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| MAGIC MAN | |
 December 6, 2000  |
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Why does Alan Greenspan have so much control over U.S. financial markets? Journalist Bob Woodward, Greenspan biographer Justin Martin, and New York Times financial reporter Gretchen Morgenson discuss his influence.
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RAY SUAREZ: Market watchers listened closely to Alan Greenspan yesterday, for hints about the direction of interest rates. The Federal Reserve Board chairman spoke to a group of New York bankers.
ALAN GREENSPAN: How do we know when irrational exuberance has unduly escalated asset values?
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| The Greenspan effect | ||||||||||||||||||||
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RAY SUAREZ: Now, three who write on the chairman of the Federal Reserve: Bob Woodward is an assistant managing editor at the Washington Post, and author of the new book, "Maestro: Greenspan's Fed and the American Boom"; Justin Martin has also written a new book about the Fed chairman titled, "Greenspan: The Man Behind Money" -- he is a former staff writer for Fortune Magazine; and Gretchen Morgenson, she covers the stock market for the New York Times. Justin Martin let me start with you: How does a passage in a longer speech, I statement from one man, create a couple of billion dollars of equity in the space of few hours how does that happen?
RAY SUAREZ: Bob Woodward, do you think that this is intentional, that the chairman understands that his words move markets and chooses them accordingly?
RAY SUAREZ: But that obsessive attention to the things that he does say in public -- he doesn't give on the record interviews, does that sort of chase him further into the hole in a way, make him even more reluctant to make open statements beyond the ones he has to make to Congress? BOB WOODWARD: No I think he wants the soft landing. But if you look at his time as Fed chairman, you find he appears at the critical points more often than anybody else in determining the economic conditions that we live in. The other thing that's interesting about him is that he's changed. Here is this very conventional Republican conservative economist who came in and formed an alliance essentially with who else other than Bill Clinton. He is somebody we should all be 74 and have as open a mind as he does. |
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| Who's listening to Alan? | ||||||||||||||||||||
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RAY SUAREZ: Gretchen Morgenson, who's the constituency? I think we should step back a little bit and talk about who it was that made the NASDAQ go wild and the Dow jump up yesterday afternoon. Who is listening to what Greenspan has to say?
RAY SUAREZ: Justin Martin asked us to remember how ephemeral this leaks can be. What was the market saying today by still keeping some of the gains but dropping a bunch of. GRETCHEN MORGENSON: Well it had a second thought about it. I think that yesterday many investors were waiting for a reason, any reason to buy. We had had so much negativity and so many down days that anything would have appealed to them. And certainly Alan Greenspan has sort of taken on a deity respect from people in the markets. RAY SUAREZ: Well, maybe that march to deity-hood, Bob Woodward, started shortly after he became chairman. Tell us the story of the massive drop in late 1987 and how a statement from the chairman sort of calmed the waters. |
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| Conquering an immediate task | ||||||||||||||||||||
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RAY SUAREZ: Justin Martin, is that a real departure from the chairmen of the past? There have been people who have served long tenure in office, but did they get the kind of attention to every word, or in this case a one-line press release that Alan Greenspan does? JUSTIN MARTIN: Absolutely not. In fact, the impressive thing to see is that Paul Volcker was considered sort of the gold standard for Fed chairman. And when Greenspan came in this 1987 it was actually thought that it would be very, very hard for him to top Volcker, and he has. Part of what has caused Greenspan to have a great run is the fact that at this point everyone -- such a large percentage of the US populous is involved in the stock market that at this point his decisions affect everyone, every household nearly, when in the old days, particularly under some of the older Fed Chairmen back in the old days, such as William McChesney Martin, there was such a small number of people invested that the decisions that were made had a less of an effect on Greenspan. That has led to Greenspan having an almost cult like status. RAY SUAREZ: Well, we both -- we just completed a presidential season in which both major candidates talked about the Fed Chairman and his retention or possible retention, commented on the job he was doing. Have you ever had heard that in the campaign before?
RAY SUAREZ: Well, Gretchen Morgenson, you have talked a little bit about the kind of bind that this also can put the chairman in -- referred to it as a moral hazard. Explain that. GRETCHEN MORGENSON: What the Chairman has done so successfully, as you alluded to in the lead-in, was that in all of these financial crises that we have had in recent years he has stepped up to the plate and really reassured investors that he would be there. What this produces, however, is the potential that investors are going to become reckless about the risks that they take, it's call it a moral hazard. By thinking that the Great Alan Greenspan is always going to be there to protect them from the disaster means they can take greater risks and maybe not be as careful in the scrutiny of their investments. That's where the risk lies. RAY SUAREZ: Do you agree with that, Bob Woodward?
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| A transformed job | ||||||||||||||||||||
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RAY SUAREZ: Justin also was talking about the how the chairman is perceived to have grown the job. Does that transform it for whoever has it from now on? BOB WOODWARD: He's got it until 2004, which means that whether Bush or Gore become President to a certain extent they are taking office in a Greenspan era that the economy so much affects so many people in these country, in the world. His presence is there but are they training somebody to take over? Not to my knowledge. He learned a lot on the job. This is a sense in his personality of restraint. He very infrequently, and I really couldn't find any instance of the time he has been at the Fed, where he confronts people. He avoids confrontation, because he realizes to do so, to confront someone is to empower them, and if you keep your cool, you can do your job. RAY SUAREZ: Justin Martin, will he hand on a transformed job from the one he was handed by Paul Volcker?
RAY SUAREZ: And, Gretchen Morgenson, quickly, your impressions on that same question, a different kind of job now that he has had it?
