody dared challenge the independence of the Fed.

5:02And quite frankly, nobody on the Fed, Federal Open Market Committee, dared challenge Ellen Greenspan. So things are a lot different today. And the independents, I think, I still believe the Fed is going to remain independent. I've been very much heartened by Kevin Warsh's first statement since he's been there and his first press conference. I think he's made it clear that he's going to certainly carry the flag for Fed independence. You know, it's interesting that you you went to the Fed independence part of this because up up until Greenspan, the Fed had been under pressure when it when it came to its independence.

5:43I mean, certainly during the Nixon administration, I think it's fair to say at this point. Yeah. And, you know, certainly Volcker came in at a time when the Fed's lack of independence had really caused difficulty for the country and for the president. So, you know, that's the last, I think, example we have of the Fed not acting independently. And it was only when Volcker got there and really decided to move forward and conquer inflation that since that day, at least, the Fed's independence has been taken as seriously important to the country. Recently, there have been so many challenges to that, but hopefully between the courts and also some understanding of exactly how dangerous it is to bring the Fed's independence into question and what that does to markets and investors and our economy in general.

6:44Carol Massar:The other thing, though, you think about this dual mandate, Betsy, when it comes to the Federal Reserve and not the financial markets being a part really of their mandate. And the read by investors, the Greenspan put the expectation that if things got messy, that he would be there to shore up markets. Good thing, bad thing, you know, when you think about what the Federal Reserve is really supposed to be focusing on. Yeah. So there was always this idea that somehow the Fed would protect markets in some way. And I don't think the Fed's, you know, it's certainly not in the Fed's remit to protect markets, But to provide liquidity and stability and to to make sure that that panic doesn't take hold is really the Fed's reason for being originally.

7:44So the Fed was originally formed because back before there was a Fed, you had they called them country banks at that time, country banks and city banks. And the country banks would borrow from the city banks. And then if the city banks didn't have enough money or got concerned about the country banks, they quit lending to them. And then those country banks didn't have enough liquidity to operate. They would fail. And then you'd have panic around the country. So that's why the Fed has the discount window. That's why the Fed has its lending authority. And that's really, really one of the most important functions of the Fed.

8:18One of the things we talked about with Mike McKee last hour, who covers international economic and policy for Bloomberg TV and radio, was the way that Chair Greenspan changed the way the bank communicates with the public. And I'm curious now if you think, and not just the public, but markets too, net-net right now, is the Fed communicating enough? Right now, the Fed's communicating probably too much. And so Chairman Greenspan did. He originated the statement coming out after the committee meeting, after the FOMC meeting. and originally came out a little bit later than it does now and it finally moved to being to come out right after the meeting ended and he also originally it was the chairman's statement alone and later became the committee statement which the committee would would ratify before that i actually um as a banker took a class in how to read through the weekly publications of the Fed and try to discern where M1 and M2 and M3 were going and what the Fed was trying to do.

9:27That was all you had to go on. And so I think it is really important that the Fed communicate what it's thinking about. The second thing Alan Greenspan put in the statement was something about the balance of risks. And at that point, they would talk about whether they thought risks were more on the inflation side, more on the unemployment side. And again, that helped markets understand what the Fed was thinking. What has happened today, and I think particularly with the dot plots, is that markets and investors now take those dot plots as this is where rates are going. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

10:13What if data didn't sit still? What if intelligence moved with us? not buried in reports, but activated in real time, where lives are being shaped, where decisions are being made. It all starts with a question. Where is the potential? Cotality turns data into clarity, intelligence into insight, insight into action. Because when intelligence moves, we all move forward. Cotality, intelligence beyond bounds. So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need.

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12:14SEC registered advisor. Crypto services by zero hash. Sample prompts are for illustrative purposes only, not investment advice. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. You're listening to the Bloomberg Business Week Daily podcast. Catch us live weekday afternoons from 2 to 5 p.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube. Jim Caron, Chief Investment Officer of Portfolio Solutions at Morgan Stanley Investment Management. He's back with us. We've got a little bit of a special treat for this last hour of Bloomberg Business Week Daily.

12:51He's joining us for the rest of the show. Jim, it's good to see you. Welcome back. Thank you. It's great to see both of you. And thanks for taking the time this afternoon. You know, we obviously weren't planning on starting with Alan Greenspan and his life and legacy. We're going to talk about the Fed. We'll talk about rates, risk, portfolio, positioning the U.S. versus the rest of the world. Matt Miller wants us to talk about motorcycles. Yes, we do that. I don't think I will be able to do that in an intelligent way that will suffice.

