Sen. John McCain was asked in one of the debates with Gov. George W. Bush whether if elected president he would reappoint Alan Greenspan as Fed chairman. McCain replied, "Not only would I reappoint him, but if he died we'd prop him up and put sunglasses on him as they did in the movie Weekend at Bernie's."
McCain could have been speaking for any number of investors who hang on Greenspan's every word.
did not carry live coverage of Greenspan's testimony before House Banking today for the man's entertainment value.
Alan matters to investors. But how much does he matter, and why?
Let's get one thing out of the way right now -- Greenspan has done a superlative job as Fed chairman since taking over in 1987. He has learned the craft of gradualist policy-making so as not to shock the financial markets. He cottoned a good four years ago to the beneficial economic effects of growing globalization, technological progress and market-oriented public policies like deregulation. Unlike many stick-in-the-mud Wall Street strategists who missed the meaning of the "new economy" -- you know who you are -- Alan got it.
Still, it is worth deconstructing precisely why we care so much about Greenspan.
It isn't because the Fed controls short-term rates. The bond market does. And if the bond market vigilantes were worried that inflation was rearing its ugly head yet again, they would jack up rates in seconds. The bond market does not wait for the Fed to move. They twitch to the economic numbers. If they saw signs of quickening inflation, they would raise short term rates in all on their own. We saw this today when strong housing numbers caused bonds to sell off almost immediately. In fact, if the market thought the Fed was behind the curve on interest-rate policy, bond investors who move rates even more and faster.
the source of Greenspan's significance to investors? He is the ultimate guru, the
-analyst. No one else frames the economic trends with the authority he has. No one else is perceived to have his finger on the economic pulse like Alan. He seems to be able to hear the economic mood music like a dog hears a high-pitched whistle. When Greenspan
hinted last week to the
Senate Banking Committee
that a soft economic landing might well be in the cards, investors felt they could rely on his macroeconomic guidance. There was at once a huge bond rally and the yield on the 10-year Treasury fell to 6%.
He helps stabilize the markets through his signaling. His tone is soothing and the phrasing wonderfully euphemistic. His statements always imply gradual economic change, which is generally the nature of large economies, and suggest similarly gradual policy changes. The implicit message in his modulated approach is that you investors have a bit of time to unwind dangerous positions. In short, the Fed is not in the business of bailing you out of losing positions, but under Greenspan it will give as much of a heads-up as possible.
And in a crisis, investors have good reason to believe that Greenspan won't make a bad scene worse. With the exception of the 1987 stock market crash when he was still a rookie, Greenspan has been outstanding in panics. With
, he has handled the Mexican crisis, the Asian crisis, the
Long Term Capital Management
crisis and numerous smaller financial conflagrations with a steady hand. You can have some confidence that he will not let the financial system collapse through policy errors.
So what would happen if Greenspan were hit by the proverbial
One money manager estimates the Dow could lose 1000 points. Another said 500. Greenspan has become like a security blanket for investors. Lose it and they will kick and scream. The market would decline on worries about the quality of his successor.
After a few weeks or months, they say, the market would get over Greenspan's departure -- unless the president appointed a boob. Their point? Greenspan is a great Fed chairman, and we certainly should cheer his reappointment by Clinton. But when he goes, and he will, there will be life after Alan. In the long run, we are all dead, even Alan G. And markets, like life, go on.