Will There Be Life After Greenspan?
If you blinked you missed it, but for a short while yesterday morning the
stock and bond markets dived after a rumor that Alan Greenspan was resigning
hit the Street. The story was quickly ... well, it wasn't exactly refuted,
since Greenspan didn't say actually say "I'm not resigning," but it was
rejected as unlikely, and both markets rebounded nicely.
Fleeting as it was, the momentary episode of selling panic was interesting
for a couple of reasons. In the first place, the rumor had all the makings of a
story that was being floated by someone who had taken a large short position
(in other words, who was wagering that the market was going down) and was
trying to knock the market down after it opened strongly. There's something
weirdly old-fashioned about the idea that a big Wall Street insider could say
"Pssst! Hey, buddy, I hear Al's on his way out!" and send stocks tumbling. It
fits our ideas of the 1920s, when the market was incredibly manipulable, or
even of the 1980s more than it does the late 1990s.
But the truth is that in the short run, markets can occasionally be pushed,
especially when so many decisions to buy or sell are keyed off what everyone
else in the market is doing. Chain reactions are not much harder to start (in
fact, given how quickly price moves get noticed, they may be easier) than they
were 70 years ago.
All that notwithstanding, the interesting thing about the Greenspan
resignation rumor was that it raised an obvious question: Would it really
matter? As Jacob Weisberg just pointed out in "
Ballot Box," Steve Forbes is apparently the only American who doesn't think
Greenspan has done a terrific job as Fed chairman. And most of us would be
happy to have Greenspan stay in office even after his current term expires in
the middle of next year. But it's interesting to note that in the past couple
of months there have been more than a few voices--including those of economists
Greg Mankiw and Robert Barr--suggesting that Greenspan has been more the
beneficiary of good economic fundamentals than the creator of them.
That position may be a bit overstated, particularly since Greenspan has
shown an unusual ability to let his thinking on inflation, productivity, and
the economy's possible growth rate evolve in response to changing data. But the
essential point, that the soundness of this economy does not depend on
Greenspan's presence at the head of the Fed, is right. That might not be the
case if Greenspan's successor were either an inflation dove like William
Greider or a perma-bear like Jim Grant. But whoever would succeed Greenspan
would be nothing of the sort. He or she would be, in a word, Greenspanian,
still concerned about the possibility of an overheating economy but also
convinced that important technological changes have allowed this economy to
grow faster than in the past without sparking inflation.
If anything, in fact, the bond market should have rallied on news that
Greenspan might be stepping down, since he has long since stopped being
paranoid enough for bondholders, who seem perpetually convinced that the United
States is about to become Brazil. There are certainly Fed governors out there
who would be far more likely to raise interest rates aggressively at the first
hint of price pressures than Greenspan.
The momentary sell-off, though, was not driven by any rational consideration
of what Greenspan's departure might mean. Instead, everyone assumes that
Greenspan's resignation will knock down the market, so Greenspan's
resignation--or rumors of it--knocks down the market. But this is not the
summer of 1998 or the fall of 1997. We don't need Greenspan to reassure us that
the world isn't going to fall apart anymore. When he leaves, the market will
hiccup. But it would be surprising if it did more than that.