13:16Carol Massar:I did once ride on it with two other people. That was dangerous when I was really young. But we do want to start with Alan Greenspan and the legacy. Because early in your career, I mean, he was the Fed chair you knew. He was it. He was a legend. So if we put this in perspective, and I think it's very important to have context around this. He started his position as chair in 1987. He ended in 2006. That's a 19-year period. So for most people, that's a large chunk of their career. I started in the business in 91, 92. That's all I knew for 14 or 15 years of the starting point of my career. He was somebody that was not going to be challenged easily by other members of the Fed.

14:01It's whatever he said went, and that was it. But he also did a bunch of different things. He changed things at the Fed in the sense that he made it a lot more transparent, if I could say those words. So the way the Fed operated, and we take this for granted today that you find out on Wednesday at 2 o 'clock what the Fed's decision was, and we all go to work. Prior to Greenspan, it was Volcker. And what happened at about 4.15, 4.10 on a Thursday afternoon, you got money supply data. Based on what the money supply data was, that was the change in policy. You had to figure it out. Nobody told you if it was 25 or 50 basis points.

14:41You were guessing. And you were trying to analyze and figure out what that was. So what Greenspan started to introduce through communications and things like that was what today we take for granted was absolutely monumental and groundbreaking as far as saying, hey, by the way, we just hiked or cut 25 basis points, and that's all it is.

15:04Carol Massar:Is it too much, though? Would some say it's gone too far? So there's been iterations. There's pre-Greenspan, and then there's post-Greenspan. So what happened in the 19 years subsequent, from 2006, say, to 2026, what we've had now is Bernanke, Yellen, and Powell. They've all followed effectively the Greenspan mode, but they added on to it. Now, clearly Bernanke had a very special situation, the financial crisis. He had to do enhanced communications and things of that nature. I think that what is it too much today in terms of communication? I'm going to say that it is a bit because what the Fed is trying to do is they're trying to telegraph and televised too much, such that they're actually directing and dictating how the markets should think about things, as opposed to what Warsh said, which is, let the markets figure it out.

16:05I mean, so the way I think about Kevin Warsh—

16:07Carol Massar:So we're being managed? Well, I mean, you know, the way I think about Kevin Warsh, if I'm going to put him in this period of time from 1987 to 2026, I'm going to say that what Warsh is trying to do is bring us back to the period that was pre-Ben Bernanke. So it was Greenspan in the 1990s. So very similar economic setup too. Big CapEx cycle, big productivity boom that we're going through. And I think what Warsh is trying to do is bring us back to that period where he lets the markets assess what monetary policy ought to be, as opposed to what Greenspan did. Greenspan was the guy that really started to come in, because Volcker and everybody else just looked at money supply, M1, M2, they were, you know, very, very much that that's what they did.

16:51Greenspan was one who started saying, you know, we should think about GDP growth in the labor market and inflation. And let's talk about inflation anchoring and, and all of these various things, things that we think of today is very common, was very uncommon at the time. So I'd say let's give Kevin Warsh an opportunity. This is his moment in history. He wants to remake the Fed. But this isn't groundbreaking what I think Warsh is trying to do. I think he's just getting back to a period that looks more like the 1990s. So it's fair to say you see a hint or more of Alan Greenspan in Kevin Warsh today.

17:27Yeah, I do. Now, whenever you compare somebody to like somebody who was a legend and somebody who's just starting out, that's always a very, very difficult, you know, we'll see how Warsh does, right? It's gonna be a long journey and long road ahead. But I think on paper, conceptually, what Kevin Warsh is trying to do is get the Fed back to a much more narrow focus. Not as narrow as the Volcker Fed, which was just money supply, but something that's a little more growth, inflation outlook, jobs market, but let's ease up on the communications. I think he's really just going back to a 1990s Greenspan model right now.

18:07And that's my perspective. And a lot of people weren't even around in the 90s in this business practicing, right? So they don't really have a good perspective on this. It wasn't chaos. It was fine. You know, you just have to get used to the new, there's a new sheriff in town.

18:19Carol Massar:What's the downside of kind of where we are and what we expect from today's Fed? I think the downside is that there's a lot of mission creep with the Fed, right? So now we have to put this in context as well. Prior to the financial crisis, we had this much more narrow remit. this is what Greenspan kind of created. I mean, he opened it up more transparency. Then Bernanke kicked the door wide open. He had to. We had a financial crisis. We had interest policy. We had QE. We had policy rates at zero. So he had to find a way to communicate policy to the markets. I totally get it. But what happens is, is that once the Fed starts to have this mission creep and they start to be asked to do more and more, even from a regulatory standpoint, or even, you know, the Fed was being asked, what's your policy on climate?

