Has he lost his magic touch?
News Analysis: The chairman of the US Fed is facing his toughest challenge yet. By Lea Paterson
This week's preoccupation with the Bank of England's interest-rate decision only briefly overshadowed the markets' perennial interest in Alan Greenspan, the chairman of the US Federal Reserve. This is undoubtedly the most important man in world markets.
Mr Greenspan, in his capacity as Fed chairman, has primary responsibility for determining interest rates in the US, the world's most powerful economy. As a result, he has the world's stock markets hanging on his every word.
In recent weeks his words have taken on particular significance as traders look for clues to help make some sense of the chaos all round them.
The markets surged following a Greenspan speech in which he was interpreted as saying that a co-ordinated cut in world interest rates was on its way. Then they tumbled when the Fed chairman said that wasn't what he'd meant at all.
Investors were cheered when he hinted that although a co-ordinated rate cut was unlikely, the US could still unilaterally cut rates. But there was bitter disappointment last week when the 0.25-point cut announced by the Fed was less than the markets had wanted. This week, the jazz-loving Fed chairman was at it again, hinting that a second cut in US rates was on the cards.
Many traders believe Mr Greenspan is capable both of single-handedly stemming the market turmoil, as well as plunging the world into a 1930s-style depression. The central banker from Brooklyn is indeed under some pressure.
The septuagenarian Fed chairman, who has made the obfuscatory language of central bankers into an art form, started in the private sector running his own economic consultancy. He moved into politics in the late 1960s as a research director in the Nixon administration and in 1987 was appointed chairman of the Fed - just two months before the October stock market crash.
It was a fiery baptism, but Mr Greenspan was, at the time, thought to have handled it well. He moved swiftly to soothe markets and ease monetary policy in the aftermath, and then in 1988 began raising interest rates to stave off the threat of rising inflation. He is famed for his willingness to strike pre-emptively when he sees inflation risks. "If you wait to see the whites of the eyes of inflation, then it's too late," is one of Mr Greenspan's favourite phrases.
The Fed chairman is often credited with nurturing the long bull run enjoyed by US stocks through much of the 1990s, and his deep knowledge of the US economy has impressed many, including the formidable Baroness Thatcher.
Indeed, Lady Thatcher was reportedly so impressed with Mr Greenspan's handle on the economy following a trip to the US that she berated Robin Leigh-Pemberton, then Bank of England governor, on her return to Britain for the paucity of his economic understanding.
But Mr Greenspan's reputation as the doyen of central bankers is starting to look a bit shaky. Revisionists have been less complimentary about his actions in 1987 than pundits were at the time. Some even blame the Fed chairman for the subsequent inflationary boom.
There have also been some well-publicised slip-ups along the way, such as his famous "irrational exuberance" speech of December 1996 which failed to dampen stock market booms.
Perhaps most importantly, the markets are now starting to question Mr Greenspan's ability to handle the current crisis. His move to cut rates last week failed to inspire the markets, and the Fed chairman is now in the position he always sought to avoid - reacting to developments rather than making pre-emptive strikes. The world waits for Mr Greenspan's next step, and investors are hoping desperately he has not lost his magic touch.
In His Own Words - Greenspan Over The Years
"Since I've become a central banker, I've learnt to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said." - Said five weeks after taking office, while joking about the obfuscatory language of central bankers
"I know you believe you understand what you think I said, but I am not sure you realise that what you heard is not what I meant." - Perhaps the best example in recent history of the obfuscatory language of central bankers, referring to frequent market misinterpretation of his words
"How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as as they have in Japan over the past decade?" - Said in December 1996, prompting a 170-point drop in the FTSE and 140-point fall in the Dow. The market jitters proved to be a one-day wonder, however, and stock indices continued their relentless upward climb
"That was not what I was intending to do at all. These are very elaborate international markets which are driven by decisions of millions of people. No one can affect them in a fundamental way." - March 1997, during a grilling by Congress about his December "irrational exuberance" remark. Mr Greenspan was asked why he kept talking the US stock market down
"A driver may tap the brakes to make sure not to be hit by a truck coming down the street, even if he thinks the chances of such an event are relatively low." - July 1997, in reference to the need to be always on the look-out for inflation. The speech as a whole was taken by the market to mean further US interest rate hikes were some way off. The Dow closed above 8,000 at a then record 8,061.65
"It clearly would be unrealistic to look for a continuation of market gains of anything like the magnitude of those recorded in the past couple of years." - Early October 1997, close to the 10th anniversary of the stock market crash and just before a round of market jitters which saw the FTSE lose 11 per cent of its value in just one month
"Provided the decline in financial markets does not cumulate, it is quite conceivable that a few years hence we will look back at this episode, as we now look back at the 1987 crash, as a salutary event in terms of its implication for the macro-economy." - The end of October 1997, in response to stock market falls. Prompted little market reaction that day, although US and UK stocks staged a mini-recovery soon after
"History is strewn with periodic contractions of significant dimensions and I have no doubt that, human nature being what it is, that it is going to happen again and again." - Said days after the FTSE hit its all-time high of 6,183. The FTSE fell to below 6,000 after this remark, and is now languishing some 23 per cent off its July highs
"I do think that we have to bring the existing instability to a level of stability reasonably shortly to prevent the contagion from really spilling over and creating some very significant kinds of problems for all of us. I think we know where we have to go." - September 1998, and widely taken as meaning that a US rate cut was on its way. Mr Greenspan duly obliged and cut rates by 0.25 points, but the markets, which hoped for at least 0.5 points, were disappointed
"We are clearly facing a set of forces that should be dampening demand going forward to an unknown extent. This is a time for monetary policy to be especially alert." - Said earlier this week, and widely taken as a heavy hint that another US rate cut was on its way, although this remark has, to date, had little effect on the financial markets
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