MONEYMAN.(The Talk of the Town)(Alan Greenspan)

Alan Greenspan, who retires this week after serving four and a half terms as chairman of the Federal Reserve, is arguably the most skillful bureaucratic survivor the nation's capital has seen since J. Edgar Hoover. But unlike the late, unlamented director of the F.B.I., who terrorized his way to longevity, Greenspan practiced the subtler art of ingratiation. His Washington career began when he joined Richard Nixon's 1968 campaign. After Watergate, he switched his loyalties to Gerald Ford, serving as the head of the White House Council of Economic Advisers. In the summer of 1987, Greenspan was Ronald Reagan's choice to succeed Paul Volcker at the Fed.

Weathering the Black Monday stock-market crash that came a few months after he took office, Greenspan gradually established his authority. He became the public face of American prosperity: calm, credible, upbeat. Under Bill Clinton, he worked closely with three treasury secretaries--Lloyd Bentsen, Robert Rubin, and Lawrence Summers--to eliminate the budget deficit. Then, barely a month after the 2000 election was resolved, Greenspan endorsed George W. Bush's plan for top-heavy tax cuts. The plan passed, the surplus disappeared, and, in 2004, Bush nominated Greenspan for another four-year term. "He's extraordinarily good at getting along with people in power," William Seidman, a former head of the Federal Deposit Insurance Corporation, has said. "He has the best bedside manner I've ever seen."

Paul O'Neill, Bush's first Treasury Secretary, has suggested that he and Greenspan secretly hoped to rein in the White House tax cutters. If that's true, the secret was well kept. But a Fed chairman's primary responsibility is his conduct of monetary policy, and it cannot be denied that Greenspan presided over almost two decades of low inflation and surprisingly strong economic growth. When he took office, the Politburo still occupied the Kremlin, the Dow was under 3,000, and few people outside the Pentagon and university science departments had heard of the Internet. Greenspan recognized that technology was upending established relationships among inflation, unemployment, and growth. The dramatic rise in productivity that was accompanying the information revolution, he said in 1997, was a "once or twice in a century" occurrence. So instead of raising interest rates, to head off inflation, as some colleagues recommended, he kept them low, and the economy recorded its longest-ever expansion.

Unfortunately, Greenspan extended the experiment too long, allowing a speculative bubble to form in the stock market. After the inevitable crash, in the spring of 2000, the Fed cut interest rates repeatedly, to cushion the impact on the economy. After September 11, 2001, it brought the rate down further--to below two per cent, the lowest level in forty years. By the middle of 2002, it was clear that the recession many expected had not materialized. Yet Greenspan chose to maintain an ultra-loose policy stance for two more years. The public explanation was that the Fed was worried about deflation, which can be even more damaging than inflation. Democrats could be forgiven for suspecting that Greenspan was also giving Bush a hand with the 2004 election.

Just as in the late nineteen-nineties, cheap money led to a speculative boom, this time in residential real estate. In parts of the country--New York, Miami, San Francisco--prices have doubled since 1999. In some neighborhoods, a decent-sized ...