'If I've made myself too clear, you must have misunderstood me'

Profile: Alan Greenspan; He likes to confuse, but there's nothing unsure about the Fed chief's handling of the US economy, says Rupert Cornwell

There have been slips in the public career of Alan Greenspan, but not many. One, however, is immortal. It occurred in late 1974, when he was chairman of the Council of Economic Advisers under US President Gerald Ford, and was bemoaning the ills of inflation. Everyone was hurt by inflation, he told a government meeting, "but if you want to examine percentage-wise who was hurt most... it was Wall Street brokers". Well, maybe, in terms of income lost. But you don't win converts to the Republican Party with remarks like that. It was years before Greenspan lived it down.

But the lesson was well taken. Two decades on, Greenspan is at the zenith of his career, reappointed to a third term as chairman of the Federal Reserve, presiding over a robust American economy, the most influential - and among the most admired - of central bankers. He is praised for his judgement and acumen, but not least for the care he takes in what he says. Or rather what he does not say. Obfuscation is a central banker's tool. Greenspan has turned it into an art form.

"If I've made myself too clear, you must have misunderstood me," he once told a business audience. In set-piece appearances on Capitol Hill the man is a sphinx, dispenser of quite indecipherable economic verities. In boom or bust, that lugubrious expression never changes. Sentences about prospects for growth and interest rates ramble on. Clauses slide into clauses, hinting at everything - and their opposite.

Take the following day's headlines on his Congressional testimony of 7 June 1995. "Greenspan Sees Chance of Recession" said the New York Times. "Recession is unlikely, Greenspan concludes" insisted the Washington Post. But no. "Recession risk up, Greenspan says" was the verdict of the Baltimore Sun - only to be contradicted by the Wall Street Journal: "Fed Chairman doesn't see recession on the horizon". But for Alan Greenspan, it was a central banker's hole-in-one.

At this point the question must arise: why on earth do journalists, traders and bankers even attempt to read the unreadable runes? The one leak-proof institution is the Federal open market committee (FOMC), which meets every six weeks to set interest rates under Greenspan's chairmanship. A communique announces its decisions. A month or more later the public is vouchsafed a synopsis of proceedings - by which time events have moved on. But still the would-be codebreakers continue with mission impossible. The reason is the sheer influence he wields.

It is a cliche to describe Greenspan as the second most powerful man in Washington, after the President. More pertinent is how the Fed chairman has achieved that giddy height: not through the deliberate theft of authority from the executive and legislative branches, but by default. By consenting to decades of massive budget deficits, the White House and Congress have effectively forfeited fiscal policy as a tool of economic management. Which leaves the Fed and interest rates. Guido Carli, the former Governor of the Bank of Italy, likened steering the economy by monetary policy alone to driving a car with only the brake and the accelerator. Greenspan's achievement is to have made the ride uncannily smooth.

Since he took over at the helm of the Fed from Paul Volcker in August 1987, he has managed to limit the recession that by then was inevitable to a mere nine months - in 1990-91. Thereafter, the economy has grown without interruption and without high inflation. Today America's "misery index", the combination of inflation and unemployment rates, stands at 8 per cent, the lowest since Lyndon Johnson's days.

The political credit is Bill Clinton's, but as much is due to the central bank. Greenspan is also praised for his handling of the three dramas of his reign: the "Black Monday" crash of October 1987 when the stock market lost 20 per cent of its value; the debacle over savings and loans institutions - the US equivalent of building societies - that briefly threatened the banking system; and the financial near-collapse of Mexico in late 1994. Small wonder the President appointed him to a third four-year term this year. To have done otherwise might have rattled the markets, sent interest rates soaring - and Mr Clinton's election hopes tumbling.

The two men get along swimmingly. They are an unlikely pair: the extrovert baby-boomer Democrat, and the reserved 70-yesr-old Republican central banker. But from the outset the Fed chairman has been a regular visitor to the Oval Office. It was Greenspan who was allotted the seat of honour alongside Hillary Clinton as her husband delivered his first State of the Union speech in 1993. The symbolism was lost on no one.

There is another link. Like Clinton, Greenspan used to play the saxophone. He once studied music and at 20 even spent a year on the road with the Henry Jerome band before embracing the discipline of economics at New York University. Nor is the chairman an old fogey. He is a fixture on the Washington social scene, frequently to be spotted on the embassy and Georgetown party circuit with his companion Andrea Mitchell, a correspondent with NBC television news. He still plays a tricky game of tennis. By common consent he is a civil, decent, graceful man, with a nice sense of humour: "The Buck Starts Here" reads a sign in his office. The criticism, rather, is professional.

Inevitably, Greenspan has been attacked for secretiveness and lack of accountability; but what central bank can air its inner deliberations in newspaper columns or on the floor of Congress? More serious are complaints at the Fed's structure which concentrates power in the hands of the chairman and the "barons" who head the divisions of international finance, monetary affairs, and research.

Unusually, the tensions surfaced earlier this year when the gifted Princeton economics professor, Alan Blinder, resigned after a miserable 18 months as vice-chairman. One of the first things he noticed was "how quiet my office was, how few people came to see me". The Fed was run, he realised, not by its appointed board, but by the chairman and the barons. It was, Blinder concluded, a deeply conservative institution.

In America's intellectual debate over macro-economic policy, Greenspan is victim of his own success. He is neither Keynesian nor Friedmanite nor supply-sider; simply a moderate conservative who believes in reducing the role of government. As befits a baseball fan, he sets huge store by statistics. But if he has one lodestar, it is the need to erase the Federal budget deficit.

But in four years the deficit has fallen by half, helping keep down interest rates and inflation. Throughout the recovery the Fed's mantra has been that the target rate of sustainable growth is 2.5 per cent. But inflation has stayed low. In an age of rapidly increasing productivity and global competition, more economists argue that expansion of 3, even 3.5 per cent, is possible without stoking inflation. To make that point, the liberal Iowa senator, Tom Harkin, held up Greenspan's re-confirmation for weeks this spring, and the President raised no public objection. In an election year especially, the White House feels the Fed could relax a little.

And there have been a few hints that the central bank might be so inclined. Contrary to many expectations, the FOMC did not raise interest rates on 2 July, nor did Greenspan move even after news of June's sharp fall in unemployment and jump in hourly wages. And a Fed paper last week seemed to suggest that the bank might be less concerned with pre-emptive strikes against inflation. Of course, the Fed being the Fed, and Greenspan being Greenspan, you couldn't be sure. Such is the art of obfuscation. But Bill Clinton needn't worry too much. The Fed has already done him proud. If he loses the election, he won't have Alan Greenspan to blame.

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