Alan Greenspan Case Study

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Recommended: Monetary policy and its effects on the economy

Greenspan presided the Fed under prosperous economic situation, and it was thought that this economic growth was done by Alan Greenspan. That era was characterized by the low inflation rate, two short recessions took place during his tenure, the use of information technology, jobs were abundant, unemployment rate was low (under 4%) and the stock market rose over 10%. All those conditions lead people to believe that Greenspan improved the economy in that time. Irrational exuberance The fall of Alan Greenspan’s reputation was due to his bad decisions such as not preventing irrational exuberance and interest rates increasing. In that time, he presided over two huge assets bubbles: stock and housing bubble. Alan Greenspan used to talk about “irrational …show more content…

After that, clearinghouses showed up as well as deposits insurance provided by some state governments. The panic of 1907 arose in the “trusts” where wealthy people saved their inheritances and estates. This kind of institutions did not have strict regulations -low reserve requirements and low cash reserve in comparison to the NB- since they wouldn’t risk the assets. Despite that trusts activities were determined, they speculated in the stock market and could pay high interests on the deposits. Trusts grew rapidly and joined the New York Clearinghouse where trusts should keep higher reserves than before. Due to that, trusts began failing causing a collapse in stock market. That era was known as the Panic of 1907. After the Panic of 1907, banking reform was done by the Federal Reserve System that forced all the institutions receiving deposits to hold higher reserves and subject to inspections. The new system standardized and centralized the holding of bank reserves. Despite that new regime, another banking crisis happened in 1930, 1931, 1933. The solution was to separate the banks into two types: commercial banks which accepted deposits (low risk, banks had access to credit from the Fed, insured deposits) and investments bank which had lower regulations. Economic troubles decreased until S&L (bank for housing loans)

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