The cult of Greenspan

Despite growing criticism, media-driven faith in the Fed chairman remains pervasive. This time, though, he just may be out of miracles

by Dan Kennedy

A FEW NOTES on Federal Reserve Board chairman Alan Greenspan -- central banker extraordinaire, media icon, and the world's most unlikely pop-culture hero:

* In the R-rated webzine Nerve, Maggie Cutler (a/k/a Kitty Lyons) fantasized last year about having sex with Chairman Al. Early in the, uh, mating process he tells her seductively, "Past successes are not to be taken as a guarantee of future performance." Following a passionate tryst comes a letdown. "As my post-orgasmic bubble bursts," Cutler wrote, "I suddenly remember: most of his money is in blue chips and cash! ... That bet-hedging faker."

* Last July, the Motley Fool, the original go-go service for online investors, published the "Top Five Signs You're Falling in Love with Alan Greenspan." Number one: "You fire a baseball at your television every time you see that hussy Andrea Mitchell." For the uninitiated, NBC reporter Mitchell married Greenspan several years ago.

* Three years ago, the New Republic reported that employees of a Wall Street bond-trading company had built a Greenspan shrine with photos, quotations, and a chair the great man had once sat in. It turned out that this tale was one of the elaborate fabrications of soon-to-be-exposed staff writer Stephen Glass. When the article first appeared, though, such devotion seemed so natural that no one even questioned it.

Fans have created Web sites in Greenspan's honor. Imus refers to him as "Crazy Al." The New Yorker has told us that he reads briefing papers while sitting in the tub for an hour or two every morning. NPR has reported that more people have heard of Greenspan than the lead singer for the boy group 'N Sync. The Samuel Adams beer company claims it has conducted a poll showing that, even after the recent stock-market woes, beer drinkers would rather "toast" than "roast" Greenspan by 50 percent to 30 percent.

Not bad for an elderly, gnomish Ayn Rand disciple who speaks in indecipherable code and whose main job is to preside over a board of financial wonks who diddle with interest rates.

But these days Greenspan the Infallible is showing signs that he may be merely human after all.

Consider, for example, that during the presidential primaries last year, John McCain declared that not only would he reappoint Greenspan, but "if Mr. Greenspan should happen to die, God forbid, I would do like [they] did in the movie Weekend at Bernie's. I'd prop him up and put a pair of dark glasses on him and keep him as long as we could." The media not only laughed, they applauded, taking McCain's quip as a sign of his good sense, even if they were not necessarily endorsing his taste in political imagery.

Now, with the stock market in the toilet, some critics are measuring Greenspan for a pine box. In his syndicated column last week, Fox News Channel talk-show host Bill O'Reilly whacked Greenspan for having the temerity to chow down at New York's pricey Le Cirque in the midst of market turmoil. "While millions of Americans are watching in horror as their mutual funds wither, Greenspan is living large. Let 'em eat cake," sneered O'Reilly.

And boneheads like O'Reilly aren't the only ones going after Greenspan. New York Times columnist Paul Krugman, a Princeton University economist formerly of MIT, has written so harshly of Greenspan's leisurely approach to cutting interest rates that New York magazine media critic Michael Wolff calls him "the guy who took down Greenspan" -- "a big, ballsy move," Wolff writes, that brought "lots of clucking" within the Times.

The clucking has only just begun. In January 2000, the Dow Jones Industrial Average nearly hit 12,000. Last Thursday, it hovered around 9100 before recovering a bit at the end of the day. Even worse has been the performance of the technology-laden NASDAQ, the home of day traders, dot-coms, and dreams -- until recently -- of unimaginable riches. Last March, it nudged above 5000; last Thursday, it briefly dipped below 1800. As analysts have noted repeatedly, some $4 trillion in stock-market wealth has disappeared since the market reached its height a year ago. And the restive media are looking for someone to blame.

There's more than a little absurdity to this. As the legendary Harvard economist John Kenneth Galbraith observed on the New York Times op-ed page several weeks ago, Greenspan's ability to move the market up or down is greatly exaggerated by the media and the public. Galbraith offered Greenspan some faint praise, citing his "extraordinary theatrical talent," and wrote, "To rely on the [Federal] Reserve as a remedy for an emerging recession is optimism carried to the point of foolishness."

Galbraith's realism notwithstanding, most commentators are still hoping for another Greenspan miracle, with his critics being cast as opportunists. Take Dan Wasserman's cartoon in this past Saturday's Boston Globe, which features a Republican elephant and a Democratic donkey sharing some beers and some laughs at a bar. Elephant: "It turns out this whole mess is Alan Greenspan's fault." Donkey: "I'll tell ya, he is the handiest little guy." And, as New York Times stock-market columnist Gretchen Morgenson wrote of Greenspan on Sunday, "most Americans still view him as the man who can save markets with a wave of his baton."

