<<Alan Greenspan is no longer viewed as god-like. Now, he has become irrelevant>> ... sounds about right, though a bit late.
macleans.ca
August 12, 2002
THE NAKED EMPEROR
Alan Greenspan is no longer viewed as god-like. Now, he has become irrelevant.
DONALD COXE
THE TIME TO SELL the stock market short was when Bob Woodward's hagiographic book Maestro on Federal Reserve Board chairman Alan Greenspan's management of the American economy was published two years ago. This readable book is, to put it charitably, naive. Where it describes incidents with which I have familiarity, it omits crucial technical details in favour of statements "allegedly" made by Greenspan and other players at the time. Greenspan almost unfailingly comes off well in these exchanges, whereas reports of what actually happened to key financial instruments -- data that might call into question the chairman's judgment -- don't appear.
What makes it worthwhile reading in this summer of discontent is its expression of a dying American faith: that a wise and fortunate Fed chairman could manage that rambunctious, unpredictable, emotionally unstable beast known as the U.S. economy. This from a nation that always revelled in its superiority over nations with economies based on central planning. It's not as if the Fed had the tools available to, say, the apparatchiks who ran Gosplan. The Fed's remit is to set just two short-term rates used in the banking system.
Last month, Greenspan spoke to Congress in the midst of the worst stock market sell-off since the 1987 Crash. What the nation craved was the Delphic mysticism and bafflegab that had soothed roiled markets on earlier occasions. But this time, it was as if Dorothy had just yanked the curtain to show the real wizardry in Oz. The stock market plunge gained momentum, and all leading indices broke through their 9/11 panic lows. A major bear market -- the worst since the horror of 1973-1974 -- was confirmed. Investors listened to Greenspan's anodyne remarks on the strength of the economy -- and sold.
Not that the Maestro is to blame for the July massacre. He and his Fed colleagues have driven their two managed rates to the lowest levels in four decades. Beyond that sustained transfusion to the sickly financial system, all they can realistically do to avert a financial and economic collapse is pray (a challenge for Greenspan, the most famous follower of right-wing atheist Ayn Rand).
What is unfolding is an unravelling of the American belief system about the integrity and superiority of U.S. economic policies and institutions. Greenspan isn't seen as a malefactor -- like WorldCom's Bernie Ebbers or Enron's Ken Lay or the Houston office of Arthur Andersen -- but as a key player within a system that is losing its legitimacy.
Investing is a faith-based initiative. Two years ago, most Americans believed that tech stars such as Bill Gates, Larry Ellison and Scott McNealy were making the economy better for everyone, that Wall Street was there to help its brokers help their clients to their share of the output of this magical money machine, and that the Greenspan Fed would keep the machine properly oiled. Now, that faith has turned to fury against top businessmen in general, and those who got rich from stock options in particular, to cynicism about Wall Street, and to a disillusionment about the Fed's ability to do anything to get America back on track. Greenspan is no longer seen as omniscient and omnipotent -- just irrelevant.
This attitudinal sea change is a major factor in the rather sudden appearance of a brutal bear market. The U.S. had been virtually unique in having such confidence and trust in businessmen and central bankers. The British are skeptical about big business, in part because too many boardrooms are bespangled with baronets and lords with precious titles and precious little evidence of real business experience or acumen. The Germans used to have profound respect for the Bundesbank, but they have yet to transfer that awe to the European Central Bank, and they have never revered their business leaders. The French only admire business leaders who come from senior positions in government after graduation from the elite school for bureaucrats, Ecole Nationale d'Administration. Italians survive by being cynical about all their institutions, even the Roman Catholic Church. The Japanese no longer venerate the Bank of Japan since the collapse of their stock market and economy in the 1990s.
Americans should never have put businessmen and central bankers on pedestals. American capitalist democracy is at its best when it's vibrant and raucous, with runaway competition knocking fat cats from their perches. "Uneasy lies the head of the Fed without renown" would have been an accurate description of that leader and that organization until Paul Volcker rescued it during his tenure (1979-1987).
The Greenspan Fed performed a generally effective job of protecting the value of the currency in the decade after the Crash of 1987, and then made the mistake of performing an effective job of pumping up already-overvalued tech stocks with massive liquidity infusions, spawning the Nasdaq monster. Now, Americans are losing their faith in the Fed -- a faith that was very useful for keeping their faith in the stock market.
To get the market rising again, the business community is going to have to make good profits and tell the truth about them. That will happen eventually. But investing was more rewarding when the secular religion included belief in the wizard.
Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. His column appears every week.
dcoxe@macleans.ca |
