GREENSPAN AND HIS FRIENDS

By Adam Zagorin/Washington

Alan Greenspan was not about to let a little global financial chaos interfere with his social life. The Federal Reserve chairman--by Tuesday the most influential man on earth--had fled his paneled office the night before he would deliver the most anticipated congressional testimony of his career. Greenspan ducked work to attend a rollicking charity roast for his new wife, NBC News correspondent Andrea Mitchell. After Elizabeth Dole and other speakers took their turn poking fun at the younger half of one of Washington's best-known power couples, White House spokesman Mike McCurry came to the podium and addressed Greenspan. "Mr. Chairman, I have a suggestion," he said. "Put that text down, look the committee in the eye and say, 'Nah, nah, I told you so.'"

Greenspan laughed as much as anyone in the celebrity-studded ballroom. He didn't take the advice, though, even if he felt entitled. In fact, Monday's 554-point drop in the Dow Jones industrial average was fulfillment of a prophecy he had made twice before, most recently four weeks ago, that markets were ripe for a tumble. His first omen was offered last December, when he warned famously of "irrational exuberance" in equity prices, and the Dow gagged 145 points.

When Greenspan finally began his testimony before the Joint Economic Committee the next morning, it was clear he knew just how powerful his words could be. As he read from a prepared text, originally composed at his desk in longhand, an aide slipped him updates on the markets, allowing him to gauge the precise impact of his words almost as soon as they passed his lips. Greenspan rarely asks for such real-time financial weather reports, but if his testimony jolted the market, either positively or negatively, he wanted the option of issuing an immediate clarification.

When Greenspan did talk about the sell-off, it was so measured you'd think the words were wearing jackets, and in a voice that occasionally passed for a whisper. But his message was soon being shouted by traders around the world, as markets cheered his view of U.S. economic performance as "impressive" and unthreatened by turmoil in Asia. Greenspan argued that America's widespread use of technology may have raised productivity, clearing the path for more growth with low inflation. He then speculated that the downturn in stocks might produce an economic cooling off and thus "prolong our 6 1/2-year business expansion." As usual, the chairman dressed his opinion in his ever qualified verbiage--call it Greenspam--never using one syllable or one word when two or three could do the job. Said he: "It is quite conceivable that a few years hence we will look back at this episode, as we now look back at the 1987 crash, as a salutary event."

Wall Street has a more limited vocabulary--buy, sell--and over the course of his testimony, the Dow gained about 60 points before dropping back to almost exactly where it had been when his presentation began. For Greenspan, a perfect performance: he had reassured markets without moving them.

Behind Greenspan's impassive facade, he and Treasury Secretary Robert Rubin and a team of senior U.S. officials spent long hours last week monitoring the global financial furor. The body, known as the President's Working Group on Financial Markets--for heaven's sake, don't call it a crash team--is charged with coordinating the U.S. government's response to economic upheavals. It was formed in the aftermath of the 1987 crash. Chaired by Rubin, it includes Greenspan, Securities and Exchange Commission chairman Arthur Levitt, Commodities Futures Trading Commission chairman Brooksley Born, Gene Sperling, director of the National Economic Council (NEC), and other officials.

For a decade the group has had little to do, but that began to change late on Sunday when anxious reports started streaming in from Hong Kong and other Asian capitals that stock prices were continuing their tailspin of the week before. As he kept a fitful eye on the seventh game of the World Series, Tim Geithner, Deputy Assistant Treasury Secretary for International Monetary and Financial Policy and an Indians fan, worked the phones. Around midnight Sperling called on one line, and Deputy Treasury Secretary Larry Summers on another, as the trio tracked a tsunami of falling equity prices rolling across time zones and heading toward Wall Street.

Monday morning, as prices on Wall Street were collapsing, President Clinton got a briefing and then left the White House to deliver a speech. Clinton had chosen the occasion to tout one of his biggest achievements: a reduction of the fiscal-1997 deficit to $22.6 billion, its lowest level since the early 1970s. But the Dow, already down 200 points as the President began his remarks, went crashing through the minus-350 mark. Having congratulated himself on his economic policy, he headed back to the White House. A message was waiting for him in his limo: Call Rubin. A.S.A.P.

Rubin delivered a characteristically calm rendition of events, befitting a legendary trader who was working on Wall Street during the '87 crash. "I've seen markets do all sorts of things, so I don't tend to flap; I take it in stride," he told TIME. He told Clinton that the downdraft certainly offered cause for concern. Like Greenspan, he thought the stock dive a predictable reaction to inflated share prices. The President agreed that for the moment, he would say nothing. "What you need to have is a mind like a yellow legal pad, to keep emotions out and attend to whatever is necessary," the Secretary says. Rubin, formerly vice chairman of Goldman, Sachs, is widely regarded as the Administration's second most powerful figure after the President.

A methodical, informal man, Rubin tends to take his work, but not himself, very seriously. "Bob was in my office one day, his shirt coming out of his pants, and he kicked his shoes off," recalls his former deputy at the NEC, Bowman Cutter. "A little while later, he left without his shoes, walked about halfway down the hall and came back to see where he had left them."

The afternoon brought no rally; in fact, the circuit breakers may have heightened the carnage. But Rubin's team didn't entertain talk, as there had been in 1987, of flooding the markets with liquidity by lowering interest rates.

Doing nothing was an option; saying nothing was not. Sitting with his advisers, his tie loosened and his shirt collar unbuttoned, Rubin began to worry aloud about what he would say. The message had to hold up, he said, even if the market continued to head south. Fearful that Wall Street might think he was trying to jawbone investors into buying, Rubin and his staff spent a full hour parsing just a few words. The message was designed not so much to buck up financial professionals--they were on their own--as to reassure the 50 million Americans with money in stocks. Said Sperling: "The prudent thing to do was to make clear our confidence in the economy." Rubin delivered that message on the Treasury's steps, standing beneath a statue of the first Secretary of the Treasury, Alexander Hamilton. He uttered six painstakingly constructed sentences, the last of which was the most important: "Remember that the fundamentals of the U.S. economy are strong."

Meanwhile, Levitt arrived back from London on Tuesday and did some reading: a slender volume formally titled The Executive Directory for Market Contingencies, otherwise known as the "Red Book," the half-inch tome that outlines procedures for dealing with market upheavals. