How Much Does Alan Greenspan Matter? Al Gore Wonders. This Year, All Plunges Are Political
Alan Greenspan may be one of the few people in America who spent a satisfied weekend after the big selloff. In recent months the Federal Reserve chairman has been playing a game of chicken with the markets--especially the once defiant Nasdaq. Greenspan repeatedly warned of feverish stock overvaluation, an on-and-off worry since his famous warning against "irrational exuberance" back in 1996. To cool the economy down he had raised interest rates five times since June 1999. But while the older industries of the Dow got hurt, the soaring tech sector seemed to defy the laws of economic gravity. And the much-lionized Fed chief seemed like a man who couldn't move markets anymore. "Alan Greenspan," sniffed a New York Times columnist on March 16, "is no longer taken as seriously on Wall Street."
For the moment, Big Al may have regained some oomph on the Street. But with the air going out of the tech-stock bubble, many market observers wonder whether he will be able to contain the selloff if it persists. The danger now, key players fear, is a runaway "wealth effect in reverse." In other words, the same people who were feeling rich thanks to the market boom--and who fueled a record-long economic expansion--may suddenly swear off that new DVD and laptop. In moderation, this impulse to save could cool down the economy just the right amount; in excess, it could lead to recession. Many eyes are on the May and June meetings of the Federal Open Market Committee. If stocks stay down, the Fed is unlikely to do more than another quarter-percent rate hike, and the Fed chief may signal the long period of rises is over.
But given Greenspan's dubious record of reining in exuberance--at least until now--why feel confident that he can contain pessimism either? His isn't the only big Washington rep on the line. For Bill Clinton and Al Gore, a market slide could jeopardize what seemed an unbeatable economy--the centerpiece of both the president's legacy and the veep's election chances. It was Clinton who recently preened over the nation's record expansion, saying, "I have a lot of sympathy with [the GOP]. I mean, it's hard for them to figure out what to run on."
If the economy takes a hit, George W. …