-- Is Greenspan Being Tuned Out by Markets? --
By Wayne Cole
22-Feb-2003 13:50:21 GMT
NEW YORK (Reuters) - Maybe Alan Greenspan is no longer the
lionized "maestro" of old on Wall Street.
When the head of the world's most powerful central bank
drew the ire of the White House last week for his lukewarm
support of tax cuts, investors were reminded that Federal
Reserve chairmen are also mortal.
The word "resignation" was whispered, though a top
Republican generously conceded there was no reason for the Fed
chief to step aside right now.
Once even the hint of a suggestion that the great man would
not always be in charge would send markets into paroxysms of
self-doubt. This time all it drew was a yawn.
In part, this new equanimity is due to a belief that
Greenspan is too much a part of the political landscape to be
removed, even by a president as popular as George W. Bush.
But analysts also see it as a telling sign of how far from
grace the central bank, and the man himself, have fallen.
"Greenspan's too much of an institution for any president
to dump him," said Ram Bhagavatula, chief economist at Royal
Bank of Scotland Financial Markets in New York.
"But it's also the case that the magic's worn off Greenspan
and the Fed," he said. Having cut interest rates 12 times the
economy's only sputtering and, far more unforgivable to
investors, equities have still halved in value from the peak of
the bubble in 2000.
"People have opened their eyes and realized the Emperor has
no clothes," was Bhagavatula's verdict.
THE GREENSPAN PUT
It was an axiom of markets during the bubble, and indeed
may have helped inflate the stock market rally in the first
place, that the Greenspan Fed would do all in its power to
support asset prices and thus there was little risk in buying,
even at historically outlandish levels.
So pervasive was this idea that it became enshrined in
market folklore as the "Greenspan put."
The Fed itself has always claimed that monetary policy is
not set with asset prices in mind. Greenspan went so far as to
argue that there was nothing the bank could have done to stop
the bubble from growing.
But the same was not true when asset prices were falling so
far and fast that the fabric of business and consumer
confidence seemed to be threatened.
When that happened in 2001 the Fed felt fully justified in
slashing borrowing costs -- 11 cuts that year alone taking
interest rates to four-decade lows.
And yet stocks have not recovered. The S&P 500 currently
cowers around 830, leaving its 2000 peak of 1,553 a fond but
distant memory. The economy has done better but only in fits
and starts, and sustainable employment growth remains elusive.
In their defense, central bankers note monetary policy
works with long and variable lags, though that's harder to
argue when the bulk of the easing came more than a year ago.
The Fed can blame geopolitical uncertainty for holding back
the economy and Greenspan evinces confidence that all will be
well once the Iraq situation is resolved.
"Policy is pushing against a lot of headwinds right now and
maybe it's better to ask what the economy would be like without
all the easing; a lot worse I bet," argued Jim O'Sullivan, an
economist at UBS Warburg in Stamford, Conn.
"As for Greenspan, I'd have to fall back on a baseball
analogy. You're never as good as when you're winning and you're
never as bad when you're losing."
NO PROFIT IN SPECULATING
Others are not as kind, noting that lower borrowing costs
alone will not revive investment when industry is saddled with
massive unused capacity built during the bubble years of the
1990s.
Low interest rates are also a backdoor attempt at forcing
investors to take more risk since they mean sharply reduce
returns on safe investments like Treasuries and bank deposits.
But instead of fueling demand for stocks, private investors
have bought houses and cars. That has helped cushion the
broader economy but it's done little for Wall Street.
Perhaps it should be no surprise then that financial
markets have reacted so begrudgingly to the Fed's supposedly
aggressive rate cut in November. Or that investors now show
scant alarm at the prospect of a Fed without Greenspan.
Even the rumor mill has fallen silent. No longer do
speculators whip up talk of Greenspan in a car accident, or
Greenspan suffering a heart attack. There's no money in it.
"Frankly, I think he's overstayed his welcome and the
market will be glad to see the back of him," said Paul Kasriel,
chief economist at Northern Trust and a long-time critic of the
Fed in general and Greenspan in particular.
"It seems the Fed knows so little about so much that it
would be best for us all if it gave up trying to micro-manage
the economy," said Kasriel.
(C) Reuters 2003. |
