Widely blamed for the problems now afflicting the US economy, Alan Greenspan, the Chairman of the US Federal Reserve has very few options available to him. No matter what he does, he seems to receive a ton of criticism. But has his critics ever considered the possibility that they might be hurting the US economy much more than Greenspan ever could?
Daily, someone new jumps of the "bash-the-Fed" parade. From the two-bit stock market player to the traditional brokerage powerhouses, Greenspan’s inbox has probably never seen more hate mail. Described as a "dot-com sucker" by some, "rudderless" by others it probably matters little when those who are saying it have the very little individual impact on the way the market acts. But when a big name like Merrill Lynch & Co. says that the Fed is "behind the curve", the reverberations that go through the market can hardly be ignored.
Market psychology
It’s bad enough that the economy of the US seems irrevocably pegged on the how the stock market performs, it’s worse when one realizes the stock market if often very little more than a reflection of investor confidence. And this is where Greenspan’s critics are causing the most damage: when they speak, people listen. Then, they react – when they hear good things, they buy, the stock market shoots up and hooray for everyone. When they hear bad things like "the financial markets no longer trust him (Greenspan)", according to the Fox News Channel, they begin to sell, and everyone loses. When they lose, they blame Greenspan. The illogicality of the criticism is simply staggering.
Who decides what is "behind the curve"? Who decides whether "trust" exists for the Fed or not? Do these people who make these damning reports actually go out and talk to…..who? The "market"? What is the "market" but a collection of individuals – do they talk to everyone? Unlikely.
More likely than not, market analysts and reporters talk get their information from those who are in "the know"; experts in number crunching and analysis of the results. Through the use of charts, graphs and tables, it’s not difficult to show the downward spiral of the stock market. Seemingly convincing evidence that something is wrong.
Lies, damn lies, and statistics
But consider the herd psychology of the stock market – I sell because you’re selling. And you’re selling, because everyone else is. And why is everyone selling? Because the numbers look bad. Complete the circle. Why do the numbers look bad? Because everyone is selling. With this vicious cycle, is it any wonder that the latest charts look like the re-entry trajectory of the MIR space station?
Back to the Fed
Greenspan is in no way responsible to ensure that players in the stock market receive a 40% return on their portfolio investments. He is there to ensure a growth pattern that is gradual and consistent enough that will keep inflation under control. All his decisions so far have been in line with that job description. Besides, if he had done more, it would be unlikely that it would have made a difference.
Let’s assume for a moment that interest rates were below the current 5.0% mark. Would this encourage companies to expand their investments? Unlikely. The problem is that most of these companies have already invested heavily in new technology and equipment – a reduction of the rates would not necessarily lead to another round of spending. Put this together with the fact that high levels of consumer debt and huge trade deficits already exist, and it isn’t hard to realize that the US is staring at a long downturn even if the Fed had been more liberal in its interest rates cuts.
Introspection needed
Alan Greenspan’s critics should look within themselves if they’re looking for answers to the current economic problems the US is facing. Greenspan has done a good job for 14 years – it is highly unlikely that he became the devil overnight. With enough self thought, they may then realize that the key to resolving the nation’s woes may very well lie in their own hands and not in the leather seat of the Federal Reserve’s chairman.
Appearing in www.renungan.com 4 April 2001
