Rational Exuberance

Global Finance, May 2004 by Keeler, Dan

It is too early to say definitively, but it looks as though the US Federal Reserve chairman, Alan Greenspan, is regaining his form. On two consecutive days last month he was caught squarely in the spotlight as he offered his views on the state of the US economy, first to the Senate Banking Committee and then to the Joint Economic Committee of Congress. After he spoke on the first day, stocks on Wall Street plunged, largely because Greenspan reiterated his oblique warning that US interest rates would be rising sometime soon because the threat of deflation had receded (see Newsmakers, page 6.) During his testimony on the second day, US blue chips gyrated wildly, presumably as traders rushed in or out of the market as they tried to gauge the overall tone of Greenspan's comments.

While most observers were focused on the Fed's interest rate strategy and its implications, they were missing, perhaps, a more important aspect of Greenspan's performance. Here was a central banker at the top of his game. Unusually eloquent and outspoken and peppering his comments with a remarkable amount of humor, Greenspan exuded confidence and conviction.

It makes a refreshing change. For the past four years he has been anything but confident and convincing, and his ability to move markets-or prevent them from moving too swiftly- seemed to have deserted him.

Of course, among his comments there was some of the usual Fed doublespeak. Greenspan sidestepped talk of impending inflation, instead trumpeting the welcome end to the threat of deflation. But he also talked frankly about the continuing problems of unemployment, pointing out that the number of Americans whose unemployment insurance had expired was heading for record levels.

This magazine has been hard on Greenspan in the recent past: His grades in our central banker's report cards in 2001, 2002 and 2003 were woeful in recognition of his contribution to the implosion of the Internet bubble and the crash-landing of the overheated US economy in 2000 and 2001. Now it looks like he may be engineering a gentle take-off for the US economy. If he pulls it off, he might be looking at a better grade this year.

Dan Keeler

dan@gfmag.com