Following in the tradition of his predecessor, Paul Volcker, who famously defeated the United States’ inflation epidemic of the 1970s, the late Alan Greenspan was a strong independent central banker with a propensity for actively managing monetary policy. Just prior to the end of his term in October 2005, with the economy riding high, financial historian, newsletter publisher and occasional Forbes columnist James Grant of Grant’s Interest Rate Observer, penned a critical but prescient review of Greenspan’s legacy as Fed Chairman, entitled, “O Sage! O Confidence Man!,” which you can read below.Despite Greenspan’s god-like reputation among Wall Streeters at the time, Grant warned of Greenspan’s “interest rate fixing” and the imbalances and bubbles that were forming in equities and debt. At the time, the Dow Jones Industrial Average was around 12,000 and our national debt was just under $5 trillion. Of course, within a few years the Greenspan-fueled housing market came crashing down, and the Great Financial Recession of 2008 ensued. His successors went on to elevate the Fed’s monetary manipulations to new heights. Today, the DJIA hovers around 51,000 and our national debt is six times greater than the end of Greenspan’s reign, at $30 trillion.

O Sage! O Confidence Man!

The public worships Alan Greenspan for his oracular wisdom. But what is his legacy? It includes a crazy housing market, overextended consumers and a burst stock bubble

The most revered figure in American finance happens to be an aging price controller. Until the end of January the price of a short-term loan--the federal funds rate--will be whatever the chairman of the Federal Reserve Board decides to make it.

Never mind the conundrum of a flattish yield curve, where ten-year Treasurys now yield only six-tenths of a percentage point more than the funds rate. Alan Greenspan, 79, is a conundrum himself, personally: capitalist price controller, Ayn Rand-trained public servant and, most oxymoronic of all, beloved central banker.

His imminent leave-taking presents an occasion both to appraise his 18-year Fed stewardship and, more important, to speculate on its consequences to all who hold, save or invest the U.S. dollar.

Many have preceded the chairman in the work of overriding the market's judgment with their own, and they have usually toiled in obscurity. These were fixers of New York City rents, of interstate rail rates and even, under the Nixon Administration, of nearly every price and wage under the American sun. With the regulatory enlightenment that followed the disastrous Nixon controls, the burden of proof began to fall on those who would intervene.

Except, that is, in the wholesale-dollar money market. For reasons about which thoughtful investors are remarkably uncurious, the Fed continues to fix an interest rate that lenders and borrowers might better discover for themselves.

Ours is a faith-based financial economy. Investors have always had to trust somebody or something, whether an accountant's numbers or a counterparty's solvency. But they have not always had to make a leap of faith about a nation's irredeemable paper currency. Up until Aug. 15, 1971 the dollar was exchangeable into gold at the rate of $35 to the ounce, a privilege admittedly limited to governments and central banks. The lip service paid to the convention of gold convertibility at least represented an official commitment to not overuse the monetary printing press. Without such a system, a currency holder must trust in people, or--in the case at hand--one person.

Greenspan is trusted as few central bankers (and probably not one admitted price controller) have ever been before. Recently writing in the Financial Times, Harvard economist Kenneth Rogoff crowned the chairman "the Michael Jordan/Lance Armstrong/Garry Kasparov of modern-day central bankers." Princeton economist and former Fed Vice Chairman Alan Blinder extravagantly seconded Rogoff. Hearing these songs of praise, a perceptive dollar holder might reason that if Greenspan were, in fact, a genius, he would be irreplaceable, except by........

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