Fed Chairmen and the Randomness of Reputations

"Maestro": Former Federal Reserve Chairman Greenspan Photograph by Stephen Voss/Redux

Fighting inflation, encouraging employment, and protecting the soundness of the banking system—this pretty much sums up the core mission of the U.S. Federal Reserve Bank. How about delivering double-digit stock market returns? Well, not exactly, but correlating the Dow Jones industrial average’s performance with the tenures of various Fed chairmen, going back to the early 20th century, yields some pretty interesting results.

While making stock market investors rich isn’t part of the Fed’s mission statement, market sentiment and big swings in household wealth sometimes influence the central bank’s thinking and monetary stance. When times are flush, Fed chairs often bask in reflected glory, regardless of their individual contribution—and when an overheated market collapses into a heaving mass of pain, it often falls to the next chair to clean up the mess.

Daniel Crissinger, who served as Fed chairman from 1923 to 1927, had the good fortune to run the central bank during a period of technological innovation, the rise of the auto industry, and growing wages. It was the Roaring Twenties, after all, and stock prices grew at an annualized 17.72 percent during his years at the Fed.

It all ended in tears. Plenty of observers warned of a stock market bubble back in the mid-1920s, but the Fed was slow to act. That resistance had less to do with Crissinger and more to do with Benjamin Strong Jr., the long-time governor of the Federal Reserve Bank of New York, which was in many ways the real power center in the American central bank system, according to a speech by then-Princeton economist Ben Bernanke  in 2002, long before he took over the Fed.

Strong died in 1928, opening the way for a more hawkish stance. The New York Fed’s discount rate stood at 3.5 percent in January 1928, then jumped to 6 percent by August 1929. The mother of all stock market crashes began in late October of that year, and the Great Depression was on.

Crissinger’s successor, Eugene Meyer, probably had far less fun on the job. Meyer ran the Fed from 1930 to 1933 and advocated heavy government spending to slow down the economic carnage; the Dow plummeted an average of 33 percent in each of those years. Meyer resigned with Franklin Delano Roosevelt’s arrival in the White House and went on to buy a newspaper called the Washington Post for $825,000 at a bankruptcy auction in 1933—a paper that his daughter, the future Katharine Graham, would run with distinction.

One of the biggest ironies in Fed history is that ultra-hawk Chairman Paul Volcker, whose policy board hiked the federal funds rate to a peak of 20 percent in mid-1981 in order to crush an inflation scourge, ran the show during an additional explosive bull market. From 1979 to 1987, the Dow climbed 15.42 percent a year, on average. Not a bad performance for one of the toughest Fed chairmen in U.S. history.

It was a far better performance than Volcker’s successor, Alan (the Maestro) Greenspan, managed. Greenspan took over in August 1987 and received generally glowing press coverage for his economic stewardship during the 1990s and the post-9/11 slowdown—until an overheated housing market crashed not long after he left the Fed in January 2006.

What of bubble historian and current Fed Chairman Bernanke, who took over the Fed in February 2006 and will stand down when his second term ends in January 2014? As of Sept. 19, the Dow has clocked 4.81 percent annualized growth during his tenure. That’s not fabulous by historical standards. However, the odds are pretty good that the Bernanke era will be remembered for other feats: the Fed’s stewardship during the worst economic crisis since the Depression, a massive and controversial central bank balance sheet expansion, the politicization of the monetary policy … you know, that sort of thing.

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