Profile: Fed chief finds a tune to suit all occasions: Alan Greenspan - Larry Black on the former sax-player who rules over US interest rates

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The Independent Online
AMONG the world's economists, traders and politicians, there are two popular caricatures of Alan Greenspan, the US Federal Reserve Board chairman who has panicked markets around the world by reversing the trend in American interest rates.

One is that of novelist Ayn Rand, the hard-money, inflation- obsessed goldbug that members of the House Banking Committee accused last week of 'taking away the punch bowl before the guests had taken off their coats'. A life- long Republican, Mr Greenspan was in fact befriended by the wild- eyed 'extreme individualist' herself when he was a young economist, and was schooled in the 'virtues of selfishness' and other pre-Reaganomic conservative notions. (He is still fond of recalling Ms Rand's funeral in 1982, where he found his one-time guru laid out under a large dollar sign.)

The other caricature is of Mr Greenspan as a closet 'Friend Of Bill' - the Fed chairman who sat next to Hillary Clinton during her husband's first State of the Union message, and who lent his considerable credibility to the Democratic president's deficit-reduction tax plan. This is the 'overly accommodative' Federal Reserve chairman who brought US interest rates to 30-year lows and kept them there through President Clinton's first year in office.

Neither view is terribly useful in understanding the owlish central banker, aged 67, who has spent the past week trying to calm fears of higher rates. His Republican credentials remain impeccable, having served as an adviser to Richard Nixon, as chairman of Gerald Ford's Council of Economic Advisers - where he oversaw Mr Ford's disastrous 'Whip Inflation Now' campaign - and as a power broker at the 1980 party convention that nominated Ronald Reagan.

'Alan Greenspan has been a key player in more Republican presidential campaigns, platforms and administrations than any other economist in the country,' says Mr Reagan's domestic policy adviser, Martin Anderson. Greenspan's appointment in 1987 by Mr Reagan to succeed the fiercely independent Paul Volcker - who refused even to accept meetings in the White House - was thus highly controversial.

Yet it was Mr Greenspan who chose to keep money tight during the 1988 election - he raised the key discount rate on the eve of the Republican party convention that summer - and during most of George Bush's term in office, all the while playing tennis regularly both with his Treasury secretary, Nicholas Brady, and chief economic adviser, Michael Boskin.

It is the nature of the Federal Reserve System to be independent, ignoring political exhortations to stimulate the economy in the interest of stable prices, and Mr Greenspan's unpopular decision to raise the Federal Funds rates a quarter point on 4 February pales in comparison to the actions of previous Fed chairmen. Mr Volcker - to take the most recent example - pushed rates well into the double digits in the late 1970s in his single-minded war on inflation, only to reverse gears abruptly in the 1980s.

But unlike his predecessors - all larger-than-life autocrats in the mould of Mr Volcker and the late Arthur Burns - Mr Greenspan is a consummate technocrat: a number-cruncher, a consensus-builder, a 'calibrater', as he likes to describe himself. He revels in his access to confidential business information. 'He prefers his numbers raw in large dollops,' says one staff member. He also enjoys both his easy rapport with the Administration and his social prominence in Washington. (His companion is a Capitol Hill correspondent for the NBC television network, Andrea Mitchell.)

Mr Greenspan, a native of Manhattan's Washington Heights, then a middle-class neighbourhood, studied economics at New York University and established a consultancy, Townsend Greenspan, that went on to make him a millionaire. Its work for large corporate clients led him to be named a director of JP Morgan in 1977.

His reputation as a 'numeroholic', however, belies his first choice of careers, music. Reputedly an accomplished saxophone player - or at least a better one than Mr Clinton - he played be-bop professionally in the 1940s with the Henry Jerome band and attended the Julliard School.

'Mr Greenspan can be a speaker of unalleviated dullness,' says the veteran Fed watcher Nicholas von Hoffman. 'But it's worth remembering that this is a man who has performed in public since he was a kid.'

The American business community and public know Mr Greenspan largely through rather dry and occasionally sarcastic testimony before Congressional committees, such as his six monthly Humphrey-Hawkins Committee last week. Privately however, meetings of the Fed's decision- making body, the Federal Open Market Committee, have become considerably more deliberative and democratic since Mr Greenspan's arrival. 'It's now a more collegial group,' says Wayne Angell, who retired recently as one of the six Fed governors, 'rather than a schoolmarm lecturing third graders.'

In this regard, Mr Greenspan - who arrived at Fed's big Art Deco mausoleum near the Lincoln Memorial with no central banking experience - is the right man at the right time. The Federal Reserve in the 1990s is operating in a climate quite different from the past, and not only because inflation rates are low and real progress has finally been made in reducing Washington's budget deficit.

For one thing, the composition and unity of the Board changed dramatically during the Reagan years. Instead of rubber-stamping nominees put forward by Mr Volcker, the Treasury Secretary Donald Regan - who reputedly hated the Fed chairman - appointed independent governors who coincidentally favoured politically expedient low rates. Packing the FOMC this way angered the Board's regional representatives, the conservative presidents of the 12 member reserve banks who were traditionally docile committee members.

When Mr Greenspan took his post in 1987, he inherited a board split between inflation doves and hawks, many of the latter riled-up presidents - such as Robert Boykin of the Dallas Federal Reserve Bank, a life-time regulator who abhorred debt and refused to buy anything on credit. Mr Greenspan has had to walk a fine line between the two camps, persuading swing votes to cross the battle lines each time the committee needs to take action.

Incrementalism has thus been forced on Mr Greenspan as much as he has initiated it, a fact that has been reinforced by the recent changes in the Fed's long-standing tradition of secrecy.

Long known as the only leak- proof institution in Washington, the Fed has begun to operate with something approaching openness. Pressed both by critics in the US Congress - notably House Banking Committee chairman Henry Gonzalez - and by free-speaking governors such as Lawrence Lindsey, John LaWare and the recently retired Mr Angell, Mr Greenspan surprised the markets earlier this month by issuing statements both after an FOMC meeting and after the Fed Funds increase, explaining the shift in policy.

Representative Gonzalez, for one, congratulated the Fed for its 'newfound openness'. The markets however rewarded Mr Greenspan's candour with an immediate 100-point sell-off in the Dow Jones average, and have since pummelled longer-term bonds, boosting the yield on 30-year US Treasury notes to more than 6.72 per cent - the highest since July.

His subsequent efforts to calm inflation fears and talk down long- term rates also appear to have fallen on deaf ears; the widely predicted market 'correction' continued apace around the world last week, ignoring his explanation that the increase simply reflected a return to historically normal rates after 'having deliberately put through a significant degree of accommodation in the money markets'.

Mr Greenspan's current frustrations - and the Fed's hesitation that helped to cause Mr Bush's defeat in 1992 - obscure his wider successes, from managing the October 1987 stock market crash, to engineering a relatively 'soft landing' to the 1980s boom, to avoiding a serious bout of stagflation in the wake of the Gulf War. His quick action during the evening of 19 October 1987 - barely two months into his term - allowed America's banks and brokerages to reopen for business, despite trillions of dollars of paper losses.

'Monetary policy is around the clock, 24 hours a day, forever,' Mr Greenspan told a recent interviewer. 'You never reach the point where you shut up shop and break out the champagne. Nor should you.'

(Photograph omitted)

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