Global Agenda: Real power

To the business world, change of leadership at Federal Reserve Board is far more important than government change even at a middle-ranking nation.

By PINCHAS LANDAU
On February 1, the world entered a new era. True, many millions of words have been written and spoken over the last several months in anticipation of this event, but they were almost all in the economic, business and finance sections of the papers, sites or programs wherein they appeared or were uttered. So, for that matter, are these words - but that's just the point. To the business and financial worlds, the change of leadership at the Federal Reserve Board is far more important than a change of government and leadership in even a middle-ranking country, such as that in Canada discussed here last week. It is arguable whether, even for Canadians, their prime minister has more sway over their lives than the indirect influence of the head of America's central bank. Even for people in much more distant countries than Canada, few world leaders have more influence on their circumstances than the Chairman of the Fed. Even the big shots - the Bushes, Putins, etc. - do not have the same pervasive, everyday influence that the chairman has. And this doesn't relate solely to the outgoing chairman, Alan Greenspan, despite the commonly held view that he is the greatest central banker of our age (or ever, if that means anything). By way of illustration, go back to August 1982. Most of the civilized world was on vacation, but in Washington they had a problem - Mexico, then the biggest of the Latin American countries that had borrowed massively from American banks over the previous seven years, was about to default on its loans. The myth that sovereign states couldn't go bust was about to go down the same tube as the money poured into the corrupt Latino autocracies. The then Fed chairman was Paul Volcker, appointed in 1979 with the mission to get control of the double-digit inflation raging in the American and most other Western economies in the late seventies. Volcker ratcheted interest rates up to unprecedented levels - the prime rate peaked at over 20% in 1981 - and was in no hurry to let rates fall. Until August 1982, that is. Faced with the Mexican default, Volcker cut rates sharply, thereby pouring money into the American economy and staving off the threat of collapse facing the big banks. This abrupt policy switch and the money it released also triggered the great stock and bond market boom of the 1980s, ended the triple-dip recession of 1980-82 and turned around the entire world economy. Yet the media gave infinitely greater coverage to, say, the massacre in the Palestinian refugee camps of Sabra and Shatilla one month later, although that event and the entire Lebanon war affected only a small fraction of the number of people (starting with the entire population of Latin America) whose lives were dramatically influenced by the decisions of a guy in Washington whose name they never knew. In the case of Greenspan, whose tenure as chairman was twice as long as Volcker's, the examples are more numerous and no less dramatic. The most famous ones are his response to the stock market crash of 1987 ('Black Monday'); his handling of the Russian default and the LTCM meltdown in 1998; and the aftermath of the 9/11 attacks on New York and Washington. Often overlooked is Greenspan's policy of holding interest rates very low during 1991-1993, when the American financial system was absorbing the collapse of an entire sector (savings and loan banks). Had Greenspan not engineered the recapitalization of the big banks, Citigroup and others would not be with us today and the whole economic history of the US and the world over the last 15 years would read very differently. Despite all these acts of salvation performed on behalf of the toiling masses of humanity - and, at least in the case of the LTCM intervention, the fat cats of Wall Street -- Greenspan the Great has many critics. The main charge against him is that he is a serial inflater of financial bubbles, which he then fails to recognize in time and delays dealing with them until it's too late (1987 was the first example, 2000 the worst). But even his critics have to admit that he has somehow succeeded in juggling all the factors at work in the American and global economies, preventing some potential disasters and effectively dealing with those that have occurred, thereby earning the fulsome praise being heaped on him as he retires. If the US economy continues to confound the pessimists for the next two to three years and keeps growing, Greenspan's reputation will be intact. In the interim, the plaudits are conditional. The one certainty is that this is a hard act to follow. landaup@netivsion.net.il