ABC Finance

NEW YORK–The more Alan Greenspan whines about his tarnished legacy since leaving the helm of the U.S. Federal Reserve, the more his predecessor Paul Volcker looks to claim the title as the “greatest central banker who ever lived.”

That’s what Greenspan was hailed as in 2005, when the economy was booming and inflation remained low. Economists lauded his significant contributions during his 18-year Fed tenure, which included making the central bank more communicative and weathering two recessions.

Those accolades largely overshadowed Volcker’s achievements. He left the Fed in 1987 after an eight-year run of steering the economy through a tough battle against double-digit gains in inflation and a punishing economic decline.

Volcker’s legacy seems to be soaring now, while Greenspan’s is sinking – despite his intense effort to shift blame away from himself as the cause of today’s punishing financial crisis.

In an interesting juxtaposition of events in recent days, the two former Fed heads collided in the headlines. Greenspan, who left the Fed two years ago, took to print and television media to defend his battered reputation. Volcker, in two rare, back-to-back speeches, gave a critical assessment of the current economy and the Fed’s role in creating and managing the crisis.

Their styles have always contrasted, now and when they were at the Fed. Economists say Greenspan is as much a politician as he is a policy-maker – always looking for opportunities to claim the spotlight – a tactic that may be hindering, rather helping his reputation now. It’s just the opposite for Volcker.

Critics say Greenspan kept interest rates too low for too long, fuelling the housing bubble. They also charge he encouraged Americans to load up on leverage, ignored warnings on risky mortgage lending and didn’t properly monitor financial institutions.

Greenspan has been on the defensive for months over such attacks, but in recent days he has stepped up his fight against them cash advance. Through comments in the Financial Times, Wall Street Journal and CNBC, he laid out a case for why he didn’t do anything wrong.

"I have no regrets on any of the Federal Reserve policies that we initiated back then, because I think they were very professionally done," Greenspan told CNBC last week.

But it’s hard to buy that "don’t blame me" argument, given the current economic predicament. Paul Kasriel, who directs economic research at The Northern Trust Co., says the facts speak for themselves.

For instance, he notes that households in 2005 spent $531 billion (U.S.) more than they earned after taxes, compared with the surplus of earnings over spending of $108 billion seen in 1987 when Greenspan took over at the Fed.

And while leverage has surged to record highs, household liquidity has sunk to near record lows.

The more Greenspan tries to spin his legacy in his favour, the less it looks likely to happen. The public is growing numb to his attempts to pin the makings of this crisis on others.

During two speaking engagements last week, Volcker didn’t sugar-coat his assessment of the roots of the current financial crisis – whereby "complexity, opaqueness and systematic risks” were embedded in new markets – and the policies now being used to clean it up.

"Simply stated, the bright new financial system, for all its talented participants, for all its rich rewards, has failed the test of the market place," Volcker said last Tuesday at the Economic Club of New York. "What has plainly been at risk is a disorderly unravelling of the mutual trust among respected market participants upon which any strong and efficient financial system must rest.”

Those comments drowned out Greenspan’s woes. And with them, Volcker began to reclaim the praise and recognition he deserves.

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Filed under: finance by Specialist