Greenspan's Masters

It’s incredible to remember that less than a year ago, Alan Greenspan was even mentioned as a possible Republican candidate for U.S. president. Back then, such a promotion from the Federal Reserve to the White House seemed merely an expansion (some say rather a limitation) of Greenspan’s duties. He had already been widely credited with being the commander-in-chief of the U.S. economy. Even media reports on his interest rate decisions tended to convey a distinctly militaristic flavor.

For instance, when the Fed lowered interest rates to combat the effects of the Asian and Russian financial markets crises in October 1998, the Washington Post ran a front page headline proclaiming, “Greenspan Orders Rate Cut.” One can easily imagine a similarly large-type, boldface headline when General Eisenhower ordered the invasion of Normandy during World War II.

Unfortunately, recent history hasn’t been so kind to Greenspan. Even the Washington Post has become less charitable. After he raised interest rates last month to cool the then-surging stock market, the newspaper protested in a March 14 article: “Greenspan Misses the Mark in War on Stock Prices.”

The question then becomes: if Greenspan can’t get the job of cooling the markets done, who can provide a soft landing for the booming exchange? Let us offer three candidates for the “Alan Greenspan Prize for Fighting Irrational Exuberance.” Each of them can legitimately claim to have made a pivotal contribution to pricking the stock market bubble.

First, take Microsoft CEO Steve Ballmer. In a remarkable speech last September (before Mr. Ballmer replaced Bill Gates as CEO), Ballmer openly admitted that : “Reality is out of line … There’s such an overvaluation of tech stocks, it’s absurd.” Although Ballmer is famous for his punch-lines, everyone was surprised by his candor.

Mr. Ballmer even included Microsoft on his list of overvalued companies. Investors responded by sending computer-related stocks into a tailspin. Microsoft shares plunged 5.1%. Owning some 240 million shares of Microsoft stock, Mr. Ballmer’s assessment of the market ended up costing him almost $1.2 billion of his personal fortune that day.

Mr. Ballmer thus deserves not only credit for his attempt to cool down the stock market, at least briefly, but also for his willingness to put his mouth right where his wallet is. From its most recent high on December 27, 1999, Microsoft had fallen 33% by April 13, 2000. On balance, Ballmer was able to show off an accidental correction of the market which would have made Alan Greenspan proud.

Our second candidate is Steve Case. The CEO of America Online heads up a company that is, after all, not really much more than a utility company. It provides a connection (through regular old phone lines) and a switchboard to the Internet. Utilities are rather boring businesses. A P/E ratio such as AOL’s at 200 at the time of the merger is clearly way out of line for a utility company.

It appears that Steve Case recognized this, too. Thus, he set out to get the maximum out of his company's market value before the generally expected crash. And so, rather than set himself up for a fall, he decided on January 11 that it would make much more sense to at least go out rich, exchanging shares of his boring utility company for the exciting world of a glamorous and content-rich “old-line” media and communications firm. By April 13, AOL was down some 37% from its high on December 13.

In doing so, Steve Case did his part in helping to prick the Internet bubble. For the leader of the Internet company par excellence – a company with a positive cash flow and the company all of those dot com start-ups want to grow up to resemble – signaled that it was time to bail out of the sector by using those new riches to buy old-economy trophies. That transaction was a powerful signal that has helped, more than anything Alan Greenspan could do, to signal that stock prices were simply too high.

Finally, as our third candidate for the Allan Greenspan prize, consider Judge Thomas Penfield Jackson who presides over the cartel case against Microsoft. The district court judge made it clear that he was going to be tough on Microsoft. But he gave the company a chance to settle the case out of court. When that settlement fell apart, the Judge indicated that he was going to hit the company hard.

Once again, investors paid more attention to Judge Jackson’s ruling than to anything Alan Greenspan has said recently. The result: since the ruling was announced on April 3, the Nasdaq has fallen 16%.

Although the market value of technology companies is still clearly above the level which in 1996 inspired Alan Greenspan to create the term “irrational exuberance,” it seems that investors have become more critical.

In recent weeks, newspapers increasingly report about “Dot.com” companies which lost 50 per cent or more of their value – and soon will probably run out of cash, too. The market correction is moving on fast. Yet, the protagonists that caused the “exuberance” to burst were new economy representatives like Mr. Ballmer, Mr. Case and Judge Jackson rather than Washington’s central bankers.

That is exactly what the Fed Chairman seems to have been looking for all along, with one considerable difference: “monopoly” – rather than “irrational exuberance” – turned out to be the code word that cooled off the markets for real.Like Ike – or Mac?With so little success on the part of the presumed master himself, it comes as little surprise that the comparisons between Alan Greenspan and Dwight Eisenhower have fallen out of favor. Ike, of course, commanded the Allies to victory in Europe, and utilized his hero status in the media masterfully to re-launch himself as a powerful political Presidential candidate. In 1952, he routed his Democratic opponent, and even went on to serve a second term as President.

If Greenspan runs out of luck, he might share the fate of another General Douglas MacArthur, Eisenhower’s counterpart in the Pacific Theater. In a stunning reversal of MacArthur’s fortunes, this hero of World War II was later relieved of his command for defying President Truman during the Korean War. One has to wonder if Mr. Greenspan, should he keep notching up interest rates, will endure a similar fate.