Months after he was written off by many as ineffective, a political hack or even approaching senility, Alan Greenspan is having a quiet revival. Not only has he secured an appointment for another term as Federal Reserve chairman, but Greenspan is once again pulling the strings that control the global economy. Moreover, he's doing so with great skill, much to the surprise of his many critics. Despite a popular belief the Fed chieftain has become toothless in the postbubble era, recent history suggests the "maestro" is proving to be a puppet master, too. "I would say
Greenspan's been very clever," said Paul Kasriel, chief U.S. economist at Northern Trust and an unabashed Fed critic. "He's getting what he wants." What Greenspan wants, in simplest terms, are higher equity prices, to curtail the decline in household wealth and re-establish business confidence, and low mortgage rates, to keep housing and refinancing activity strong in order to bolster consumer confidence and spending. Following Wednesday's action, the S&P 500 is up 27% since its October lows and the Nasdaq Composite has risen by a whopping 47%. Meanwhile, the benchmark 10-year Treasury is yielding 3.29%, its lowest level since 1958, while the Mortgage Bankers Association reported record levels of both refinancing and new-mortgage applications. Greenspan also desires risk-taking and wants disincentives for individuals and businesses to keep their cash. Rock-bottom money market rates and big gains in many small-cap and speculative stocks, often mutually exclusive, suggest that wish is coming true, too. Not bad for a guy supposedly all washed up. Buoyed by such successes, even if he's not roundly credited with them, Greenspan seems to be getting greedy. Some observers suspect his hints at another rate cut in Tuesday's speech were aimed mainly at the European Central Bank, whose rate-setting body meets Thursday. Greenspan wants his European counterparts to stop dawdling and loosen monetary policy.
"We expect the ECB to opt for the more aggressive 50-basis-point easing action," in part because of "rising expectations that the U.S. interest rate disadvantage will be further
led by the Fed's resilience to combat deflationary pressures," Ashraf Laidi, chief currency strategist at MG Financial, commented Wednesday. (Spurred, perhaps, by Greenpan's bluff, the ECB did opt for a more aggressive 50 basis point rate cut on Thursday.) Heading into Thursday's meeting, the ECB's short-term rate was 2.50%, double the fed funds target rate. The 125-basis-point differential between the two has helped spur the euro's 24% rise vs. the dollar in the past year, including its record high above $1.19 on May 27. But the euro's strength has started to crimp European exporters, something the ECB is being forced to address. In addition to placing greater onus on the ECB to ease, Greenspan also wants a weaker dollar to help U.S. manufacturers and put upward pressure on import prices, which fights deflationary pressures -- real or imagined. on Wall Street feel about Greenspan: His best days are behind him." Bianco, a longtime critic, said Greenspan's fall from grace was sealed by his flip-flop on the issue of tax cuts and ham-handed defense of his failure to identify the equity bubble in a speech at Jackson Hole last August.
More practical reasons explain why many market participants see Greenspan more like Cal Ripken, who struggled at the end of an otherwise stellar career, vs. Barry Bonds, the San Francisco slugger who seems to improve with age. First, Fed rate cuts beginning in January 2001 failed to stop the marauding bear market in equities. Second, the Fed chairman has been speaking for almost a year now about how "the fundamentals are in place for a return to sustained healthy growth," as he
testified before Congress last July. To date, healthy growth remains elusive. Understandably, many have concluded Greenspan has lost the magic touch, even if his prognosticating abilities were always suspect. A more forgiving explanation goes as follows: Monetary policy arguably didn't become truly aggressive until after the Sept. 11, 2001, terror attacks. Rate cuts beginning in January of that year sparked false hopes for a stock market recovery, but really only "got us away from tightness," as described by Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago. Notably, MZM -- the broadest measure of U.S. money supply -- had been dropping steadily in 2001 until after Sept. 11, when the Fed opened the liquidity spigots, setting the stage for record-setting home and auto sales in the months that followed. (Money supply fell again in early 2002, perhaps contributing to last year's falling equity prices and sluggish economy, but that's another story.) The stock market apparently bottomed 13 months after Sept. 11, a bit longer than the normal six-to-nine-month lag. But that's close enough for quasi-government policy, considering the corporate scandals that erupted during the period and other postbubble overhangs, as well as fears of more terror attacks. Such factors, as well as the crippling overcapacity after the capital spending boom in the 1990s, also help explain the economy's ongoing reluctance to respond to rate cuts.
The Fed's easing campaign was on hold from November 2001 until November 2002, when the Federal Open Market Committee eased by 50 basis points, bringing the fed funds rate to its current 1.25% level. The November 2002 rate cut was soon followed by a now infamous
speech by Fed Governor Ben Bernanke, which detailed how the Fed would use "whatever means necessary to prevent significant deflation in the U.S." While many decried the irresponsibility of Bernanke's "printing press" comments, others took it as a signal from the Fed that "'we're not going to let this thing go down,'" as Bert Dohmen, founder of Dohmen Capital Research in Los Angeles, recalled. "Bernanke rang a bell and I think they'll keep it glued together until the elections" in 2004. Since last November, various Fed officials have become increasingly emboldened in talking about deflation risks. On Tuesday, Greenspan said the Fed will "lean over backwards" to prevent what he described as "corrosive deflation" vs. a less-onerous decline in prices. Once again, Alan Greenspan got what he wanted. Those comments fueled further gains in stocks, as equity traders took solace knowing the Fed is vigilant against deflation, and lower bond yields, as fixed-income traders surmise the Fed may buy long-dated securities as part of the same effort. In sum, while many traders wave Greenspan voodoo dolls in public, more are once again genuflecting to him, albeit silently.