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The Most Powerful Guy
You've Never Heard Of
December 20, 2000

With America's strangest presidential election ever barely over, and a new Commander-in-Chief about to step in, some Americans are a little nervous about the nation's future. But others feel secure, knowing that the man they consider the most powerful person in the world isn't going anywhere.

Just who is this behind-the-scenes guy they think has more power than George W. Bush ever will? He's Alan Greenspan, a 74-year-old expert economist who heads the Federal Reserve, commonly known as the Fed.

Unlike the president, who has to please the voters and compromise with Congress, Greenspan doesn't have to answer to anyone.

But that doesn't mean his job is easy.

Basically, Greenspan is in charge of keeping the nation's economy stable. The economy is sort of like a balloon: blow in too much air, and it pops. But with too little air, it falls to the floor. Greenspan helps decide when to blow more air into the economy. In this case, the air in a balloon is the amount of money in the economy. Greenspan can make the economy grow by increasing the money supply, or keep the economy from inflating too much by decreasing the money supply. His goal is for the economy to grow and contract gradually. Rapid changes can harm businesses and consumers.

Another way of thinking about it is like starting a car. If you floor the gas all of a sudden, your passengers get jolted back into their seats. If you slam on the brakes, they hit the windshield, or at least get a bad case of whiplash. The idea is to slowly change the pace of economic growth, so no one gets hurt. And since Greenspan has his foot on the gas pedal, his every move is watched by investors around the world.

Translating "Greenspan-Speak"

In a speech on Dec. 5, 2000, Greenspan hinted the Fed was concerned the economy might be slowing down too fast. What Greenspan actually said was that the Fed should "remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending." But what investors heard was: "I may lower interest rates which will make it easier for the companies you are investing in to borrow money. That means they'll expand and their stock will be worth more in the future."

Within hours of Greenspan's remarks, so many investors bought stocks that the Dow Jones and the NASDAQ rose by three percent and 10 percent that day. The value of some companies went up by millions of dollars, just because investors had confidence in Greenspan's words.

Increasing Influence

But Greenspan doesn't just work magic by talking. He was educated at New York University and Columbia and appointed to his job in 1987 by President Ronald Reagan. And he's credited with steering the country through some difficult times since then, including a serious stock market crash just after he took the job.

Another reason Greenspan has become almost a celebrity in America, is that more people are paying attention to the stock market than ever before. It used to be that only rich people and powerful corporations had the extra money to invest in stocks. But the U.S. economy has done so well in recent years, that more and more ordinary people are investing in stocks.

How Does He Do It?

One of the most important things Greenspan does is control interest rates -- the amount a bank charges people who borrow money.

When the Fed raises interest rates, that makes it more expensive for people and companies to borrow money. When this happens, companies don't make as many long term investments (like building plants or buying expensive equipment) and people don't take out as many loans. There is less money floating around. This lowers the demand for all the goods and services that our economy produces (because people and companies have less money to spend) and lowering the demand for stuff helps to keep a lid on inflation. It also means that companies are less likely to borrow money to take risks that might have big payoffs for investors.

When interest rates are low, individuals and companies borrow more and make long term investments. This increases the amount of money changing hands and increases demand for goods and services. But when demand goes up, usually prices do too. For example, if it suddenly becomes really easy for teenagers across the country to borrow money from their parents, stores like Tower Records and The Gap would notice that they had a lot more customers and they'd raise their prices.

Greenspan's Next Move

After years of very high growth, the American economy is starting to slow down. Recently, corporations have been making less money and people are starting to have a harder time finding jobs.

Greenspan is hoping to ease the economy into a soft landing -- to make the car come to a gentle stop instead of hitting a brick wall. If he succeeds, our country will avoid two possible problems: rising prices and high unemployment.

At the Fed's meeting on Dec. 19, 2000, Greenspan and the other members decided that the economy was growing at an OK rate, but that there is a possibility of a serious slowdown. If they are worried that the whole economy is starting to sag, they could lower interest rates at the next meeting in an attempt to encourage people to borrow and spend.

While there's no way to know what they will decide, one thing is certain: the decisions that Greenspan and the Federal Reserve Board make will affect everyone who earns, borrows or spends money.

What do you think? Is it a good idea to give one person so much control over the United States' money? Does Greenspan deserve the bulk of the credit for the country's historic economic growth?