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Greenspan Fatigue

Rob Walker
Posted Tuesday, March 21, 2000, at 3:41 PM ET

"Alan Greenspan is at it again," went the voiceover in ads running on CNBC yesterday, as grainy footage of Greenspan's visage suddenly looked menacing, like the villain in a General Hospital promo. Not that I watch soap operas, of course, but in the run-up to today's Federal Reserve Open Market Committee meeting, Greenspan really did seem to have undergone one of those bizarre transformations common to daytime drama, from sparkling hero to loathed heavy. "Don't kid yourself into believing that what he is saying is so profound that we can't understand it," advised one ranter on the Yahoo message boards this morning. "He is as nutty as he sounds. He is no genius, we just think he is!"

To the surprise of absolutely no one, the Fed announced that its benchmark interest rate would rise by a quarter-point, bringing it to 6 percent from 4.75 percent nine months ago. Attention focused on whether the announcement itself would contain any clues as to how many more increases might be in store for us. But one could easily ask: So what? If Greenspan is still the all-knowing oracle, then isn't his every pronouncement ultimately good news for all? And if it's good news for all, why was yesterday's Nasdaq sell-off partly attributed to anticipation of Greenspan's announcement? What's to explain the emergence of anti-Greenspan sentiment?

Interpreting Greenspan has become an absurdly mainstream phenomenon, and lately a lot of attention has swirled around figuring out whether the world's most famous Ayn Rand fan thinks the market is overvalued and is now trying to steal the punchbowl from this party we've all settled into. Whether or not Clinton Fatigue is real, it's clear that Greenspan Fatigue is upon us. It used to be an article of faith among people who didn't have the slightest idea what they were talking about that the market would crash if something happened to Alan Greenspan. (They said this about Robert Rubin, too, until he left Treasury, the market did not crash, and everyone promptly forgot about it.) But now Greenspan is starting to seem like a bit of a drag. Maybe he doesn't get the New Economy after all. Maybe we'd be better off with one of the Motley Fool guys running the Fed. The younger one.

But really, how omnipotent, much less omniscient, was Greenspan to begin with? Over the course of his tenure, the main thing has always been that Greenspan recognizes that in good times he should do nothing rash, and nothing rash is precisely what he has done. Sure, he's occasionally tried to jawbone the market down, but let's face it, he has failed: The Dow was at about 6,400 when he made the famous "irrational exuberance" speech. The Fed chairman could quote Marx in his next speech and it wouldn't have any affect on corporate profits or productivity. This market, it turns out, is what made Alan Greenspan, not the other way around. The Fed's actions are important, but the direction of the market is not determined by any single number, much less by any single person.

The frenzy that surrounds Greenspan's actions and the Fed's announcements is nothing more than a combination parlor game and trading opportunity, and the surrounding fluctuations have a lot less to do with the real effects of rate changes than with traders trying to outflank one another. And actually, even that game seems to be wearing thin in the age of Greenspan Fatigue. Maybe we'd all be better off watching General Hospital a little more often.

Photograph of Alan Greenspan on the Slate Table of Contents by Mike Theiler/Reuters.

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While I agree that the times have conferred a loftier status to the actions of the Fed Chair than would otherwise be the case, I would add that the recent shift in sentiment is a possible sign of denial. The Fed has made clear that rates will rise until aggregate demand growth is matched by aggregate supply growth. This is a precondition to long term economic growth. This can happen in two ways. IT productivity can increase aggregate supply, reducing inflationary pressures, or aggregate demand can slump in the face of higher rates. If the former then the stock market may yet prove its valuations. If the latter then we are in for a correction. Gradual rate hikes will eventually bring the economy into balance. This in turn will force the market into value-seeking mode, clearly a positive for longterm growth. Resistance to this re-balancing as evidenced by the shift in perceptions of the Fed Chair is perhaps a sign that we are far from value and would prefer not to be reminded, however gradually.

--Dave Lewis

(To reply, click here.)


I am a huge Greenspan fan, but for somewhat unusual reasons. I like that Greenspan is empirical and skeptical and does not claim to have all the answers. This contrasts with the attitude of many other central bankers and has helped keep the US car on the road. Greenspan knows that he doesn't know. My opinion has gapped down a notch in recent weeks though. I find his comments on productivity growth very off-putting. I am fully aware that demand can rise more quickly than supply if a trend recovery in measured productivity is extrapolated into higher equity prices. Been there done that. I am aware of the subtleties. But I still think it is extremely unhelpful and misleading for Greenspan to highlight productivity growth--or even the equity market itself--as the issue. Its the demand growth, stupid. There is no need for G to complicate the story, as he has.

--Game Warden

(To reply, click here.)

(3/22)

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