On the Spot: A Jittery Stock Market Tries to Figure out Where Fed Chairman Alan Greenspan Really Stands
Hirsh, Michael, Newsweek
A jittery stock market tries to figure out where Fed chairman Alan Greenspan really stands
ALAN GREENSPAN DOES HIS BEST thinking in the tub at 5:30 a.m.-- a time when, the Federal Reserve chairman has told friends, his "IQ is about 20 points higher." Engrossed, his thick eyeglasses steaming, Greenspan pores over reams of data each day. It was during such a water-soaked reverie in the last few months that, like Archimedes of old, the world's most influential economist may have had his "eureka" moment. There was no escaping the facts, no other way to explain the central conundrum of the U.S. economy: why inflation isn't picking up and profit margins aren't shrinking this late in the business cycle. Something was wrong-and it probably had to be the government's own productivity
numbers. They were low. Far too low. After a two-decade wait, America was finally getting a return on its investment in new technology; thanks to computers, voice mail and other automation, workers were cranking out more and more per hour, swelling profits without inflating prices. That in turn meant full speed ahead for the economy in the foreseeable future, and few worries about inflation.
That, at least, is the way many on an increasingly edgy Wall Street would like to imagine Greenspan's daily ruminations in the tub. The chairman himself has never made clear exactly how serious a believer in the "New Economy" he really is. Nonetheless, evidence is growing that he has come closer than ever to shaking off his nagging worry that the long-running economic recovery and even longer-running bull market are a bubble ripe for the bursting. But the faith of any true believer in the New Economy was sorely tested last week First, the government's own figures continued to belie the idea that the economy has entered a golden age. Data released on Tuesday showed that productivity grew at a tepid-and typical-seven tenths of a percent over the last 12 months. Those figures helped accelerate a market slide that, by the weekend, left the Dow down 565 points, or 7 percent, from its record high of 8,259 on Aug. 6. Last Friday's 247-point plunge had many wondering whether the long-awaited bear market was finally at hand. But many Fed-watchers still think Greenspan is ready to run at least part of the way with the bulls who believe that the business cycle has been tamed.
If so, he maybe risking his glittering reputation. As he observed his 10th anniversary as Fed chairman on Aug. 11, the 71-year-old Greenspan could bask in the kind of success that few of Washington's big players enjoy any longer. He and his predecessor Patti Volcker have all but ended a nearly 40-year-long era of inflation. "If he retired right now he would be the greatest Fed chairman in history," says economist Bruce Steinberg of Merrill Lynch. Greenspan may be the only truly mythic figure left in Washington. At his recent Humphrey-Hawkins testimony, Rep. Michael Castle, chair of the House subcommittee, compared the chairman to a Roman general at a triumph, and the committee to the servant holding a laurel wreath above his head and whispering in his ear, "Remember, you are only human. …