Fame and the Fed

As Alan Greenspan has become a media fixture, he's learned to use the media as a tool of economic policy.

Searching for clues into the future of Federal Reserve policy? Look no further than People magazine.

Seriously.

Two years ago, People, that rapturous recital of consumer culture, featured Alan Greenspan as one of the year's most "Intriguing People." "A cross between oracle and king," People opined in its wonderfully breathless way, "he doesn't just drop hints about the future. He has the power to make it happen."

Such populist praise actually means something. There has been a tangible effect of the celebrity enveloping Greenspan, the subject of two new biographies, magazine profiles and CNBC's "Greenspan Briefcase Indicator," which tries to determine Fed action by the thickness of his briefcase as he strides into rate-setting meetings.

During the past few years, as Greenspan has become the embodiment of the public's burgeoning interest in the financial markets, the Federal Reserve has attempted to wield the power that celebrity confers.

Last week's dramatic action, an emergency hack at interest rates, was proof. [See story, page 48.] Not too long ago, the Federal Reserve existed within the quiet confines of bankers, limited to moving interest rates by controlling the federal funds and discount rates. The Fed didn't even announce these moves when they happened. Even when it started to let word out, the moves garnered parenthetical attention outside the financial markets.

In the last few years, the Fed has also added a new weapon to its quiver -- the immediate announcement of its "bias" after all meetings of Greenspan's Federal Reserve Open Market Committee. Even when there were no changes in rates, the Fed would roll out its bias announcement in an attempt to move the markets. And in this new era of rabid Fed watchers, even its non-moves were played to great effect.

But now the Federal Reserve has gone mainstream. So last week, it cited a broader mandate. It's no longer just the economy, stupid. Greenspan wanted to shock the world -- and did. Ignoring his typical baby steps, Greenspan held a hastily arranged conference call with Fed members. The resulting decision to cut rates cited "lower consumer confidence" and "tight conditions in some segments of financial markets."

In other words, Greenspan's intent was to goose the markets and inspire consumers. That's a far cry from fundamental economic change.

Greenspan's Fed, clearly, has left its comfortable culture of numbers and now embraces that larger culture of spin. And that has some market players worried.

"The economy is now suffering from a period of obvious over-investment," says Tom McManus, chief equity strategist at Banc of America Securities. "The Fed is going out of its way to bail out the new economy. All those investors who played fast and loose with their money are getting bailed out by the Fed, and that's not good for the health of the financial markets."

There is a historical economic argument called the "moral hazard." Essentially, it says that some habits or morals increase the likelihood of a loss, and should. Bad investments shouldn't pay off. The fear is that the Fed, by focusing on the failures of a speculative market rather than a sole focus on the underlying economy, is encouraging such moral hazard.

"The moral hazard is that the Fed bails out Mexico, then Long Term Capital Management and now the new economy," says McManus. "By playing fast and loose with Fed policy, they're eliminating the risk of speculation. What's the old Flip Wilson Line? 'The looser the lips, the sinker the ships.'"

One hopes the new economy doesn't go the way of another People favorite: Titanic.

Cory Johnson (cjohnson@thestandard.com) also writes a stock-market column each Wednesday for The Standord.com.

COPYRIGHT 2001 Standard Media International
COPYRIGHT 2001 Gale Group