Pipeline Books

Words that Move the World's Markets, THE GREENSPAN EFFECT
by David B. Sicilia

When I first decided to read this book, I must admit it was with not a little trepidation with quotes like "When Alan Greenspan talks, the markets listen". The one genre of book that I despise is flattering biography. Given the widespread credit that Alan Greenspan has received for "engineering" the longest peacetime growth period in United States history, I feared a sycophantic summary of his powers and prescience. Much to my delight, not only was this not the case with this book, I found that I actually gained a very important insight into both Alan Greenspan and the economic impact of his actions.

The beauty of this book is that it exposes Alan Greenspan's economic beliefs and relates them to his actions through an analysis of his public speeches and appearances. The importance of Greenspan's views to an investor and money manager cannot be underestimated. Through monetary policy, the Federal Reserve system has immense power over the financial system. Those investors who ignore this do so at their own peril. Going against the market maxim of "Don't fight the Fed" has wiped out many investors, both bullish and bearish. Control of the production and amount of money is a monopoly of the United States government which is the financial equivalent of its nuclear arsenal.

The fascinating thing about Alan Greenspan is his financial pragmatism. Economics is a very fashion conscious and trendy pursuit. Unfortunately, like all academic disciplines, it is a very political process of theoretical supposition. Keynesians explained the Great Depression, pointed the way out and came to dominate economics faculties around the world. Monetarists explained the stagflation of the 1970s and replaced the Keynesians. Since economists seem to have a "take no prisoner" approach to their particular brand of analysis that meant that most economists who came work at central banks and monetary authorities had been thoroughly indoctrinated in the "proper" way to look at things. Like generals at the start of a conflict, they typically fight the last war (usually ineptly).

Enter Alan Greenspan, economic pragmatist extraordinaire. His experience and training was in practical economics, working as an economic forecaster never very far from the political corridors of power. He admired the rugged individualism espoused by Ayn Rand. Replacing the zealous Paul Volcker who slew the inflation dragron, he was tested very quickly in the 1987 stock market crash. Drawing upon financial history and understanding the importance of confidence to the financial system, he emulated the financial confidence-building of J.P. Morgan by very visibly making funds available to stem market panic.

"Early on Tuesday morning, October 20th, we issued a statement indicating that the Federal Reserve stood ready to provide liquidity to the economy and financial markets. In support of that policy, we maintained a highly visible presence…… underscoring our intent to keep markets liquid." Alan Greenspan

The effect of these words and actions on financial market participants was that panic was stemmed and the markets again started their upwards march that lasted through the 1990s. Compare this to the hapless head of the Japanese monetary authority who declared that the stock market was not his worry during the meltdown of their stock market in the late 1980s and early 1990s. Japan entered a recession that it has yet to come out of!

What one learns from this book is that Alan Greenspan is not an economic moralist. He doesn't think that risk taking is bad and should be punished. In fact, Greenspan thinks that it is the job of the monetary authority to prevent "systemic risk" and remove the need for other economic agents to hold reserves in case of very negative market and economic scenarios. He also isn't an economic ideologue. Compared to the 1990s central bank vogue of "zero inflation" he has waged a moderate war on inflation. Canada, New Zealand, Germany and France all waged their absurd fight for zero inflation at a very high cost to their economies. Greenspan allowed the markets to run which allowed resources to be devoted to further lowering the cost of goods and services to American consumers. He understood that expansion of nominal cashflows was essential for investors to be confident of the economic future.

Where this book falls down is in its lack of analysis of the particular set of circumstances that allowed Greenspan the latitude to wash huge amounts of liquidity through the U.S. financial system without substantive inflation. Clearly, being the world's reserve currency removed the prospect of a currency crisis. Having virtually all of the world's tradable commodities and manufactured goods priced in U.S. dollars meant that inflated money supply would not lead to higher input prices due to currency depreciation.

The Greenspan response to the Long Term Capital hedge fund crisis is also omitted from the book, perhaps though timing. Given that Greenspan rescued the investment dealers and banks that dealt with this inanely speculative fund, one has to question how far the "systemic risk" net can be cast before Greenspan's Fed becomes a classic regulator "captured" by its industry. A friend of mine attended a conference in the Far East last year that featured Hong Kong monetary officials being highly praised for rescuing their stock market by buying up a good part of it with foreign currency reserves. It seems that Greenspanian intervention is now the new central bank vogue. Could the "no lose" central bank regulated stock market be Greenspan's true legacy?

No matter what your economic bias, this book will help you understand one of the most important reasons for our current long period of economic growth and stock market increase. A must read for the serious and professional investor.

Review by: John Carswell, President, Canso Investment Counsel Ltd.

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Words the Moved the World's Markets, THE GREENSPAN EFFECT by David B. Sicilian

Words that Moved the World's Markets, THE GREENSPAN EFFECT

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