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Green Span

Green Span

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Published by macwizz8

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Published by: macwizz8 on Mar 17, 2009
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Rhett WilliamsDaniel GibbonsIntentional FinanceMarch 2, 2009ALAN GREENSPANIntroductionAlan Greenspan is an economist and served as Chairman of Federal Reserve Bank of theUnited States (Martin 5). He was first appointed to this position in August 1987 by thenPresident Ronald Reagan. After that, he was reappointed to that position by successive presidentsuntil January 2006, when he retired. During his tenure as Chairman of Federal Reserve Bank, hewas responsible to set interest rates and entrusted with the task of directing U.S. nationalmonetary policy (Canterbery 45). In the initial period of his career, he incorporated a consultingfirm, Townsend, Greenspan, & Company in association with a bond trader William Townsend.The company had major clients such as US Steel and J.P. Morgan. Later on, he decided to leavethe company to join as Director of Policy Research for Richard M. Nixon's presidentialcampaign in 1968 (Jones 13). Thereafter, he became Chairman of President Gerald Ford'sCouncil of Economic Advisers. He received his PhD from New York University in 1977(“NNDB”). Interestingly, the university did not require him to submit dissertation for hisdoctorate degree.The United States witnessed tremendous affluent during his tenure. From 1993 to 2000,the country reported creation of around 21 million new jobs. This substantial growth rate in new jobs creation dented unemployment rate below 4 percent during 2001. Further, the economygrew by around 4% a year and this strong growth rate translated into the addition of $2 trillion toreal GDP. (“Business Publications”)Major policies
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It is only during his tenure, the Federal Reserve Bank explicitly announced inter-bank interest rates of the previous night, when it amended commercial banks (Martin, 2000). So, it is believed that the federal bank achieved very much transparency under his chairmanship. Apartfrom announcing interest rates, the reserve bank also provides a slight indication on near-term policy trends. When he served as Chairman of Federal Bank, he emphasized the policy of keeping lower interest rates and thereby stimulating growth of the economy.Movement of Inflation during His TenureWhen Greenspan assumed his position as Chairman of Federal Reserve Bank, inflationrate hovered around 4% a year. Thereafter, trend of inflation started declining and achieved itslowest level of 1.5% during 1998, according to IMF data. It was observed that inflation rate breached only one time 5% level during his career as Chairman of Federal Reserve Bank.Chart 1: Trend in inflation
        1        9        8        2 1        9        8        4 1        9        8        8
Source: International Monetary Fund, Note: Inflation data are average for the year Although, more than 80% of the drop in inflation witnessed during Paul Volcker Chairmanship, it remained at a manageable level for a longer time only during Greenspan’s term.Implication of his policies
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Under his guidance, interest rates were slashed between 2001 and 2002. This drop ininterest rates influenced consumers to pull equity out of their homes and invest in roomadditions. These actions of home owners increased home building and modernization of existinghomes in the country. Later on, Federal Bank decided to increase interest rates in a bid to rein inrising inflation.Chart 2: Trend in mortgage loan amount
New home Previously occupied home
Source: Federal Reserve Bank This rise in interest rate increased delinquency rates in the country and subsequentlyresulted in real estate bubble. Greenspan, thus, paved the way for subprime crisis and resultantfallout of global capital markets.Chart 2: Trend in interest rate

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