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Greenspan Shrugged

Daniel Gross

Voters faced stark policy choices in this election, especially when it came to fiscal policy. Gore wanted to use the projected surplus to pay down the national debt, shore up and expand Medicare and enact limited tax cuts. Bush, who had little interest in slashing the national debt, advocated an across-the-board tax cut and elimination of the estate tax. Further, he called for using a portion of the surplus to let people set up stock-market retirement accounts. And while he proposed several new government programs, they were far smaller in scope and size than those pushed by Gore. The candidates' two economic plans -- like their attitudes toward drilling in the Arctic National Wildlife Refuge -- were in many ways polar opposites.

But the vote for Bush and Gore was about as evenly split as could be imagined. As a result, and please forgive the upcoming punditspeak, it would be folly for either candidate to conclude that the results constitute an unambiguous mandate. In fact, Tuesday's vote provides no clear-cut directive on fiscal or budget policies.

And that only strengthens the already powerful hand of the Fed Chairman for Life.

In 13 years at the helm of the Fed, Greenspan has built up an enormous amount of credibility and clout -- in Washington and New York. His actions in controlling the movement of interest rates have been credited with making or breaking the past two presidencies. George Bush -- the elder -- explicitly blamed Greenspan for dooming his one-term presidency by not cutting rates quickly enough in 1991. "I reappointed him, and he disappointed me," Bush said.

Greenspan, on the other hand, made Clinton's presidency. The Fed Chairman strongly suggested, early on, that the president focus on deficit reduction because that would please him and, in turn, the bond market. Clinton exploded: "You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of [bleeping] bond traders?" But with the market-savvy Robert Rubin whispering in his ear, Clinton chose the path of budgetary restraint. Greenspan ratified his 1993 budget plan, and the rest is economic history.

In today's political/investing culture, it is difficult for policymakers to make much progress without the cooperation of the bond market. And because the bond market regards Greenspan as an oracle par excellence, the 74-year-old former devotee of Ayn Rand now occupies the catbird seat.

And he knows it. Jealous of his turf, and a skilled Machiavellian operator, Greenspan rules the Fed with an iron fist swathed in a velvet glove. He is acutely aware of his status, his image and his ability to alter policy with a bit of mangled syntax or a properly arched eyebrow.

Today, the conventional wisdom says Bush's proposed tax cuts would be bad for bonds -- even though they wouldn't begin to kick in until 2002 -- and would make Fed easing less likely. It also holds that Gore's desire to cut debt may have precisely the opposite effect. Greenspan has done nothing to discourage such thinking. In fact, he has, at times, seemed to intimate a preference for debt reduction over tax cuts.

As a result, Greenspan's reaction in the coming months -- any movement on rates, public speeches or congressional testimony -- could put the kibosh on a proposed economic plan before our next president is inaugurated. Like a Roman emperor, Greenspan can condemn the battle-scarred gladiators who battle in his arena with a thumbs up or a thumbs down.

Should he win, Gore must continue to play Clinton's bond-market strategy of debt reduction and fiscal restraint. And because the markets are naturally distrustful of Gore, it will be critical for him to announce quickly an economic team that has credibility on Wall Street and at the Fed.

If he wins, Bush will find himself in the same position as Clinton did back in 1992 -- a president with a winning personality who failed to garner an electoral majority, and who presides over a Congress in which his fellow partisans hold slim (and slimming) margins. And like Clinton, Bush may find that the success of his economic plan, and, ultimately, his presidency, hinges on the reaction of a bunch of bleepin' bond traders -- and on the man whose opinions they so revere.