Greenspan works on the fine art of manipulation

April 20, 2001

THE sharpest weapon possessed by central banks is their ability to shock or surprise the financial markets to achieve the maximum psychological effect. Ironically, this rare ability lies in the domain of art - not science.

Alan Greenspan, the chairman of the Federal Reserve Board, artfully unleashed that element of surprise by announcing on Wednesday a cut in the key short-term rates by another half percentage point. The rate cut came as a lightning bolt ahead of the formal May 15 meeting of the Federal Open Market Committee.

By doing so, Greenspan, once again, proved that he is the real master of the universe. By keeping a close watch on the financial markets and playing around with them, Greenspan was able to time his move perfectly. Although he had had all the figures in his head, he had to rely on his intuition as to when to make the decision. And that was an art, which cannot be learned from a textbook.

In a way, Greenspan looked like a knight in shining armour, riding a white horse and trying to save the world from its most precarious position since the 1973-1974 oil crisis.

The financial markets reacted in a frenzy with a herd instinct. The Dow Jones Industrial Average soared out of bear territory, jumping 399.10 points, or 3.9 per cent, to 10,615.83 on Wednesday. The Nasdaq rose 156.22 points, or 8.1 per cent, to 2,079.44, reaching the 2,000 level for the first time since March 15.

MR Chatu Mongol Sonakul, the Bank of Thailand governor, known for his unorthodoxy, also worked to surprise the financial markets. On April 5, he announced publicly that the Thai central bank had intervened in the foreign exchange market to prop up the baht. The Thai central bank stepped into the offshore markets to defend the baht on April 3, succeeding in preventing the currency from a free fall.

Only under extremely special circumstances do central bankers come out and admit to have launched an intervention in the financial markets. Chatu Mongol succeeded quite artfully to a certain degree in taming the speculative attacks on the baht. Although the players in the financial markets knew that the Thai central bank did not have the luxury of ample reserves to squander in the defence of the baht, they had to become cautious in any further attacks.

At that time, Chatu Mongol even contradicted Finance Minister Somkid Jatusripitak, who only a day earlier told reporters that the authorities had not entered the market. Although he made the finance minister look bad, Chatu Mongol got the credit for his management of the baht. Chatu Mongol is known by his friends as an animal keen on survival. Again, this is an art.

Greenspan's move to bring down the overnight rate to 4.5 per cent is similar to his decision to slash interest rate in September 29, 1998. Then the Russian financial crisis and the ensuing collapse of the Long Term Capital Management Fund hedge fund threatened a global financial meltdown. The US rate cut helped to inject liquidity back into the financial system and hence succeeded in preventing the meltdown.

Both actions by Greenspan and Chatu Mongol serve to illustrate the high art of public policy making. In most instances, top policy makers have to rely on their instincts or their intuitions to make decisions. The decisions cannot be made too soon or too late; they must be made with perfect timing.

Greenspan might blunder from time to time, but his decisions on the monetary policy are mostly timed perfectly. This quality to make the right decision at the right time distinguishes a good leader from a bad one. In Thailand, we have witnessed very few cases of this quality of artful leadership.

THANONG KHANTHONG