19:05You know, things like that. This is not what the Fed's job is. The Fed, and according to Kevin Warsh, should color in a very, very narrow set of lines and stick to what their job is. Under Volcker, it was money supply.

19:19Carol Massar:Well, what if the economy has gotten more complicated? Climate change is an issue. Companies have to think about it, you know, because it is ultimately going to impact their bottom line. But does it affect a dual mandate, I guess some might say? Well, it might because people can't work. You can extrapolate, right? So what Warsh is basically saying is, don't ask me that question. That is an elected official's job to do. My job as Kevin Warsh, if you're Kevin Warsh, if you're the chair of the Fed, is price stability and full employment and to really focus on the price stability component. But don't you sometimes need, okay, I'm going to get into trouble, by needing a figure that's not political.

19:59Carol Massar:But we understand that politics has certainly crept its way, Jim, into the US central bank. But I think there are times we look at the Fed share, even if there is a political backdrop, as being kind of a voice of reason on all of these major issues that will impact economic growth globally, will impact corporate bottom lines. Is it not important to have that voice of reason? It is absolutely important to have a voice of reason. But in a position like that, in the way that I believe that Warsh interprets it, is that it's a very narrow remit. And one of the things that he said is that the Fed should have absolute independence on a narrow set of items.

20:40Everything else, this is not, this is what the Fed is, and this is not what the Fed does. And I think keeping that very, very clear and setting these boundaries, right? You know, we all have to set boundaries, right? You know, this is a very important aspect of things. Is like, look, don't ask me these questions. I mean, these aren't questions that are for Kevin Warsh, right? You know, so that's what he's basically saying. And what he says ultimately is that the Fed can do its job better if it's just doing the job that it was tasked to do, but is not being asked to solve all these other problems.

21:10In the words of Jay Powell, we'll stick to our knitting, is what he said over and over again. Yeah, exactly right. So it just reminds me of that sort of go-to for him. We're speaking with Jim Caron, the CIO of Portfolio Solutions at Morgan Stanley Investment Management. So what does all this mean for rates under a Walsh regime? It was pretty clear. Yeah. It was, and the market reacted in a very clear way. Well, yeah. So I have a very out of consensus view on this. Okay. So I actually think Warsh was more dovish than what the markets thought. Okay. So I know what he said in a traditional interpretation.

21:48So markets got it wrong. I think so. Okay. So effectively under a Bernanke, a Yellen, and a Powell, if that's your mindset and say, look, traditionally, if I think about what Warsh said and I use that framework, Bernanke, Yellen, and Powell, then yes, he was absolutely very hawkish, right? You know, there's no question. But I think if you read between the lines and listen to what he's really saying, what he's saying is that, like, is he's gonna create these task forces in terms of like, so how do we think about the data? So if you were to ask me a week ago, two weeks ago, what is the Fed's most favored measure of inflation?

22:24I'd say core PCE. That's the Fed's favored measure of inflation. Today, I don't know what it is. I don't know what the task force is going to say that it is. is it year-over-year PCE, or is it month-over-month, or is it three-month-over-three? This is what the task force is going to figure out. So the market, I think, for the next six months until this task force gets this all done, is going to be very confused as to what the inputs are to the Fed's large-scale policy model, which is what they call the FERBUS model, Federal Reserve Bank of the U.S. model. And what Warsh is doing is he's not saying, I'm going to change the model.

22:58What he's saying is, I want to look at different inputs. I want to look at labor data in a different way. I want to think about productivity differently. Kevin Warsh is a supply-side economist. He's going to start to create a lot of supply-side indicators to inform him as opposed to the more traditional demand-side components of the economy and those indicators. This is, in my career, and I've been doing this since, you know, 91, 92, so about 34 years, is the most monumental shift that I've seen take place. I inherited Greenspan. When I started, Greenspan was there. That's all I knew. This is a major shift.

23:35And I think that people are underestimating how monumental of a shift this is and where they're going to get it wrong is by applying what they've learned over the last 25, 30 years under a Greenspan to then say, oh, well, this is how I would interpret this. I think the rules are, the ground is shifting, not the rules of change, but the ground is shifting.

23:54Carol Massar:So good that it's shifting? Good that we kind of take a look at a system that we've been kind of moving along for a long time. Well, I mean, you know, changes happen, right? So Greenspan changed it, right, when he came in because he felt that, and you mentioned yourself, the economy has changed, right? So when we look at labor data and labor statistics, I think the data has been challenged for the last five years. The nonfarm payroll data, for me, used to be the sun rose and set on the nonfarm payroll data for most of my career. Last five years, not very informative. weekly jobless claims were a bit better.