But the fact that Greenspan is being criticized at all is a considerable departure from the recent past.

LIKE BILL Gates, that other poster boy of New Economy prosperity, Greenspan became the object of cult-like worship during the 1990s.

Bob Woodward, in his Greenspan biography Maestro (Simon & Schuster, 2000), summarized it like this: "With Greenspan, we find comfort. He helps breathe life into the vision of America as strong, the best, invincible. The fascination with Greenspan has become one of the ways in which the country expresses confidence in itself and in its future." (Later, in an interview with Salon, Woodward allowed that "maybe the paperback version of my book will have to be entitled Maestro Emeritus or Former Maestro.")

What makes Greenspan's cuddly image hard to fathom is that the secretive, unaccountable power he wields is precisely the sort of thing that has long enraged the more populist elements of American society. Andrew Jackson was elected president in large part because he vowed to abolish the Bank of the United States, a promise he made good on; we have not had a national bank since. William Jennings Bryan based his own futile but eloquent run for president by telling dirt farmers everywhere that they would not be sacrificed on a "cross of gold" -- an archaic-sounding pledge that amounted to a promise of readily available low-interest loans, Wall Street financial interests be damned.

The Federal Reserve, established in 1913 to control interest rates and, it was hoped, stabilize the economy, had -- until the 1990s -- been attacked by presidents and conspiracy theorists alike. As has been memorably observed, the Fed's role is to take away the punch bowl just as the party gets going -- in other words, to ratchet up interest rates, and thus slow the economy, in order to prevent inflation.

It was Greenspan's good fortune to preside over the Fed at a time when the media were promoting the notion that anyone could get rich through the stock market -- and just enough people were actually doing so that the image did not seem all that far off from the reality. Enticed by Web sites such as the Motley Fool and TheStreet.com, and continually fed up-to-the-second news by CNBC, millions of average Americans plunged into the market during the 1990s. Today it's estimated that more than half of all households own stock -- an unprecedented democratizing of what had always been a plaything of the plutocracy.

And yes, Greenspan's accomplishments are real and impressive. Shortly after he became Fed chairman in 1987, the stock market plunged more than 20 percent. Greenspan's smooth management, which included jawboning large financial institutions to make sure the money supply kept flowing, made the crash little more than a slightly unpleasant memory. He strongly supported the Clinton administration's successful bailout of Mexico in 1995, and he swiftly lowered interest rates to minimize the effects of the "Asian contagion" of 1997.

More than anything, though, Greenspan is best known for letting the economy -- and the stock-market bubble -- grow of their own accord. After Bill Clinton signaled that he was serious about deficit reduction by raising taxes and controlling spending, Greenspan took a largely hands-off approach to the economy's rapid expansion. Among central bankers such as Greenspan, it's almost holy writ that rapid growth leads to inflation; yet Greenspan and his board kept interest rates low, bringing unemployment down to levels not seen in several decades, even as inflation remained in check. He expressed occasional consternation about a stock-market bubble that seemed based more on feverish speculation than on real value (in 1996, when he worried aloud that investors might be showing "irrational exuberance," the Dow was only at 6000). For the most part, though, his motto was Laissez les bon temps rouler. And "irrational exuberance" became the title of a hot-selling jeremiad by Yale economist Robert Shiller that was published by Princeton University Press last year.

It is the aftermath of that policy that now threatens Greenspan, not to mention the rest of us. Starting about a year ago, he and the Fed board began raising interest rates -- even though there were no signs of inflation -- because the stock-market bubble had reached absurd proportions. He never said that talking down the stock market was his aim, but most analysts concluded that he was seeking to bring about a gentle fall in prices and thus avoid a crash. It didn't work. Last spring, numerous dot-com companies, many of which had no hope of ever making a profit, started crashing and burning. Companies such as Pets.com, DrKoop.com, and eToys.com went out of business. Mighty Amazon.com, the very symbol of dot-com investing, saw its stock price drop from more than $100 a share to (as of the past week) about $10.

In an effort to stem the carnage, he's cut interest rates three times since the beginning of this year. Still, his critics say, he isn't moving quickly or boldly enough. Last week, when he cut interest rates by a half-point instead of the hoped-for three-quarters of a point, the market went into a tailspin. Paul Krugman and other critics charge that Greenspan has to do much more, and he needs to do it now. In a March 12 Wall Street Journal column, Greenspan's former Fed colleague Wayne Angell, now a private economist, wrote, "It seems to me that backing away from rapid and forceful easings poses significant and unnecessary risks to a V-shaped recovery later this year." (That's econ-speak for "Holy shit, Batman! We're going down the tubes!")

Yet, as the Boston Globe's Kimberly Blanton reported on March 20, Greenspan's dilemma is that the stock market is in much worse shape than the real economy, which is slowing down but is still characterized by low inflation, low unemployment, and even rising consumer confidence. The last thing Greenspan wants to do is overstimulate the economy and risk re-inflating the stock-market bubble.