RAY SUAREZ: It's amazing how you can become a media star while refusing to give interviews. But, thank you, guests, all. |
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ALAN
GREENSPAN: In periods of transition from unsustainable to more modest
rates of growth, an economy is obviously at increased risk of untoward
events that would be readily absorbed in a period of boom. The sharp
rise in energy prices, if sustained, is worrisome in this regard. With
equity prices weakening in response to reduced earnings from higher
costs, and a more moderate pace of sales, the so-called "wealth
effect" that spurred consumer spending is being significantly attenuated.
RAY
SUAREZ: The chairman didn't promise anything, not in so many words anyway.
But the markets read into his comments an impending cut in interest
rates. By day's end, stock prices-- which have been shaky of late--
shot up. The Dow Jones Industrial Average closed up 3 percent, and the
NASDAQ climbed 10 percent, it's largest one- day gain ever, by any measure.
Over the years, the words of the Fed Chairman have been regularly parsed
and pored over. Greenspan-speak is notoriously hard to distill, and
often includes a number of, "on the other hands." But at times,
his words and actions have had dramatic and immediate effect. Soon after
being appointed Fed Chairman by Ronald Reagan in 1987, Greenspan faced
his first major test-- a 23 percent stock market plunge. Interest rate
cuts helped stock prices recover within a year. In fact, not only did
prices rebound, over the next years they soared. By 1996, Greenspan
issued a famous warning. 
RAY
SUAREZ: Still, the boom continued, and today the Dow is four times its
value than when he took office. In 1998, a new test: The Asian economic
crisis threatened to go global. The Fed responded by lowering interest
rates three times, and the U.S. expansion continued. And in mid-1999,
the Greenspan Fed began to cool things off, with the first of five interest
rate hikes. This past January, Alan Greenspan was appointed by President
Clinton to his fourth four-year term. Come this January, he will be
working with a new President, the fourth in his years as Fed Chairman.
JUSTIN
MARTIN: I think it's really important to make a separation between Greenspan's
words and Greenspan's deeds. Greenspan's words -- it's a fascinating
almost sociological phenomenon you see -- that they are parsed by the
markets, parsed by the pundits, and it results in, as you said yesterday,
a jump in the NASDAQ, the largest jump in the NASDAQ's history, a jump
in the Dow. But you also see the sort of ephemeral nature of the words
when you look today and both markets, both major indexes are down considerably.
What's more crucial I think - the distinction needs to be made -- is
his deeds -- and with respect to his deeds he has had interest rate
policy, the right interest rates, the right level throughout this ten-year
expansion. That to me is more critical than the words although they
are fascinating to see how it works. 
BOB
WOODWARD: Certainly he does. But if you read that speech or listen to
the whole thing, not only is he hinting that there may be and I emphasize
maybe an interest rate cut in the near future but he is being very optimistic
about the economy. He says that the productivity growth that we have
experienced in recent years could likely continue for years. He says
the banking system is quite sound, thematically he is saying that he
is slowing down the economy and it's possible to have a soft landing,
meaning no recession, which of course is his main goal in all of this.
GRETCHEN
MORGENSON: I think everyone is listening. We've got small investors
who hang on his every word; we have the professional investors who are
right in there with them. You know, the investing public is extremely
powerful and the moms and the pops of Main Street are now -- maybe even
more dominant than Wall Street professionals. So I think you had it
up and down the line. The remarkable thing to me about the speech yesterday
was that Mr. Greenspan sort of said the market is too big to fail. He
is here to backstop it almost. We had seen a dramatic plunge in the
NASDAQ, almost 50 percent from its highs earlier this spring, and this
is really the first time he has said that falling asset values in the
stock market are a worry and the stock market is now driving much of
the economy. 
BOB
WOODWARD: Well, it was the stock market crash of October '87 and Greenspan
had only been there two months. And it was panic everywhere. No one
knew what to do. In the White House, Howard Baker, who was Reagan's
chief of staff was, in a sense, lost. Greenspan, under the advice of
some other people in the Federal Reserve system, put out his famous
one sentence statement, which essentially said the Federal Reserve will
guarantee unlimited credit to banks and to everyone else, and that calmed
the waters. And it was Howard Baker who later said the White House couldn't
do anything, Congress couldn't do anything, individual investors couldn't
do anything. But that word and that pledge from the Federal Reserve
was what stabilized the system. And we could have lost American capitalism
or a portion of it in that week. 
JUSTIN
MARTIN: I don't think it was ever part of a campaign before. It was
really fascinating to see. And as some people have suggested, we may
be due for a next presidency which may be a Greenspan presidency. 
BOB
WOODWARD: Yes. I think that's true. There are people within the Federal
Reserve and to a certain extent Greenspan himself ponders and worries
about how he is read and how much in a real way he has an incredible
track record. There is no one in Washington in a position of authority
who has had that long a good run. And, so what's interesting about him,
I think, is he is continually rethinking and looking. We are talking
about the economy, not just the stock market, because really he has
to focus on the real economy, what is the level of inflation, what is
the level of unemployment. What is the level of growth and he's trying
to even things out so we don't have these big ups and the big downs,
which really hurt people. And it's worked so far and we are in the midst
right now of Greenspan attempting to execute this second soft landing.
If it works, it will only add to the myth in the sense of that, as Justin
was suggesting, the real President, ladies and gentlemen, is Alan Greenspan.
JUSTIN
MARTIN: He absolutely will. The job will have a new sort of public component
almost - and you saw that of course at work yesterday where comments
he made will be even more parsed in our hyperactive media society --
and the Chairman has to be aware of how comments that are made are going
to play out over in the markets, and so the next person will really
have to get a handle on that for sure. 
GRETCHEN
MORGENSON: Well, I guess I think he's more of a media star than anyone
else who's been in the role and so I think to the degree that that will
continue you'd better be a good looker on the camera and have a sound
byte or two for reporters. I think it will be a different job going
forward.
