Which brings us to last week’s surprising rate cut, which set off huge cheers in the two main hotbeds of Greenspan mania: Wall Street and Washington. A cut that, in my humble opinion, was widely misunderstood in both places, because people thought there had to be something more than the Fed’s explanation about wanting to bolster the economy. The unwise conventional wisdom in Wall Street and Washington–that Greenspan was riding to the rescue of the stock market and that he’s engaged in an economic turf war with the incoming Bushies–is part of the “all about me” syndrome that afflicts both places. And an example of how celebrity worship of Greenspan foolishly attributes omniscience and omnipotence to the man. As Greenspan would surely tell us if we hit his local saloon and poured a few drinks into him, he’s a mechanic, not a maestro. And he has to know it’s absurd to think that the limited financial tools at his disposal can let him (or anyone) fine-tune a $10 trillion, complex economy.
In hindsight, it’s clear that the U.S. economy started heading south in November, with employment growth faltering and consumer confidence starting to fall off a cliff, and Greenspan missed it. As luck would have it, that’s when Bob Woodward’s best-selling and laudatory “Maestro: Greenspan’s Fed and the American Boom” was published. An example of the perils of celebrity. Or, as economists would say, a contrary indicator.
The depth of the cut is a tacit admission that Greenspan, who’d raised rates six times, decided he’d kept rates too high for too long. The head Fed, a statistics junkie who immerses himself in numbers and often works the phones to get data and reactions from chief executives and the occasional regular human being, had been disturbed by rises in new claims for unemployment insurance, one of his favorite stats. What prompted the sudden and dramatic cut? A disastrous December fall in another of his pet indicators, the National Association of Purchasing Management index. It’s an important indicator of future manufacturing activity. The NAPM December figures came out Wednesday morning–and within an hour, Greenspan convened an unusual emergency telephonic Fed meeting to get authority to cut rates.
I’m going to risk an excursion into arcana so you can understand the blunt instruments with which Greenspan has to work. And why, unlike Michael Jordan in a close game, he can’t just call for the ball and slam-dunk a winner at the buzzer. Consider Greenspan’s most important tool: the federal funds rate, which is what banks charge each other for short-term loans to raise money to post the reserves the Fed requires from them. Many short-term rates are tied to the Fed funds rate. It falls, they fall, and in a few weeks or months, you pay less interest on credit cards or consumer loans.
Market mavens know that the Fed frequently cuts or raises rates after the market has done so, rather than leading it. And the Fed funds rate has little or no effect on long-term rates, which are more important than short rates. The Fed, which has bank regulatory power, has huge, albeit informal, influence in the financial system. For example, I’m sure it’s jawboning banks to keep troubled California utilities afloat. The Fed orchestrated the private-market bailout of a giant, insolvent hedge fund, Long Term Capital Management, in 1998 because it feared that an outright collapse would destabilize the world’s financial system. But the Fed’s tools force it to operate like a coach sending plays to a quarterback with homing pigeons instead of a radio. Which is why it’s silly to attribute all good things in the economy to the Fed or to blame it for everything that goes wrong.
Which brings us back to Washington and Wall Street. Washington first. In Washington, everything these days tends to be viewed as being related to the incipient Bush regime. As we say in clicheland, to a man with a hammer, every problem looks like a nail. Since no one can read Greenspan’s mind, this isn’t something that can be proved or disproved. But when you consider the hastiness of the cut– and the fact that it’s much quicker and easier for the Fed to stimulate the economy with rate cuts than it is for Congress to spend months to institute tax cuts–I think it’s clear Greenspan was trying to jump-start the economy. You don’t have emergency Fed meetings to play political games. “Greenspan isn’t that Machiavellian,” says David Jones of Aubrey G. Lanston & Co., a leading Fed watcher. “He’s clearly acting to stimulate the economy, not to pre-empt the tax cut that Bush is proposing.”
Given the economy’s sudden swoon, it wouldn’t surprise me if Greenspan comes out one of these days in support of a plan to stimulate the economy by adopting a tax cut targeted at lower- and middle-income people, rather than Bush’s campaign proposal for a massive across-the-board cut and phasing out the estate tax and the so-called marriage penalty. I’m assuming, of course, that someone proposes such a targeted cut. Greenspan supports such things, sometimes. He doesn’t initiate them.
Then, there’s Wall Street. Its first, unwise reaction–that Sheriff Greenspan was riding shotgun on the stock market and protecting it by cutting rates–had faded by Friday. Most of Wednesday’s monster gains were wiped out the following two days. Where the market goes from here is anyone’s guess. But lots of problems remain. Among them: the fear, undoubtedly justified, that some big banks are awash in bad loans. Many stocks are still highly valued by historical standards, and corporate profits will obviously be less than exuberant. Cutting rates is better for the market than not cutting rates. But it’s not a magic cure.
Just remember two things. First, that even though Greenspan has a good record, no one wins them all. And second, he’s paid to protect the economy, and to prevent economy-disrupting financial shocks. But when it comes to the value of your stock portfolio, he’s not even in the game.