Given Greenspan's sphinx-like silence, one can only speculate; but it could be that he sees his position as similar to that of his predecessor, Paul Volcker. In the late 1970s and early '80s, Volcker put the clamps on the money supply so tightly that interest rates shot into the high teens, even the low 20s. Volcker's actions caused the most serious recession since the Great Depression of the 1930s. But by breaking the back of inflation once and for all, Volcker set the stage for nearly 20 years of prosperity. Similarly, Greenspan, by refusing to cut interest rates as quickly as his critics would like, may have set a goal of bringing stock prices in line with their true value, even if there's some short-term suffering in the process.

The criticism that's being directed at Greenspan now may seem like something new; but even at the height of his popularity, there were some naysayers. Greenspan has long been criticized for writing a letter of recommendation on behalf of savings-and-loan criminal Charles Keating, whose corrupt practices ended up costing taxpayers $2 billion. (Greenspan later said he was "embarrassed" that he had been unaware of what Keating was up to.) In 1998 Greenspan helped engineer the bailout of the hedge fund Long-Term Capital Management, which may well have averted a crisis but which was also conducted on terms that were highly advantageous to a few inside players. That prompted a furious piece by self-made Wall Street millionaire Michael Thomas for the New York Observer in which he referred to Greenspan as the "butt-boy of Wall Street" and added, colorfully if semi-coherently, that the affair "raises the question whether, at some future date, Mr. Greenspan will, like Robert McNamara, come clean with a mea culpa, or will he, like Henry Kissinger, be so transfixed by the success of his dissemblances and deceptions in this world as to assume that he will get away with them in the next?" (Greenspan also comes off looking none too good in a book on the Long-Term affair, Roger Lowenstein's When Genius Failed, [Random House, 2000].)

On a more macro scale, William Greider -- the man who exposed the cynicism behind Reaganomics in the Atlantic Monthly a generation ago -- has been banging loudly on the warning bell for quite some time. In a piece for the Nation nearly a year and a half ago, Greider criticized Greenspan for lowering the amount of cash that banks have to hold in reserve and for refusing to raise margin requirements on individual investors -- steps that could have brought the runaway stock market under control. "The giddy adoration of Alan Greenspan has come to resemble the stock market bubble itself and, when one phenomenon comes to its end, so will the other," Greider wrote.

As the stock market's recent problems show, the voices of those naysayers are sure to grow. Greenspan made a rare public-relations misstep shortly after George W. Bush became the president-elect by joining with Bush in endorsing a large tax cut. As a New Republic Notebook item observed, Greenspan opened himself up to accusations that he was relying on his authority in one arena (monetary policy) to make it look as if he had equal authority in another (tax policy). "It's the Federal Reserve chairman's job to react to short-term fluctuations in economic growth and inflation. It's not his job to decide the size and shape of government," lectured TNR.

The demystification of Greenspan has also unleashed right-wing conspiracy theorists, who were fairly quiet when Mr. Chairman could do no wrong. The ultraconservative Web site WorldNetDaily.com is hyping a story in its print edition that begins: "Congress passed the Federal Reserve Act on the 22nd of December 1913, and from that day forward the United States of America ceased to be a Republic."

Black helicopters at 12 o'clock!

ALAN GREENSPAN reportedly has long been troubled by an economic idea known as "moral hazard" -- the notion that if some people get bailed out after making risky investment decisions, others will be encouraged to make similarly risky decisions on the assumption that they, too, will be held harmless if anything goes wrong. Greenspan was reportedly uncomfortable with the intervention in Mexico on just those grounds, although in the end he agreed with the Clinton administration that there was no good alternative.

In a very real sense, Greenspan may be dealing with a similar moral-hazard situation right now. Millions of Americans who've watched their investments tank may be waiting for Greenspan to ride to the rescue, as he has in the past, and cut interest rates enough to goose their flagging portfolios. So hey, let's buy some more Amazon.com while it's still a bargain. "I think he is a danger to himself, in that excessive public confidence in the Fed can itself be a source of problems," economist Milton Friedman told Fortune magazine recently.

But though faith in Greenspan may be wavering, it flickers still. In a front-page story in the Wall Street Journal on Monday, the irrationally exuberant Goldman Sachs analyst Abby Joseph Cohen offered a little ditty based on Ernest Lawrence Thayer's "Casey at the Bat": "They saw his face grow stern and bold, they saw his intellect strain/And they knew that Alan wouldn't let the economy go low again."

Cohen had better hope that Greenspan does better for investors than Casey did for the Mudville Nine.

Oh! somewhere in this favored land the sun is shining bright;
The band is playing somewhere, and somewhere hearts are light.
And somewhere men are laughing, and somewhere children shout;
But there is no joy in Mudville -- mighty Casey has Struck Out.

Dan Kennedy can be reached at dkennedy[a]phx.com.