MAGIC MAN
December 6, 2000

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. Watch the background report in streaming video Watch the discussion in streaming video

 

Nov. 15, 2000: This year's election and the stock market. Oct. 18, 2000: What is behind the markert's recent ups and downs? April 14, 2000: Market analysts provide insight into point loss for the Dow and NASDAQ markets. March 10, 2000: The NASDAQ breaks the 5,000 barrier. Feb. 25, 2000: What is the cause of the NASDAQ/Dow trade-off? Feb. 1, 2000: The cultural impact of the new economic boom Jan. 13, 2000: Is the current boom a "new" economy? Jan. 7, 2000: Today's unemployment figures and their meaning for the economy. Jan. 4, 2000: Fed Chairman Alan Greenspan accepts re-nomination. Dec. 30, 1999: A look back at the meteoric stock jump of 1999. Nov. 26, 1999: Can the red-hot economy stay warm during the holiday season? Oct. 15, 1999: The increasingly volatile Dow Jones average. Oct. 14, 1999: One town struggles to keep up with the economic boom. Sept. 27, 1999: A report and discussion from the annual IMF/World Bank meeting. Aug. 24, 1999: Should the stock boom bring another interest rate raise? July 7, 1999: Online salesmen like Amazon.com are changing the way we do business. July 7, 1999: A new study says the Internet is changing our economy even more than we think. Browse the NewsHour's coverage of Economic issues     Board of Governors of the Federal Reserve Profile of Alan Greenspan	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: 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. ALAN GREENSPAN: How do we know when irrational exuberance has unduly escalated asset values? 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.
	The Greenspan effect
	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? 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. RAY SUAREZ: Bob Woodward, do you think that this is intentional, that the chairman understands that his words move markets and chooses them accordingly? 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. 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.
	Who's listening to Alan?
	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? 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. 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.
	Conquering an immediate task
	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. 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? 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. 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? 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.
	A transformed job
	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? 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. RAY SUAREZ: And, Gretchen Morgenson, quickly, your impressions on that same question, a different kind of job now that he has had it? 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. RAY SUAREZ: It's amazing how you can become a media star while refusing to give interviews. But, thank you, guests, all.