Being Alan Greenspan

July 28 -- Sen. John McCain was asked in one of the debates with Gov. George W. Bush whether if elected president he would reappoint Alan Greenspan as Fed chairman. McCain replied, “Not only would Ireappoint him, but if he died we’d prop him up and put sunglasses on him as they did in the movie Weekend at Bernie’s.”

McCain could have been speaking for any number of investors who hang on Greenspan’s every word. CNBC did not carry live coverage of Greenspan’s testimony before House Banking today for the man’sentertainment value.

Alan matters to investors. But how much does he matter, and why?

The All Powerful HawkLet’s get one thing out of the way right now — Greenspan has done a superlative job as Fed chairman since taking over in 1987. He has learned the craft of gradualist policy-making so as not to shock the financial markets. He cottoned a good four years ago to the beneficial economic effects of growing globalization, technological progress and market-oriented public policies like deregulation. Unlike manystick-in-the-mud Wall Street strategists who missed the meaning of the “new economy”— you know who you are — Greenspan got it.

Still, it is worth deconstructing precisely why we care so much about Greenspan.

It isn’t because the Fed controls short-term rates. The bond market does. And if the bond market vigilantes were worried that inflation was rearing its ugly head yet again, they would jack up rates in seconds.

The bond market does not wait for the Fed to move. They twitch to the economic numbers. If they saw signs of quickening inflation, they would raise short term rates all on their own. We saw this Tuesdaywhen strong housing numbers caused bonds to sell off almost immediately. In fact, if the market thought the Fed was behind the curve on interest-rate policy, bond investors would move rates faster.

Market Mover and ShakerSo what is the source of Greenspan’s significance to investors? He is the ultimate guru, the Uber-analyst. No one else frames the economic trends with the authority he does. No one else is perceived to have his finger on the economic pulse like Greenspan. He seems to be able to hear the economic mood music like a dog hears a high-pitched whistle. When Greenspan hinted last week to the Senate Banking Committee that a soft economic landing might well be in the cards, investors felt they could rely on his macroeconomic guidance. There was at once a huge bond rally and the yield on the 10-year Treasuryfell to 6%.