The man with his finger on the trigger
City & business
Sunday 20 September 1998
So far, if you were Mr Greenspan, you would have to concede that you have led a charmed life. Now, however, you would also have to concede that there is a chance your lifetime of success is about to turn to ashes.
A bookish lad growing up in Brooklyn in the 1940s - not a looker, as the ladies in his neighbourhood might have said - Mr Greenspan has followed a career trajectory similar to that of his slightly older kindred spirit, Henry Kissinger. Both men rose from modest backgrounds to great heights on the strength of the intellects that set them apart from the tough kids on New York City's streets.
Both emerged blushing into the spotlight as celebrities after the bloom of youth had passed. Both belatedly developed an almost touching taste for the high life, squiring beautiful women, their pix appearing on pages devoted to tittle-tattle as well as the news.
Mr Kissinger tied himself to the millstone of Richard Nixon. Mr Greenspan has remained resolutely independent. The head of the US central bank is, indeed, the Frank Sinatra of central banking. He has always done it his way.
Look at his early career. He rose to prominence via the unpromising route of running a private economic consultancy. Nor did Mr Greenspan's life in the public eye begin well. Appointed Federal Reserve Bank chairman by Ronald Reagan in July 1987, he was initially regarded as a pipsqueak. Sceptics wondered if he had the ballast to fill the shoes of his giant - literally and metaphorically - predecessor.
Running the Fed from 1979 to 1987, Paul Volcker tamed inflation. He became world famous as a result. He developed a towering persona. To this day, Mr Volcker is the man with the cigar in the off-the-rack suit, speaking sardonically, not suffering fools gladly.
After Mr Greenspan's arrival in Washington it got worse. Before he had time to settle, October 1987 brought a hurricane to southern England and a crash to the world's stock markets. So unprepared were central bankers that when they saw the red numbers on their Reuters screens - the former German Bundesbank chairman, Karl Otto Poehl, once recalled - they thought their screens had gone on the blink.
In response to the October 1987 stock market crash, Mr Greenspan and the world's other central bankers opened the spigots. The stock market righted itself. But damage was done to the business cycle. By 1990, the world teetered on the brink of recession. "Short and shallow," predicted the pundits. Long and deep, it turned out to be.
But this adversity only set the stage for Mr Greenspan's eventual triumph. The growth the US and Western Europe has enjoyed since 1992 is modest by historical standards. But the bull run accompanying it has been extraordinary. From 1995 to 1997, the Dow rose 86 per cent. The rise in the Footsie was not quite as spectacular, but it did create a wave of PEP millionaires.
The markets regard Mr Greenspan as one of the authors, if not the author, of this great bull run. His stature today is greater than that of Mr Volcker at the height of his fame. With bad news suddenly piling in from everywhere and people talking about a replay of the Great Depression of the 1930s, therefore, much of the world is asking: "What does the great man do now?"
The news that Mr Greenspan must neutralise is terrible, even if it is now well known. The Asian tigers remain basket cases. Zhu Rongji has vowed that China will not devalue its currency this year. But analysts are beginning to wonder what China will do next year. Japan is in deep recession, although visitors returning from Tokyo are quick to remind Westerners that the country is still rich.
Brazil has emerged as the battle front in the Group of Seven's war to stop the contagion of rotting financial markets jumping from Asia and Russia to Latin America. Investors will watch this week to see if Washington bails out Brazil in a manner that restores a semblance of confidence to emerging markets.
Not many are optimistic. "We're clearly in trouble," David Hale, chief economist at Zurich Kemper Investments, said on Thursday after the markets slipped another big notch downward. "On the current trendline, 60 per cent of the world will be in recession next year. It's gone so far now, it's probably impossible to stop."
Hovering like a bad dream in the background to the market news is Mr Clinton's fight to save his presidency. The stupidity of Clinton's affair with Monica Lewinsky is matched only by the stupidity of his Republican opponents trying to use the Starr report for partisan political gain in the November mid-term Congressional elections.
The markets rose on Monday on hopes that a Group of Seven meeting in London and a Clinton speech in New York would demonstrate that our elected leaders might finally be getting their act together in the face of the economic crisis. The markets rose again on Tuesday on hopes that the G7, nudged by Clinton, were moving toward a co-ordinated cut in interest rates.
But on Wednesday, Mr Greenspan doused these hopes. Speaking to a Congressional committee taking testimony from a wide range of market luminaries including George Soros, Mr Greenspan made it clear that the US central bank was unlikely to cut US interest rates immediately. He added for good measure that the Fed was not discussing a co-ordinated cut in interest rates with other central banks.
On Thursday, the FT-SE 100 index was down 3 per cent, taking the London stock market almost exactly to its starting point in January. On Friday it was down another 1.5 per cent. The Dow was off significantly on Thursday, too. Brazil closed down 7.6 per cent, emphasising that the high-low swings in Sao Paolo in recent weeks have approached a staggering 40 per cent. "Volatility like that is new," said Mohamed El-Erian, Salomon Brothers Smith Barney's head of emerging markets in London.
The bad financial news is now seeping into the real economy - both here and abroad. The fusillade of news about UK job losses last week sent a chill down the spines of even the best-cushioned. On Thursday, the International Monetary Fund's managing director, Michel Camdessus, said the IMF was cutting its forecast for world growth from 3.1 per cent to 2 per cent, the worst figure since the 1980-81 recession that set the stage for the propagation of the Reagan-Thatcher let-the-markets-rip doctrine.
Why did Mr Greenspan pour cold water on the market's hopes? He said the US economy did not need a cut in interest rates. In reality, however, he was probably playing for time.
Mr Greenspan knows he has only one bullet in his revolver - one chance to use an interest rate cut to reverse negative market sentiment. He knows his coming interest rate cut will be the defining moment of his career - as his American brethren say.
He is, no doubt, saving his interest rate cut for an even darker hour than the present one. He is, no doubt, praying that reinforcements will arrive, although what they might be is hard to imagine. A piece of unexpected good news, perhaps. Hard evidence that Wim Duisenberg will take an easier line on European monetary policy than Hans Tietmeyer has at the Bundesbank, Europe's dominant central bank up to now.
He cannot wait very much longer. The pressure mounts daily. The Fed's open market committee, which officially reviews US interest rates, next meets on 29 September. "Everyone in the markets is focused on that meeting," said a Warburg Dillon Read international economist, Paul Donovan. "Everyone in the world wants to know when Mr Greenspan is going to pull the reflation trigger."
If Mr Greenspan pulls the trigger and his interest rate cut puts a floor under the panic now seeping out from the highest citadels of the world economy, he will be a hero. If he pulls it and nothing happens, then what? Ashes for his reputation and a lot worse, perhaps, for the rest of us.
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