- The Washington Times - Wednesday, February 8, 2006

Last week marked the end of an era in the world’s financial markets. Alan Greenspan finished

his fifth and last term as chairman of the Federal Reserve Board of Governors.

The chairman of the Federal Reserve is often referred to as the most powerful man in the world. Such a bold statement isn’t flippant. During Mr. Greenspan’s tenure over the last 18 years, financial markets waited anxiously to hear the next word that came out of his mouth.

Among other things, Mr. Greenspan will certainly be known as an inflation fighter. He began his tenure in August 1987, only a few years after a period of hyperinflation experienced from the mid-1970s to the mid-1980s. He was determined not to let prices run away again.

Mr. Greenspan guided the financial markets through some rough roads. By most accounts, he is expected to leave a favorable legacy.

Let’s take a look at some highlights of his career. Since this is a mortgage column, I’ll try to spin these highlights into the mortgage arena.

• Aug. 11, 1987. Mr. Greenspan takes office as chairman of the Federal Reserve Board. One month later, the Fed raises short-term interest rates in response to rising consumer prices. This is the first indication that Mr. Greenspan is not afraid of raising rates to keep inflation low. Fixed-rate mortgages edge up from 10.50 percent to almost 11 percent.

• Oct. 19, 1987. “Black Monday.” The Dow Jones drops 508 points — nearly 23 percent. Mr. Greenspan relaxes the marketplace by promising to lend money to financial institutions in trouble. The stock market rallies the next day.

• Aug. 2, 1991. Iraq invades Kuwait, sparking a rise in oil prices and a mild recession. Mortgage rates fall because demand for long-term financial instruments rises. These long-term investments are considered a safe place to park money during uncertain times.

• Feb. 4, 1994. The Fed begins an aggressive campaign to fight inflation. Interest rates are raised several times, almost doubling the federal funds rate in a year. Mortgage rates rise considerably, adversely affecting every sector involved in real estate. Rates finally begin to fall in 1995, as economic news suggests that inflation poses little threat.

• Dec. 5, 1996. Mr. Greenspan delivers his famous “irrational exuberance” speech, suggesting that the stock market is overvalued. Investors initially sell off, then shrug off the warning and continue to ratchet up the market.

• Sept. 29, 1998. The Fed begins a rate reduction campaign in response to collapsing foreign currencies in an attempt to avoid a financial crisis.

• June 30, 1999. The Fed begins a credit-tightening campaign, raising short-term rates by 1.75 percent following unfavorable inflation reports. Mortgage rates shoot up almost 2 percent, killing a refinancing boom.

• Early 2000. The stock markets peak and then the sell-off begins, erasing trillions in paper wealth.

• Jan. 3, 2001. Mr. Greenspan senses a recession coming on and begins what turns out to be a long series of interest-rate cuts.

• March 2001. The economy officially falls into a recession.

• Sept. 12, 2001. The Fed continues to ease credit in the aftermath of September 11. By June 2003, the federal funds rate is at a 40-year low of 1 percent. Mr. Greenspan is credited with eliminating the recession and acting accordingly to prevent a financial and economic crisis that could have followed the terrorist attacks.

• June 30, 2004. After determining that “deflation” is not a threat, the Fed begins a series of rate increases. The Fed funds rate slowly rises to 4.50 percent as of Jan. 31, 2006.

• Mid-2005. The real estate boom shows signs of ebbing, and economists fear that the housing boom will be followed by a bubble, exacerbated by an increase in mortgage rates.

• Jan. 31, 2006. Ben Bernanke takes over the reigns as chairman of the Federal Reserve Board.

It’s been an interesting 18 years in the financial world. Most talking heads are predicting that the new chairman will continue the course set out by his predecessor.

If so, expect low inflation and abrupt changes in interest-rate policy.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).


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