Does the market ever go up on a day when Alan Greenspan talks? I can’t remember when it ever has.
On July 18, 2001, the markets gapped lower on the opening. They tried to recover in the first hour, but as soon as the prepared text of Greenspan’s testimony before the House Financial Services Committee was posted on the web, the recovery was doomed. The markets drifted lower for the rest of the day.
Intel’s incomprehensible conference call Tuesday (July 17) night set the tone. By the time the opening bell rang, half the Street had upgraded Chipzilla and the other half had downgraded it — both based on what they think they heard in the very same call. The reality distortion field was extended by Greenspan’s droning testimony — but what really iced it was the Q-and-A session with the best legislators money can buy. When it was all over, the markets were convinced that nobody really knows what’s going on here. The problem isn’t that we have no visibility, as we’re so fond of complaining — it’s that we, and our elected (and appointed) leaders, are blind.
The good news — no, the great news — in Greenspan’s testimony was his adamant assurances that inflation is not a risk.
But the bad news — no, the horrible news — is that, even though inflation may be blessedly sidelined as a constraining issue, neither Greenspan nor anyone else in yesterday’s daytime docudrama has any idea what to do to help the economy get back on a growth track. Well, except to cut interest rates, of course. But that little lever is hardly what Archimedes asked for when he promised to move the world. It hasn’t helped in depression-racked Japan, where interest rates have been at zero for the last four years.
Just think for a moment about how weak a lever the fed funds rate really is. The FOMC announces a funds rate target, and then the NY Fed’s Open Market Desk buys and sells Treasury securities to make the target stick. If member banks want to borrow a ton of reserves, then they’ll bid above the target rate — the Desk will buy securities to bring the rate back down, and fresh money is thus injected into the system. If member banks want only to lend reserves, they’ll offer them below the target, and the Desk will have to sell securities to bring the rate back up to the target, and thus liquidity is withdrawn from the system.
So whatever goal the Fed wants to achieve — a certain inflation rate, a certain unemployment rate, a certain stock market level…whatever — they have to guess the fed funds rate target that will, first, drive buying or selling by the Open Market Desk — and, second, result (as a consequence of that buying or selling) in achieving the goal.
That’s it. That’s all they can do. It’s like trying to launch the space shuttle, orbit the earth, build a space station, and land the shuttle — all by controlling one little joystick. No, it’s not even that good. It’s like manipulating a feather on a long pole, designed to tickle a monkey in such a way that the monkey will control the little joystick.
The Congressmen who listened to Greenspan’s testimony have no interest in what it takes to restructure the administration of monetary policy to achieve growth. Their encounters with the Master of the Universe are simply photo ops. Yes, the Q-and-A session got off to a great start when Committee Chairman Michael Oxly (Republican, Ohio) asked Greenspan if he was concerned about the “33% rise in value of the U.S. dollar over the last five years.” But Greenspan just blew him off, and after that the Congresscreatures just lined up to be seen on national television advocating feelgood fallacies like a raise in the minimum wage.
Oddly, it is Greenspan’s super-hawk nemesis on the Board of Governors, Laurence Meyer, who is talking about alternate monetary policy tools. In a speech at the University of California at San Diego Economics Roundtable on Tuesday, Meyer talked about targeting inflation, not interest rates. It was one hell of a speech, too — 8,534 words… can you imagine having to listen to that?
It’s interesting that Meyer snuck into his speech a little hint that Alan Greenspan might not be around forever. Among the virtues of the more objective and explicit regime of inflation-targeting, as opposed to rate-targeting, Meyer asserts that “The Federal Reserve has been fortunate to have strong leadership for many years under both Paul Volcker and Alan Greenspan. A more fully articulated mandate could help ensure that policy remains well focused and disciplined as the leadership of the Fed changes.” Trust me — a Fed governor doesn’t say something like that in public casually.
Does Meyer know something that we don’t about Greenspan’s longevity as the Master of the Universe? Who can say… but when I let myself think along these lines, I can tell myself that Greenspan’s performance yesterday had a slightly different quality to it than we have been forced to get used to — perhaps a quality of someone who doesn’t plan on having to play that role very much longer. For example, when Maxine Waters (Democrat, California) asked Greenspan point blank whether he would favor total elimination of the minimum wage, Greenspan admitted that he indeed would. Greenspan’s normal style would be to sidestep a question like that nine ways from Sunday. But yesterday he was acting like a man who wasn’t quite as concerned as usual with taking politically difficult positions — more like a man with nothing to lose.
So maybe one of the things that spooked the markets so much yesterday is that Alan Greenspan is signaling the end of the Greenspan era. Hey, you heard it here first!
Personally, I’d love to be rid of him — but then, one has to wonder what kind of even worse chairman would replace him. Laurence Meyer? Holy dog! Call my real estate broker and buy that cave in Kentucky!
The views expressed within represent those of the author, and do not necessarily reflect those of Capitalism Magazine’s publishers.
