Alan Greenspan: The buck starts here

'I know you believe you understand what you think I said, but I am not sure you realise that what you heard is not what I meant.' There, in a sentence, is what makes a wilfully dull, obfuscating 77-year-old the second most powerful man in the world. That, and a long, hot bath every morning...

His lugubrious features resemble those of an upmarket undertaker. He makes a point in his public utterances of being as dull and unfathomable as possible, and his idea of an agreeable evening includes watching pre-season games involving baseball's dismal Baltimore Orioles. And yet, this seemingly unassuming person is arguably the second most powerful man in the world.

Last week, after a delicate "you first, no you first" minuet, President Bush in effect offered, and Alan Greenspan accepted, another term as chairman of the Federal Reserve, America's central bank. Both parties couched their words in the obligatory conditionals. But few doubt Greenspan will now be reappointed next year and serve out what remains of his tenure, which expires in January 2006, when he will be almost 80 years old.

Central bankers usually do not become cult figures, but Greenspan is the exception. His power is hard to exaggerate, given the Fed's control of US short-term interest rates, which set the trend for financial markets, and thus indirectly national economies, around the world. But since he succeeded Paul Volcker as Fed chairman in 1987, his stewardship of a US economy worth ten trillion dollars has acquired an almost mythical aura, and Greenspan himself has become the stuff of legend.

Let us start with the ritual of the bath. Greenspan has long suffered from a painful back. But he found that a long, hot bath early each morning helped not only his vertebrae but also his brains. His IQ, he is fond of saying, is 20 points higher at six in the morning than at six in the evening. Much important work therefore is done in the bathtub – and yes, things do get wet. As his wife, Andrea Mitchell, a prominent TV journalist, has admitted, "I'm amazed that his staff are able to read his chicken scratches, with one word bleeding into the next."

Which leads to another Greenspan legend, that of a speaking style so convoluted as to be almost incomprehensible. He started seeing Mitchell in 1984, but did not propose until Christmas Day 1996. The story goes that he had to do it twice because his bride-to-be did not understand what he was saying the first time. If so, she is in good company.

Obfuscation is part of every central banker's trade. But Greenspan's influence is such that his every utterance, however trivial, is minutely parsed by investors, analysts and traders across the globe. To keep his audiences guessing, he has raised impenetrability into an art form. "I know you believe you understand what you think I said," he memorably chided one overeager Congressman at a Capitol Hill hearing, "but I am not sure you realise that what you heard is not what I meant." Which of course only adds to the aura of infallibility.

Greenspan, as might be expected, has been involved with money and numbers most of his life. His father was a stockbroker. At high school, mathematics was his favourite subject. The young Greenspan was also a talented musician and joined a swing band as a clarinet and saxophone player. Inevitably, though, he was the one who kept the accounts and handled everyone's tax returns.

After graduating in economics, and then taking a master's degree in the same discipline, he co-founded Townsend-Greenspan, a Wall Street financial consultancy. The move to Washington came in 1974, when Richard Nixon appointed him to chair the President's Council of Economic Advisers. When Nixon resigned, Gerald Ford kept him on, before the Republicans lost power and Greenspan returned to Wall Street.

Though it seems inconceivable now, there was considerable surprise when Ronald Reagan picked Greenspan to succeed the much-venerated inflation hawk Volcker in 1987. The newcomer's swift and decisive handling of Black Monday, when the market plunged 20 per cent in just one day, on 19 October that year, banished most doubts. His laconic assurance that all necessary liquidity would be made available prevented a panic, and possibly a repeat of the 1929 crash.

At least until lately, no central banker has had a safer pair of hands. The Mexican bailout of 1995, the clever handling of the Asian financial crisis of 1997, the 1998 rescue of the derivatives trader Long Term Capital Management, and the avoid- ance of a Y2K financial crisis – all were ascribed in large part to the deft touch of the inscrutable Alan Greenspan. For the first time in decades, meanwhile, America was enjoying a virtuous cycle of falling budget deficits, declining interest rates, solid growth and soaring productivity. Truly, the man could do no wrong.

And Greenspan did nothing to discourage that impression. No one disputes his formidable technical abilities, his knowledge of (and passion for) the most intricate and arcane economic data. He usually spends a couple of hours a day doing his own research in his large and airy office in the Federal Reserve building overlooking Constitution Avenue, and as much time or more devouring reports compiled both by his own Fed staff and by outsiders. But his political savvy is equally remarkable.

His 16 years at the Fed have been divided between Republican and Democratic presidents. Greenspan is a Republican, but arguably his most productive relationship was with Bill Clinton. Earlier this year, and with uncustomary bluntness, he conveyed his unease at the return to budget deficits under this President Bush.

Some predicted he would not be offered a fifth term, starting in 2004. Instead he received the invitation 12 months in advance. Greenspan, clearly, is not a man you ditch in election year – especially when the economy is in trouble. As the economist William Seidman, a Greenspan friend dating back to Ford administration days, put it, "He has the best bedside manner I've ever seen. He's very non-confrontational, but also very good at persuading people."

But has Greenspan outstayed his welcome? In retrospect, he should have quit in 2000, when the economy was booming and Wall Street defying gravity, and he would have been remembered as one of the greatest Fed chairmen in history. Today, cracks are appearing in the listed national monument that is Alan Greenspan.

It is undeniable that he did too little to prevent the boom turning into an almighty bust. Yes, he did issue his celebrated admonition in 1996 against "irrational exuberance" by financial markets – and the wisest central banker cannot prevent a speculative bubble if the markets are determined to create one. But the truth of Greenspan's reign is that he's always talked tougher than he acted. His financial policies have been expansionary, perhaps overtrusting of the ability of rising productivity to solve every problem. Somewhere along the way, he forgot the old maxim about the central banker's duty to take away the punch bowl just as the party gets going.

These next three years will determine Greenspan's place in history. If markets stabilise, and the US economy stages a vigorous recovery, his 1990s gamble on growth will have been justified. If not, the myth will have to be rewritten – and the curse of the Bushes may be revisited.

Some Republican loyalists still blame Greenspan for raising interest rates and thus provoking the recession they say cost the elder Bush the presidency in 1992. The fear of the son's advisers today is exactly the opposite: that by not keeping rates higher under Clinton, Greenspan created the boom which was inevitably followed by the shakeout that could yet cost the 43rd president his job in 2004.

But Bush has chosen to follow the advice of John McCain, his rival for the Republican nomination three years ago. God forbid it should happen, McCain said, but if Greenspan died, he would try to keep him on as chairman, propped up at his desk in sunglasses. Some reputations, even the grave cannot dim.