dave-re: Oreilly's "Dec's rate reduction" forecast + "In Greenspan We Trust"
Hope is right, sorely needed now.
Very interesting article below, isn't it?
di
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washingtonpost.com
>>> In Greenspan We Trust
By Robert J. Samuelson
Thursday , November 23, 2000 ; Page A43
The widespread idolizing of Alan Greenspan may be the simplest explanation of why America's post-election melodrama has produced so little popular anxiety. The unspoken assumption seems to be that either Bush or Gore matters less for the economy than Greenspan. As long as he safeguards prosperity, the country can bear the suspense of not knowing the next occupant of the White House. This Greenspan worship is as understandable as it is delusional.
Having enjoyed the longest boom in U.S. history, Americans feel entitled to their optimism. In the abstract, most people may recognize that the business cycle isn't dead. But in practice, they seem to believe that Greenspan can disarm almost any conceivable danger. Jobs, incomes and profits will grow, just as they have for nearly a decade.
The adulation is well captured in the title of Washington Post writer Bob Woodward's new book on Greenspan: "Maestro." He's the economy's conductor. If the strings or brass go off key, he'll restore harmony. Fortune magazine once ran a cover story: "In Greenspan We Trust." Business Week's version was "Alan Greenspan's Brave New World." Time put Greenspan, Treasury Secretary Robert Rubin and his deputy Lawrence Summers on the cover with the headline "The Committee to Save the World."
Though romanticized, Greenspan's reputation is not undeserved. Woodward's book and another new one by Justin Martin ("Greenspan: The Man Behind Money") make it clear that by temperament, intellect and experience, Greenspan was almost born to head the Federal Reserve Board. A job description might read: "Should thoroughly understand the economy. Must embrace the Fed's role in preventing inflation and financial panic. Needs nerves of steel during crises. Requires political skills to mute outside criticism and maximize power inside the Fed."
On all counts, Greenspan qualifies. His obsession with understanding the economy is well known. For nearly four decades, he ran a successful private forecasting firm. Unlike many academics, he does not hold rigidly to a single model of the economy. Greenspan immerses himself in statistics to discover changes. Widespread contacts with business leaders complement these investigations.
This curiosity caused Greenspan to doubt standard predictions that inflation would dangerously accelerate as economic growth rose and unemployment dropped in the late 1990s. From the data, he saw evidence that computer investments were improving business efficiency, a.k.a. "productivity." Companies could offset higher costs without raising prices and still enjoy greater profits. As a result, the Fed moved slowly to tame the boom. Since mid-1999, it has raised short-term interest rates (the Fed funds rate) from 4.75 percent to 6.5 percent.
But no one doubts Greenspan's commitment to containing inflation or his belief in markets. Indeed, popular thinking has moved closer to Greenspan's. When he served as chairman of President Ford's Council of Economic Advisers between 1974 and 1977, Greenspan was regarded as a slightly fanatical disciple of the rabidly anti-communist writer Ayn Rand.
"When I met Ayn Rand, I was a free-enterpriser in the Adam Smith sense, impressed with the theoretical structure and efficiency of markets," Greenspan told Newsweek at the time. "What she did was to make me see that capitalism is not only efficient and practical, but also moral." People didn't speak this way in the mid-1970s. Capitalism was an archaic concept. The emphasis was on the "mixed economy" of power sharing between government and business. People didn't connect freedom and creativity.
The mistake then was to typecast Greenspan as a rigid ideologue when--despite strong intellectual views--he is both an economic and a political pragmatist. There are times when even markets cannot be left alone. In 1987 the stock market crashed a few months after Greenspan's arrival at the Fed. When the Dow dropped more than 20 percent in a day, the Fed liberally provided credit to banks. The aim was to prevent large investment houses (which borrow heavily from banks) from defaulting on payments to each other. That could have triggered a further wave of stock selling. Of Greenspan's calm, former Treasury secretary James Baker told Martin: "I just don't think Alan gets nervous."
His political skills flow from a simple insight: People in public life have big egos; they want to be taken seriously. Greenspan shows a "pronounced deference to political power," writes Woodward. Though a Republican, he has cultivated leaders of both parties. This helps explain why he's worked so easily with the Clinton administration. When the Fed raised interest rates in 1994--to preempt higher inflation--the White House muted criticism. Inside the Fed, Greenspan has only one vote of 12 on the key committee that changes interest rates. He prevails by listening to others and being insistent when he feels strongly.
The mistake now is to equate his past successes with infallibility. No one--including Greenspan--can fully predict the twists of the U.S. and world economies. Case in point: Asia's 1997-98 financial crisis surprised almost everyone. Even if forecasting were perfect, the Fed has only the short-term Fed funds rate to move the economy. It's a crude tool. The recovery from the 1990-91 recession was sluggish despite a 3 percent Fed funds rate.
Finally, confidence in the Fed (and Greenspan) "to cushion the economy and financial markets against any and all shocks" may have led businesses, consumers and investors to take dangerous risks, as Mike Prell--then the Fed's director of research--suggested last year. There are already many signs of speculative excess: some collapsed stock prices; bad bank loans; bankruptcies among dot-coms.
"Every business cycle is the same with the exception of some fundamental difference that characterizes that particular cycle and rarely, if ever, is in evidence in other cycles," Greenspan once said, according to Woodward. In this cycle, is Greenspan the fundamental difference?
© 2000 The Washington Post <<< |
