Summing Up Greenspan

By Daniel Kadlec

When Alan Greenspan merely suggested that he was open to the idea of cutting interest rates a couple of weeks ago, the stock market went wild: the Dow posted its third biggest single-day point gain; the tech-laden NASDAQ truly soared, rising a record 10.5%. Deep into a bear market, was Greenspan trying to stanch the slide?

You could read it that way. His comments prominently mentioned a reverse wealth effect stemming from falling share prices. "Weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending," Greenspan warned. Such softening could, in turn, lead to a recession--clearly something the esteemed chairman of the Federal Reserve would want to head off.

Could he do so by targeting sinking stock prices? If so, could he also head off dreaded inflation by targeting runaway stock prices in a bull market? These are provocative questions that take on added weight in America's newfound equity culture. Half of all households now directly own stock or stock mutual funds. We all have a stake in whether the Greenspan Fed has reinterpreted its central charter to include managing the stock market as a means of managing inflation.

Yet two new books on Greenspan give the subject little attention. In Maestro: Greenspan's Fed and the American Boom (Simon & Schuster; 270 pages; $25), author Bob Woodward briefly notes that for a while Greenspan claimed "impotence about the stock market while doggedly trying to influence it." Woodward comes back to the subject only briefly to conclude that Greenspan ultimately gave up on such a strategy because the market is just too unpredictable.

That's it. No serious discussion of whether adjusting interest rates to influence stock prices makes sense, whether it has ever really been tried, how it might work, what problems it presents or how Greenspan would or should approach it.

The Fed chief has said he does not target stock prices. But he has also said stock prices have a lot to do with inflation, which he targets daily. Justin Martin, author of Greenspan: The Man Behind Money (Perseus; 284 pages; $28), neatly points out that this is "a rather too fine distinction." But he spends even less time than Woodward probing the matter and then mysteriously concludes that such a strategy wouldn't work anyway. Millions of people have come to believe that Greenspan purposely moves stock prices. They're wrong, according to both authors. Yet we get no proof.

In Maestro, an often tedious recounting of every Fed adjustment in short-term interest rates since 1987, we come to appreciate how brilliantly Greenspan manages the Federal Open Market Committee--the body that regularly meets and votes to set interest rates. We also get a revealing taste of the heavy politics involved and how Greenspan quietly and effectively shuffles through the most powerful ranks in Washington. Woodward, assistant managing editor of the Washington Post, makes a case for Greenspan's almost single-handedly engineering the prosperous 1990s. And his assertion that Greenspan sometimes literally gets a pain in the stomach as an early warning to problems not yet evident--"the body knowing something before the head"--is priceless. Fed watchers will want to read this book, as will the curious drawn to Greenspan's celebrity. For the average reader, though, there's less to get excited about.

Martin's Greenspan is a better read. A former FORTUNE writer, Martin gives us a real biography, one that winds through Greenspan's geeky youth (band, glee club, math nerd) to his stint as a professional clarinet player and time spent in the inner circle of author Ayn Rand, and then to his advisory role with Presidents Nixon and Ford. Along the way we learn that Greenspan is yet another powerful political figure who was in the room but didn't inhale, and that as a child he was terrified of the movie Frankenstein. We also get plenty of quotable Greenspan-speak: "I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant," the Fed chief once told Congress. Where Martin lets us down is in detailing recent events that mark Greenspan's tenure at the Fed and have turned him into a cult figure.

In that light it's good to have both works. Woodward picks up where Martin stops. That two books can look at the same figure with little overlap and leave readers thirsting for more testifies to Greenspan's immense stature. He moves markets with a sneeze, and so takes pride in being the king of obfuscation. These books help us know him better, but we still have a way to go.