In the 1990s, Greenspan continued Volcker's trend, bringing broad-based price gauges down from around 4.5 percent to slightly above 1 percent. This miniscule inflation rate surely constitutes domestic price stability. Hence, the Greenspan standard can be classified as a success.
Still, numerous supply-siders -- including myself -- have fretted in recent years about the threat of deflation. This is another pernicious form of monetary instability, one that contributed mightily to the longest and deepest stock market plunge in 60 years.
For these and other reasons many economists would prefer a price-rule standard of monetary conduct. Such a rule would rely on real-time market indicators, like commodities (including gold), bonds and the international exchange value of the dollar. These price indicators would tell policymakers how well the volume of money created by the central bank is calibrated with the amount of money demanded by financial markets and the economy.
But without such a rule in place, we are subject to the prescriptions of a single person -- the Fed chairman.
Here's a case in point. A year and a half ago, the Greenspan Fed decontrolled its interest-rate target and poured huge buckets of new liquidity into a financial system reeling from the aftershocks of 9-11. These actions saved the day. During the next six months, the economy increased at a 4 percent rate and the stock market surged by 25 percent. It was a phenomenal monetary policy success.
Then the Fed went back to its old ways, resuming a straitjacketed interest-rate targeting approach that prevented the bank from providing adequate liquidity to maintain economic recovery. Stocks and the economy sagged.
With the ongoing threats of terrorism, war, energy-price fluctuations and corporate misdoings, no one can be sure about much these days. Should our 77-year-old central banker -- with a success rate that usually beats his failure rate -- sign on for a few more years, we can add monetary policy to this list of uncertainties.
Let's keep our fingers crossed.