Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, July 11, 1993 TAG: 9307070441
SECTION: BUSINESS PAGE: B-1 EDITION: METRO
SOURCE: ECONOMIST NEWSPAPER LTD.
DATELINE: LENGTH: Long
There are even times, happily rare, when for a short while the world hangs upon his actions. Alan Greenspan's hour came with the stock market crash on Oct. 19, 1987.
Greenspan is a man who is happiest when hidden in his sanctum, surrounded by computers and piles of data that track the minutest twitches in the economy and the financial markets. On the day of the crash, however, he was sitting in a hotel room in Dallas, with nothing but a television set and a channel-changer.
That same night in Dallas, Margaret Thatcher was telling dinner guests that the crash was nothing to worry about: a symptom of financial excess, maybe, but not of chronic economic malaise.
Her calm turned out to be right, but that was thanks largely to the actions that were being taken by the Fed. It supplied near-unconditional liquidity to the markets, and financial meltdown did not turn into economic depression.
Today Greenspan is about to face a test that may not prove the equal of that turbulence; but will certainly prove more prolonged.
There comes a time in every economic recovery when monetary policy must be tightened if incipient inflation is to be throttled. This year inflation figures, suggesting an inflation rate of over 4 percent, has knocked the confidence of a Federal Reserve that cockily expected prices to rise by only 2.5 percent this year.
If the Fed has to raise interest rates, it will be for the first time in over three years.
In and when it does, the Fed would be pitting its actions not just against the abstraction of the financial markets but against an administration and a Congress that will certainly turn hostile.
Why should there be so many fears, within and without the institution, that the Fed will soften under political pressure?
Greenspan is, after all, a Republican and a Reagan appointee. He stood up well to the bullying of Republican administrations, and notably to two former Treasury secretaries, Jim Baker (with whom he did not get along) and Nick Brady (for whom he had a reciprocated disdain). He prides himself that the Fed raised interest rates on the eve of George Bush's nomination at the 1988 Republican convention.
As a result of all this, a great deal of "credibility" is accrued to Greenspan, and this good will is any central banker's most valuable intangible asset. But good will can swiftly be squandered.
So far this year, Greenspan's relations with Bill Clinton and his administration have shaken some people in the financial markets and at the Fed. They think that Greenspan is playing poodle to the president, with an eye to being reappointed to his job in 1996.
The criticisms concern silly things and it does not help that Greenspan is a compulsive courtier, rarely turning down tennis at the White House or missing a cocktail party of any political hue.
Greenspan was invited by the president to attend his first State of the Union speech, and did so against the advice of his senior staff.
Unexpectedly, he was placed in the congressional gallery between Hillary Clinton and Tipper Gore, from where he was bounced before the nation into 24 standing ovations for Clinton's tax-and-spend policies.
This for a man who, when pressed on the matter, still believes that government is theft and still professes the fiercely libertarian beliefs of Ayn Rand.
In the days that followed, the chairman was called up to Capitol Hill to give his opinion of Clinton's budget package. He called the deficit-cutting proposals "credible," and much of the Fed's staff gasped in horror.
Newspapers duly declared that Greenspan had endorsed a package which, in the long run, would not tame the deficit.
Greenspan says that he was misunderstood: he meant merely that the budgetary assumptions upon which Clinton based his plans were realistic.
Everyone who comes to Washington has an act, and Greenspan's, in the early Nixon years, was his little black box: a computer-simulated model that seemed to be able to forecast how the economy would respond to various impulses. Today's economic diviners trust no guiding theology, now that monetarism and its advocates have been discredited by events.
Is the current rise in inflation driven merely by expectations of rising prices, as Greenspan seems to believe? Or is it something more fundamental? Should the Fed react differently to the two? Nobody, especially inside the Fed, is quite sure.
Greenspan should be a man well-equipped for such times. His love for the minutiae of economic data is unparalleled, though now that Clinton demands to see the daily statistics, he has a fellow enthusiast.
And he has what one senior Bush official calls "the greatest economic bedside manner of anyone who came to Washington."
This manner has helped restore the Federal Open Market Committee, which sets monetary policy, to working order after Paul Volcker's imperious time at the Fed. And it has built good bridges with the administration.
But now the committee is wavering about monetary policy. And the administration is making as big a hash of "managing" the dollar as any of its Republican predecessors.
Rather than playing gentle lobs with the White House Greenspan should start practicing for the day when the game gets tough.
by CNB