Greenspan Speaks: Will Investors Listen?

Sept. 17, 2007 — -- Ahead of Tuesday's meeting to set interest rates, it was a former chairman of the Federal Reserve who stole headlines Monday and got the markets buzzing.

In a series of recent interviews to promote his new memoir "The Age of Turbulence," Alan Greenspan has assailed the Bush administration's fiscal policy and rationale for invading Iraq, admitted he failed to realize the significance of subprime real estate lending and defended his position on lowering interest rates.

For 18 years as chairman of the Fed, financial markets hung on his every word, and in both major policy pronouncements and brief utterances, Greenspan could literally move markets. But as a private citizen -- it's now more than year since he left the Fed -- Greenspan is still ruffling feathers with his comments.

Greenspan started a financial forecasting firm, Greenspan Associates, that he hopes will parlay his reputation as an oracle of the markets into a thriving business.

In February, Greenspan irked investors and his successor, Ben Bernanke, when he predicted a one in three chance of a recession by the end of the year.

In a recent interview with CBS's "60 Minutes," Greenspan reproached those, including Bernanke, who would criticize him for using his reputation as a public figure to comment as a private citizen.

"I then become incarcerated and am not allowed to do anything because I might say something," Greenspan said in the interview. "My responsibility is what I'm doing now. I'm not commenting on monetary policy, I'm commenting on global things…How am I going to pursue my profession without doing precisely that [commenting on the possibility of a recession]?"

Investors are divided on just how much Greenspan, or any private citizen, can do to upset the markets just by talking.

"A single individual, who is just a private citizen, cannot move markets by words alone. What moves markets is a governmental change in policy or a commitment to change financial assets by a large investor," said Mike Ryan, head of wealth management research at UBS. "His influence is limited in that he no longer has a finger on policy -- he's not pulling levers -- and he is not committing billions of dollars as an investor."

Ryan pointed to heavyweight investor Warren Buffet and "big money management types like Peter Lynch," a consultant at Fidelity Investments, as individuals who could not only by word, but through their investments shift the markets.

Liz Ann Sonders, a chief investment strategist at Charles Schwab, disagrees. For her, Greenspan "still remains relevant… [and] the market still hangs on his every word, even if he's not an oracle of perfect forecasting."

"Some have criticized Greenspan for trying to promote his book given Tuesday's meeting," she said. "Some say he should butt out and let Bernanke do his job, but he's a private citizen now and can say whatever he wants. His perspective on the economy remains valid, but his word is no longer gospel."

Despite the high praise usually directed at Greenspan, he still has his detractors. Many blame him for both the recent burst in the housing bubble and the similar burst in the Internet bubble of the mid-1990s. He has also been criticized for supporting President Bush's early decision to cut taxes, ending the surplus created under President Clinton.

"He still has some impact on the markets, but his reputation is rapidly being tarnished," said Michael Metz, a chief investment strategist at Oppenheimer & Co. "His decision to push short-term rates down to 1 percent was an enormous disaster. It penalized savers and rewarded speculators."

Metz said words alone, even coming from someone as respected as Buffett, can do little to move the markets if the mood is not right.

"No one person can move the markets if the markets are not in a mood to be moved. If they're in such a mood -- especially when convictions are low and anxiety is high -- then anything can set them off."