In 1959, at the annual meeting of the American Statistical Association, a 33-year-old economist named Alan Greenspan argued that central banks should beware of letting financial markets get too comfortable. The Federal Reserve’s success in smoothing economic fluctuations in the 1920s, he said, had led to the dangerous belief that “the business cycle is dead.” The crash and depression that followed were “inevitable” consequences of that cavalier attitude toward risk.
Sound familiar? As Fed chairman from 1987 to 2006, that same Alan Greenspan presided over what was called “the Great Moderation,” a period when business-cycle downturns were muted and investors became convinced that the Fed had their backs. Greenspan hadn’t forgotten his earlier worries: A few months before he stepped down, he cautioned that “history has not dealt kindly with the aftermath of protracted periods of low-risk premiums.” Sure enough, it didn’t.
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