Ex-Fed chief still has clout

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His million-copy memoir comes out in September, his speeches command more than $100,000 apiece and nearly every remark he makes gets scrutinized by investors across the globe, but some people wish Alan Greenspan would just shut up already.

In the 18 months since he left the Federal Reserve, Greenspan has taken to voicing his opinions with increasing frequency, stirring up the markets and making this 81-year-old rock star of the financial world an even tougher act to follow for his successor as Fed chairman, Ben Bernanke.

Yet the tide may be turning. Wall Street is warming to Bernanke’s quieter, steadier methods of communicating the Fed’s intentions, while Greenspan’s new role as a paid consultant for a bond fund underscores his retreat from the seat of power.

On Thursday, Bernanke’s Fed policy-makers stood pat on interest rates, neither tightening nor easing credit, keeping to the same unwavering course they have followed for the past year. Fed-watchers accustomed to Greenspan’s restless fine-tuning and rambling, ambiguous commentary were taken aback when Bernanke resisted the pressure to tinker with monetary policy as economic growth slowed months ago.

Now the U.S. economy is growing again, and Bernanke’s restraint looks smart. “He was right,” says Chris Lundergan, a Chicago Board of Trade member and veteran independent trader. “He has established his credibility.”

The upshot has been a rise in long-term rates, which help the Fed by dampening inflation. But they also tend to drag down home sales, undermine the stability of hedge funds and raise borrowing costs for anybody with a variable-rate mortgage or credit-card balance.

Still, Bernanke appears content to stay the course, says Michael Lewis of the Free Market Inc. economic consultancy in Chicago. “Bernanke is a patient, on-the-sideline guy who would prefer to do nothing rather than screw stuff up. (He) has surprised the market by his willingness not to look at every little wiggle in the economy.”

Even as Bernanke wins converts, Greenspan’s comments still gets star billing. While Bernanke delivered 13 major speeches so far this year, and testified four times before Congress, according to the Fed’s Web site, Greenspan upstaged his successor repeatedly. When he pegged the odds of a U.S. recession at one-in-three, for instance, or predicted high-flying Chinese stocks would crash, investors took notice.

Last month, without referring to Greenspan by name, Bank of England Governor Mervyn King suggested that ex-central bankers should limit their public remarks, and expressed relief that his predecessor in the United Kingdom has taken a lower profile: “I’ll say only that I am very grateful to Eddie George that he has not been in the newspapers or on the radio all the time commenting on what the committee is doing.”

Greenspan has said that his real impact is exaggerated. “There is a general view out there that I have more influence than I know I have,” he reportedly told a New York audience earlier this month. “I get accused of market changes, really because I was standing next to the market when something else happens.”

In March, Greenspan explained that he felt freer to talk once more than a year had passed since his January 2006 departure from the Fed. At first, he told Bloomberg News, “I was aware of the problem that if I stayed public, I could make it difficult for Ben.”

But then Greenspan started talking within a week of giving up his job, causing a stir in financial markets when he made upbeat comments about the economy at several private events for investment pros. Bernanke had barely taken his ceremonial oath of office.

Given that his memoir “The Age of Turbulence” arrives in bookstores Sept. 17, with a reported $8.5 million advance from Penguin Press at stake, no one should expect Greenspan to shun publicity any time soon.

And truth be told, although Greenspan is known for his conduct of policy rather than his forecasting skills, the appetite for his musings remains unsated.

“People will listen to him, because he knows how all the parts fit together and how the products interact,” explains Todd Colvin, a vice president at Man Financial in Chicago.

Considering the prevalence of complex trading strategies that involve betting on more than one nation’s economy at a time, he says, “Information is power in this market.”

That demand for information gives Greenspan a compelling incentive to speak out, and the ex-Fed chairman is said to be putting in long hours at his Washington economic consultancy. Greenspan Associates recently added PIMCO, a huge money manager specializing in fixed income, as a client.

Also making it tough for Bernanke to move out from under Greenspan’s shadow is the relative calm that has settled over the markets, with the world’s major economies growing at a respectable clip. In contrast, Greenspan became Fed chairman just months before the crash of 1987, then faced a painful recession three years later.

“Living through a crisis and helping the world calm down adds to your credibility,” says Brian Wesbury, chief economist at First Trust Advisors in Lisle. “A crisis can be your best friend if you handle it correctly. Bernanke so far hasn’t had to deal with anything like that.”

The Fed’s inaction should not be mistaken for an unwillingness to act if necessary, adds Anil Kashyap, professor at the University of Chicago’s Graduate School of Business. “I don’t think the fact that Bernanke is not whipsawing the market around is a sign of underperformance.”

Coming to the chairmanship after a long career as an Ivy League professor, Bernanke is less inclined to seek the limelight, particularly on topics outside the Fed’s formal purview, Kashyap says.

In addition, Bernanke got scolded early in his tenure for making private remarks to a TV news correspondent, which riled financial markets when they were reported. He later told the Senate Banking Committee he’d be more careful in the future.

Greenspan, a public-policy veteran before becoming Fed chairman, displayed no such reluctance to speak out, particularly on political debates. “A lot of times, Greenspan made headlines with tax cuts, health care, unemployment policies that were not the Fed’s mandate,” Kashyap notes.

Bernanke’s narrower focus is likely to continue as the economy cruises along with little or no intervention needed, says Wesbury. Neither sub-prime mortgage defaults nor rising energy prices nor the housing-bubble deflation will provoke a widespread crisis, he predicts.

“There isn’t going to be one for a long time. We are in a boom period,” Wesbury says. “The Fed’s job is to keep the value of money stable. It’s going to be a really boring job.”

If Bernanke’s quieter approach fits the times, a good illustration could come Thursday, when the Fed Open-Market Committee wraps up its policy-setting debate with an end-of-meeting statement. If, as expected, the Fed keeps its key benchmark rate at 5.25 percent, where is has stood for a year, market pros still will search the statement for clues: Will inflation remain what the Fed calls its “predominant” policy concern? And will the FOMC retain its term for inflation risk: “Elevated”?

If policymakers decide the risk of higher prices indeed remains “elevated,” then traders could take it as a sign the Fed is targeting a lower rate of inflation than previously understood. That would mean keeping the money supply tight, which in turn pressures corporate profits and economic growth, a negative for the stock market.

If the word “elevated” gets dropped, however, suggesting inflation is in check for now, traders may take it as a positive signal.

That narrow focus reveals one of the differences between current and former Fed chairmen, says Keith Hembre, chief economist at FAF Advisors Inc. in Minnesota. “With Greenspan, you never really knew if there was going to be a zig here or a zag there.”

Bernanke, on the other hand, relies more on data than instinct, Hembre says. “Instead of parsing through three paragraphs, it comes down to the inclusion or deletion of one particular word. He is a man of many fewer words.”



(c) 2007, Chicago Tribune.

Visit the Chicago Tribune on the Internet at http://www.chicagotribune.com/

Distributed by McClatchy-Tribune Information Services.

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ARCHIVE PHOTOS on MCT Direct (from MCT Photo Service, 202-383-6099): Greenspan, Bernanke

ARCHIVE CARICATURE on MCT Direct (from MCT Faces in the News Library, 202-383-6064): Greenspan, Bernanke

AP-NY-07-02-07 0608EDT

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