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A. Seshan

INTERNATIONAL financial markets and central banks all over the world were electrified by the news that Dr Alan Greenspan, Chairman of the US' Federal Reserve System, had agreed to serve in that capacity for a fifth term at the request of the President, Mr George Bush. He took office on June 20, 2000 for a fourth four-year term ending June 20, 2004. He was originally sworn is as Chairman to fill the unexpired term of Paul Volcker, on August 11, 1987. He has thus had his appointments as Chairman by four Presidents — Ronald Reagan, George Bush Sr, Bill Clinton and, now, Bush Jr.

Under the US law, the seven members of Fed's Board of Governors are nominated by the President and confirmed by the Senate. A full term is for 14 years. A member serving a full term is not eligible for reappointment. However, if one is appointed to fill a vacancy caused by resignation or death of a member, the unexpired portion of the term is not reckoned with for reappointment for 14 years. The Chairman and Vice- Chairman are named by the President from among the members and are confirmed by the Senate. They serve a term of four years. It is these rules which have facilitated the reappointment of Dr Greenspan for a fifth term. The fact that the decision to reappoint was taken more than a year ahead of the expiry of the current term signifies the importance attached to the post and its impact not only on the US but on the rest of the world.

Although the Fed is not the central bank of the world, in the sense of being the lender of the last resort, its decisions on such matters as the interest rate reverberate throughout the international economy. A chance remark of the Fed chief can create ripples around the continents. Remember Dr Greenspan's warning against the `irrational exuberance' of the US stock market and its effect on all the continents. Thus, in terms of the impact on the financial market, the Fed head may as well be considered as the central banker of the world.

There are not many cases of a Fed Chairman holding office for several terms. The two others who had a long innings as chairman were William McChesney (Bill) Martin (close to 19 years till January 31, 1970) and Mariner Eccles (just over 13 years till January 31, 1948). Until the time of Arthur Burns and Paul Volcker, each of whom had two terms, and Alan Greenspan, generally the Fed Chairman's term was limited to four years. The Fed chief draws a salary of $171,900 per annum and the other Board members, including the Vice- Chairman, $154,700. They are small compared with what an experienced financial expert can draw in Wall Street firms. But the prestige of the position is enormous. Dr Greenspan revealed the portfolio of his personal investments a few months ago. They consist only of government securities including Treasury Bills.

Within a few weeks of his assumption of office, Dr Greenspan's competence was tested. The stock market crash of October 1987 was the first fire he went through. He emerged victorious. The other major events were the Mexican and Russian Debt Crises and the terrorist attack on the World Trade Centre. There have been important changes in the policies and procedures of the Fed initiated by him. Thus, the Federal Funds Rate (FFR) has come to assume a critical role in monetary policy. It is the rate at which banks lend to each other. The Fed directs its market operations with a view to achieving its target thus influencing conditions.

The other rate — the Discount Rate (DR) at which the Fed lends to banks — generally moves with the FFR but in the American context it has receded into the background. One reason is that when a bank asks the central bank for funds, uncomfortable questions are asked and a thorough analysis of its balance-sheet is made by the latter. Secondly, the fact that a bank has approached the Fed is considered as a black mark against its financial soundness. As a result of these factors banks rarely approach it for help. Hence, an unusual situation prevails. The DR is lower than the FFR and still banks would rather borrow from one another than approach the central bank!

Dr Greenspan introduced the practice of announcing the FFR after the meeting of the Federal Open Market Committee. In the past only changes in the DR were announced. The first time he raised the DR to cool the market, Paul Volcker is reported to have rung him up and said: "Congratulations. Now that you have raised the discount rate, you're a central banker." (Maestro, Bob Woodward)

He introduced the practice of making changes in the FFR in between regular meetings of the Federal Open Market Committee. He invented the device of asymmetric directive (towards easing, to begin with), which authorised him to make the changes in the rates without consulting the Committee members. Later, due to their resentment, he agreed to "enhanced consultation" with them on telephone before making a decision. The minutes of the Committee meetings are released to the public with a lag.

As Bob Woodward says: "His long convoluted sentences seem to take away at the end what they have given at the beginning, as they flow to new levels of incomprehensibility. He uses what he calls `constructive ambiguity'."

Dr Greenspan has not convened any press conference so far. He did only one TV talk show early in his career. He allows only three-four appointments a day so that he has plenty of time for reading. He is a great believer in charts. By pressing one key on his computer he can access 50 economic and financial charts. He does it every half hour on a normal day. It was his insight that unlocked the puzzle that American economy was expanding without any inflationary surge — it was due to productivity increase. He writes his speeches in longhand while in the bathtub. It has arm -rests for the purpose. Tennis is his hobby. He is a southpaw. Classical music is another passion of his. Early in life he had trained in clarinet, piano, flute and tenor saxophone.

Dr Greenspan presided over the longest expansion of the US economy during the Clinton era. He took pre-emptive action against inflation as well as recession knowing the implementation lags. To forestall the downturn, he reduced the rates several times during the last two years. However, he has not been able to revive the economy despite the massive cuts. Obviously, there is a limit to what the central bank can do. You can stretch an elastic string but not shrink it. Look at the plight of the Bank of Japan, which has not been able to make any dent in the gloomy situation in that country despite a near-zero rate of interest. The economic structure and its response to policies have been changing imperceptibly so much so that old models no longer work.

To give an example, wars are supposed to be a stimulant to aggregate demand as proved in the past. On the other hand, the war in Iraq is blamed as one of the factors aggravating the current problems in the world economy. We need another Keynes and another New Economics.

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