You remember Alan Greenspan: you know, the one who was chairman of President Gerald Ford’s Council of Economic Advisers from 1974 to 1977, and was then appointed chairman of the Federal Reserve Board by President Ronald Reagan in 1987, a position that he served in for nineteen years, retiring just in time for the financial crisis. His reputation as grand maestro of monetary policy and general oracle about the economy has gone downhill since then, but I think it is only fair to say that he was a very good chairman of the Fed.

Greenspan was masterly in the first two challenges that popped up during his tenure. When the stock market collapsed by almost a third one day in October 1987, the Fed did the classically right thing. It made clear that it stood ready to provide every bit of the liquidity that might be needed to keep the financial system functioning, so that anyone who acted in panic would probably live to regret it. There was no financial breakdown, and the real economy was essentially unaffected by the episode. Score one for Greenspan.

During the long Clinton-era upswing from 1992 to 2000, Greenspan and the Fed faced a much more complex problem, and again did the right thing. Nearly all of the punditry and probably most professional economists (including those in the Fed itself) believed that the key inflation-safe unemployment rate (below which inflation arrives and accelerates) was something like 6.5–7.0 percent. As the upswing continued and the unemployment rate drifted down below that level (and, you may remember, budget surpluses appeared), the Fed was beset with urgent reminders that the time had come, and maybe passed, to tighten credit and choke off the boom before the inevitable inflationary disaster arrived.

Greenspan looked at the data and the economy around him, and saw few, if any, signs of gross imbalance or impending inflation, and persuaded his colleagues to let the expansion go on. In the end the unemployment rate dipped briefly below 4.0 percent without trauma. Greenspan thought that productivity was improving faster than anyone or the conventional measurements realized, and that was what provided the room for further expansion. He was right, though there were several other factors that helped, as became clearer after the fact. Never mind: it was an exhibition of pragmatism and cool that saved the economy from wasting trillions of dollars of output in unnecessary unemployment and idle capacity.

Greenspan’s reputation has suffered from two big mistakes.

There ends the plus side of the Greenspan ledger. On the minus side, Greenspan’s reputation has suffered from two big mistakes. The first was his failure to see the importance of the housing bubble and the dangerous vulnerability of the financial mechanism that supported it. Had he done so and punctured the bubble promptly, the economy would have been spared the prolonged weakness that it is still suffering. The second was his deep-seated conviction that the unregulated financial system was self-stabilizing, that the self-interest of all those clever and experienced participants with a lot of their wealth at stake would keep the accumulation of risk within tolerable bounds. So he promoted deregulation and financial consolidation (as did others, of course) and, when this simple faith proved wrong, allowed disaster to strike. I think that the first mistake may be partially excusable, but the second mistake was a catastrophe, and it was not an accident.