Greenspan Defends Fed's Risk Management Strate

San Diego, CA, Jan. 4--Federal Reserve Chairman Alan Greenspan took another step Saturday to secure his place in history, saying the central bank under his leadership over the past 16 years steered through a minefield of unpredicted economic dangers and still achieved inflation-free prosperity. In a speech to economists, Greenspan attributed that success to the strategy of "risk management" he pursued. The approach involved avoiding rigid policy rules and seeking to insulate the economy against a wide spectrum of risks, including the risk that Fed policy makers might have been wrong in their understanding of the economy. Such a strategy, he said, was necessary in an environment in which the complexity of the U.S. economy was growing faster than the Fed's capacity to keep up. Uncertainty, Greenspan said at the annual meeting of the American Economic Association in San Diego, "characterized virtually every meeting" of Fed policy makers in the past two decades. Still, he said, the policy makers "managed to defuse dangerous inflationary forces and dealt with the consequences of a stock-market crash, a large asset-price bubble and a series of liquidity crises. These events did not distract us from the pursuit and eventual achievement of price stability and the greater economic stability that goes with it." Greenspan suggested, moreover, that other central banks around the world have begun to follow the Fed's lead in avoiding strict policy rules in favor of more complex judgments about the full spectrum of economic risks they confront. Many central banks that practice "inflation-targeting," which involves conducting monetary policy strictly to achieve price stability, now focus on broader goals, he said. "This evolution has gone so far that the actual practice of monetary policy by inflation-targeting central banks now closely resembles the practice of those central banks, such as the European Central Bank, the Bank of Japan and the Federal Reserve, that have not chosen to adopt that paradigm," he said. Greenspan, who is 77 years old, didn't discuss the near-term U.S. economic outlook. He has served as Fed chairman longer than any other person in history except William McChesney Martin, who led the Fed for 19 years until 1970. His reputation as an economic miracle-worker has grown steadily--except for a spell recently, when some critics accused Greenspan of acting too late to avert the economic slump of 2001. President Bush has said he intends to nominate Greenspan to a new term as chairman when the current one ends next June. But the criticism has stung Greenspan, prompting him to defend his record in a series of speeches over the past two years. His speech Saturday was the most comprehensive of those, encompassing everything from the stock-market crash of October 1987 to what he called "the exceptionally mild recession" of 2001. Greenspan said the success of the Fed's policies during his tenure bodes well for the future. "As we confront the many unspecifiable dangers that lie ahead, the marked improvement in the degree of flexibility and resilience exhibited by our economy in recent years should afford us considerable comfort," he said. "Assuming that it will persist, the trend toward increased flexibility implies that an ever-greater part of the resolution of economic imbalances will occur through the actions of business firms and households," Greenspan said. "Less will be required from the risk-laden initiatives of monetary policy makers."