Wall Street gave Alan Greenspan, coiner of the expression "irrational exuberance," a present yesterday: a 360-point drop in the Dow Jones industrial average.
Was it a response to his renomination a few hours earlier for a four-year term as chairman of the Federal Reserve? Pundits who track the market's movements said no, the market likes Greenspan. The causes were general jitters and fear that inflation might take a whack out of profits.
The man himself, as usual, had no comment.
The timing of the market drop seemed apt for the odd twin identities that Greenspan has assumed in the late 1990s. Confident if often impenetrable, he is praised widely as chief architect of the country's abiding good times. At the same time, he has been a voice of concern about one of the boom's most dramatic effects, the soaring stock market, using the now-famous "exuberance" phrase to describe the state of mind of investors.
At 73, he shows no sign of tiring of the job. Running the Federal Reserve, he joked in a White House appearance with President Clinton yesterday, is like "eating peanuts." Once you've tasted the thrill of having the $9 trillion-a-year economy as a lab to test your theories about how interest rates affect the general well-being, it's hard to stop.
The news brought praise from Wall Street and many other quarters. "People have a lot of trust in him," said Alan Day, an economist and portfolio manager at Stratevest Group, an investment company in Burlington, Vt.
Philip Tasho, chairman of Riggs Investment Management Corp. in Washington, had similar views. "When I look at what the financial markets have done during his tenure, how can I complain? He was able to squeeze inflation out of our system, create a slow and steady economy. He guided us back from the crash in 1987, maneuvering the country toward great financial health."
Tasho remembers, but many people have forgotten that Greenspan's name was not always associated with prosperity and flawless performance. Just two months after he took over in August 1987, the Dow suffered a one-day drop of 23 percent, terrifying investors the world over. That crisis proved short-lived, but three years later the United States slipped into recession, to which many economists say Greenspan was slow to respond.
As chairman of the country's central bank, Greenspan is the closest thing the economy has to a general manager. He sits down eight times a year behind closed doors with fellow Fed officials to make a call on where interest rates should be. Lowering them can pump up economic activity by making it easier for businesses to get credit. Raising them causes companies to retrench, to put off building new plants or giving raises to their employees.
The Fed manipulates interest rates mainly by controlling the size of the money supply. By selling government securities, it takes in cash, thus taking it out of circulation. With less money on hand, banks begin charging each other more for loans, and that ripples out to affect every other form of credit, including credit-card rates, mortgages and the availability of capital.
Though other factors deeply influence the economy--the price of imported oil, set by the OPEC cartel, say, or the size of the federal budget--the interest rate tool that Greenspan and his colleagues wield is arguably the most important and certainly the most routinely and scientifically applied.
Greenspan himself was a study in contrasts well before the current boom. He is a Republican who works well with Democrats. A socialite who spins witty stories at Georgetown dinner parties, he almost never gives on-the-record interviews. Possessed of a finely tuned mind that can sift reams of economic data (the bathtub is a favored spot for that job), his public statements come in a code that has even the most devoted of his admirers scratching their heads.
The Greenspan mind, said Alan Blinder, a former Fed vice chairman, is highly analytical and "a bit like a Cuisinart--he throws a lot of things in there, stirs them up, and out comes something." Blinder reconsiders the analogy, noting that you can at least see the food being mixed in a Cuisinart, but Greenspan's process is invisible.
A jazz musician in his youth, Greenspan established himself as an economic consultant in the 1950s. He linked up with Richard Nixon's presidential campaign and was named chairman of the White House's Council of Economic Advisers in 1974. In 1987, President Ronald Reagan nominated him to head the Federal Reserve.
Most economists praise his response to the "Black Monday" stock-market crash of Oct. 19 that year. The Fed talked financial institutions into continuing business as usual, even though no one was sure who was solvent and who wasn't, avoiding gridlock that would have heightened the crisis. He also pumped cash into the economy to reassure everyone that it was readily available.
Perhaps the most controversial part of his career was his belated response to the only recession to occur on his watch, the one triggered in 1990 by Iraq's invasion of Kuwait and the resulting high oil prices.
"He was still talking about the growing economy, the inflation risk, at a time when at least in retrospect it was clear the economy was already in recession," said C. Fred Bergsten, director of the Institute for International Economics and 30-year-plus acquaintance of Greenspan's. Noting that it's easy now to see that a recession was on, he praised Greenspan and the decision to renominate him.
As that recession was defeated, in part through interest-rate cuts, and the smooth sailing of the mid-'90s took hold, the debate turned more to traditional complaints about Fed policy. Democrats for years have said that just when economic growth is gaining momentum and lowering the unemployment rate for ordinary Americans, the Fed steps in with higher interest rates that cool the growth and edge joblessness back up.
The gain, Fed officials say, is the taming of inflation, a force that robs every American by making paychecks and pensions worth less and ultimately destabilizes the economy.
What criticism there was yesterday of Greenspan's renomination came from people who say he remains a prisoner of that thinking. "He's been consistently wrong about how fast our economy can grow and how fast unemployment can drop," said Sen. Byron L. Dorgan (D-N.D.). ". . . He continues to search in closets and under beds for inflation." Dorgan contends that interest rates have been consistently higher under Greenspan than under his predecessors.
But other people see him as the first Fed chairman to break free of that approach. As unemployment dropped below 6 percent, said Bergsten, "most Feds in the past probably would have started to slam on the brakes." Greenspan's approach was: "We'll experiment--it's dropped to 5.2, so let's sit a bit and see how it works out."
Today the economy he oversees has unemployment of around 4 percent, inflation of 2 percent and growth of 4 percent, a trio of statistics that by traditional economics can't coexist. The low unemployment should bid up wages, creating inflation. No one knows quite how to explain it, but most theories center on productivity created by information technology.
Clinton joked yesterday that Greenspan himself was part of that phenomenon. He praised him as one of the few economists who recognized the power of the new technology to boost growth. "I've been thinking of taking Alan.com public," he said. "Then we can pay the [national] debt off."
Alan Greenspan was renominated as Federal Reserve chairman yesterday, amid a very healthy period for the U.S. economy. Here are highlights of his tenure:
Aug. 1987: Greenspan becomes Fed chairman
Oct. 1987: Dow industrials fall a record 508 points.
July 1991: President Bush, reportedly upset about the Fed's 1988-89 interest-rate hikes, renominates Greenspan -- but after a delay.
July 1997: Thailand devalues the baht after a long sell-off of its currency.
Sept. 1998: The Federal Reserve Bank of New York backs a $3.5 billion rescue package for Long-Term Capital Management, near collapse after its Russia investments go sour.
Year-end 1999: Inflation and unemployment rates stay very low, while the economy continues to grow.