Greenspan's utterances will move to stage

By Ashby M. Foote III
Special to The Clarion-Ledger

Tuesday marked the last hurrah for a mythic Beltway figure. If there is one attribute that citizens of Washington, D.C., admire and aspire to, it is the art of the politic. Outgoing Federal Reserve Chairman Alan Greenspan is the current grand master.

He was appointed by four different presidents of both parties to the position of chairman of the Federal Reserve. He served an 18-year stretch that saw him become a global figure able to move markets with a turn of a phrase.

As his stature grew, Greenspan adroitly extended his influence into numerous areas outside the monetary policy arena. In time, he became the go-to guy for politicians wanting to buttress their case on tax, budget, trade and other issues.

Fellow Beltway icon Bob Woodward penned a book on him titled Maestro: Greenspan's Fed and the American Boom. As fate would have it the release of Woodward's book in 2000 marked the top of the stock market boom and the zenith of Greenspan's cult status as economic miracle man.

MARKETS REFLECT POLICIES

To fully appreciate the deft and dexterous nature of Greenspan's journey, one must first realize that economic and financial calamities are not random bolts out of the blue but rather manifestations of underlying problems. Long-term performance of the markets is a reflection of government policies - fiscal, monetary, trade and regulatory. Get those policies right and prosperity and wealth creation will follow. Mess them up and mayhem will ensue.

Since gold is history's oldest form of money and the gold standard performed the monetary policy function for most of U.S. history, it can be a useful barometer in judging the effectiveness of today's monetary authority - the Federal Reserve. By that metric Greenspan's first nine years was an unqualified success.

From August 1987 through December 1996, gold traded between $326 and $492, closing at $369 down 24 percent for the nine-year period. As gold dropped, so did inflation and interest rates. The economy prospered, national income rose by 64 percent and the stock market increased by a healthy 138 percent. That's amazing when you consider that period included the stock market crash of 1987, the savings and loan crisis and bailout and the first Gulf War.

MONEY POLICY REDIRECTED

In early 1997, Greenspan steered monetary policy on to a different track. Technology stocks were the primary momentum for a two-year bull market.

With his platform as the world's most trusted and famous central banker, Greenspan gave speeches in December '96 and February '97 warning of "irrational exuberance" and the "wealth effect." While intuitively attractive, the premise that rising stock prices could cause inflation was new theory unsupported by historical data.

The policy moves that resulted sent the world's trading system as well as its financial markets on a roller-coaster ride from which we are just now recovering.

Ben Bernanke, Ph.D., once tenured professor and chair of the Princeton Economics Department, now takes the helm as chairman of the Federal Reserve. In his confirmation hearing, he indicated little interest in commenting on policy matters outside the monetary field. This will surely diminish the chairman's visibility on the national stage and that is probably good. Alan Greenspan goes on to the speaker circuit, where he will turn phrases into mountains of greenbacks.

Ashby M. Foote III is president of Vector Money Management in Jackson. His e-mail address is: ashby@vectormm.com.