Greenspan vs. Bernanke: Hold Your Bets
It sounded like an economic clash of the titans. In one corner: Former Federal Reserve Chairman Alan "the Maestro" Greenspan, who warned on Feb. 26 that the U.S. economy could stumble into a recession by yearend. And in the other: current Fed chief Ben "the Professor" Bernanke, whose soothing words helped the markets rebound two days later.
Investors might have had ringside seats, but they were also the ones who took a beating. The day of Greenspan's bearish blow stocks couldn't hold their ground, despite the biggest leveraged buyout deal in history—a $31.8 billion bid for Texas power company TXU (TXU). Then on Feb. 27, a 9% plunge in China's stock markets combined with economic worries to deal a one-two punch that sent the Dow Jones industrial average to its biggest point drop since Sept. 17, 2001 (see BusinessWeek.com, 2/28/07, "Stocks' Great Wall of Worry").
Dig a little deeper, though, and there's a different story. While investors may have to get used to possible tension between the present Fed chief's statements and those of his legendary predecessor, they also need to read beyond the headlines. The opinions of Bernanke and Greenspan on the economy probably aren't as different as you think.
First, Greenspan hasn't forecast a recession. What he did Feb. 26 was respond to a question by saying it was "possible" the U.S. economy would go into recession in the second half of 2007. The retired Fed boss also indicated it would be "very precarious" to try to predict so far into the future, and noted that most economists don't forecast a recession. Still, he declined to rule one out.
On March 1, Greenspan clarified his outlook further. "By the end of the year, there is the possibility, but not the probability of the U.S. moving into recession," Greenspan told an audience in Tokyo, according to a Bloomberg report. This wasn’t exactly the gloom and doom implied by press reports earlier in the week.
Bernanke's statements don't necessarily contradict his predecessor's position. On Feb. 28, Bernanke told the House Budget Committee he could see no single factor that caused the market's pullback a day earlier. However the slump didn't change policymakers' overall view of an economy with "moderate growth going forward," the Fed chief said (see BusinessWeek.com, 3/1/07, "Testimony of Fed Chairman Ben S. Bernanke").
In other words, short-term traders probably took Greenspan's comments out of context. "I would be surprised if there was a significant difference in opinion on the likely path of the economy between Bernanke and Greenspan," says Conrad DeQuadros, senior economist at Bear Stearns (BSC), noting that Greenspan's other recent comments have actually been more upbeat, not less, than Bernanke's. "If you were to ask any economist if there was a possibility of recession, they're going to say yes."
Hogging the Spotlight?
That's because the probability of a recession is never zero. In other words, the market may have been reacting to Greenspan's comments in the manner of Jim Carrey's goofy protagonist in 1994 movie Dumb & Dumber. Told the odds he will end up with actress Lauren Holly's character are one-in-a-million, Carrey lights up: "So you're saying there's a chance!"
At the same time, Greenspan's outspokenness remains unusual for a former head of the world's top central bank. A year after erstwhile Fed chief Paul Volcker stepped down in 1987, he wasn't making similar market-moving statements. By contrast, Greenspan remains much in demand on the public speaking circuit and has seized the spotlight with other economic pronouncements since his retirement. The highly visible former chairman could prove a challenge for his successor even when their outlooks don't widely differ (see BusinessWeek.com, 2/14/07, "For Bernanke, Capitol Hill's No Easy Street").
"For the lifecycle of most people on the Street, Greenspan's words will always carry weight," says Peter Rodriguez, a Darden Graduate School of Business economist and one of Bernanke's former students. "If you're Bernanke, what you would hope is that you will grow to fill those shoes in such a way that investors begin to listen at least as much to you as to him."
There's little else Bernanke can do about the other Fed eminence in his midst, some economists observe. "It's certainly the case that it's possible for people outside the central bank to make central bankers' jobs harder or easier," says Stephen Cecchetti, a professor at Brandeis International Business School. "That's life in the big city."
This time, any difference between Greenspan's remarks and Bernanke's doesn't seem to have left the market with too much lasting damage. "It just so happens that [Greenspan] made one comment that ends up being right in front of a big stock market move," says Charles Jones, a finance professor at Columbia Business School. "I think that's more coincidence than anything."
Stocks recovered modestly on Feb. 28. The Dow bounced 0.43% to 12,268.63, just 1.6% below where it ended in 2006 (see BusinessWeek.com, 2/28/07, "Stocks: A Half-Hearted Rebound"). Whether the market can make up more lost ground will depend more on corporate earnings and the extent of the housing market's weakness than on a war of words between two central bankers—no matter which one comes up with the snappier sound bite.