Lessons Kevin Warsh can learn from the late Alan Greenspan

Alan Greenspan’s recent passing provides an opportunity to reassess his legacy as Chairman of the Federal Reserve and consider the lessons Kevin Warsh can learn as he begins his own tenure leading the Fed. Greenspan held a strong belief in markets’ capacity for self-regulating, but his controversial monetary policy and managerial stances helped to cement expectations of Fed bailouts. Warsh can emulate Greenspan’s deregulatory approach while distancing himself from the crisis-driven rate cuts and liquidity interventions that defined the latter part of his tenure.

A close friend of Ayn Rand with strong libertarian leanings in his early life, Greenspan generally advocated for limited government and, although more in rhetoric than action, markets’ self-regulating capabilities. In his well-known essay The Assault on Integrity, he defended businesses’ natural interest in obtaining and maintaining a reputation for honesty. He believed reputation and credibility were markets’ fundamental self-regulating force.

Among Greenspan’s most consequential deregulatory stances was his support of policies that shifted responsibility for risk assessment from government institutions to private businesses. He notably resisted the Commodity Futures Trading Commission’s attempt to regulate over-the-counter derivatives and opposed leverage ratio requirements throughout the 1990s. He also supported Basel II’s Internal Ratings-Based Approach, which allowed banks to utilize their own internal models for capital requirements. This emphasis on private risk management shaped the regulatory environment pre-2008 and would later become one of the most controversial aspects of Greenspan’s career.

Yet, Greenspan’s commitment to market self-regulation did not prevent him from intervening aggressively in the economy when it faced serious financial instability. During the 1987 stock market crash, where the Dow dropped 22.6 percent in one day, Greenspan injected the financial system with liquidity while cutting interest rates shortly after. With similar reactions following the 1998 Long-Term Capital Management crisis and the 2001 dot-com bust, the market increasingly came to expect that the Fed would almost always save the economy in the possibility of a recession. That became known as the “Greenspan put” – or “Fed put” nowadays.

As Kevin Warsh begins his tenure as Fed chairman, he inherits not only Greenspan’s institution but also a Fed that has become increasingly intertwined with financial markets over the last two decades. So far, Warsh has signaled a willingness to reduce the use of extraordinary tools, like quantitative easing and the massive expansion of the balance sheet, which he argued the Fed has grown too dependent on following the 2008 crisis. In his first Fed meeting earlier this month, Warsh also broke with the long-standing forward guidance tradition, a practice which was widespread under Jerome Powell. If sustained, these changes would support free markets while simultaneously reducing short-termism and speculation in the economy.

If Warsh follows through on his commitment to a more conservative monetary-policy framework, he may avoid repeating the mistakes that led to Greenspan’s controversial career and association with the 2008 crisis. Facing a booming economy fueled by AI-driven innovation, Warsh’s greatest contribution may be resisting the temptation to fine-tune markets and instead learning from the Fed’s past mistakes.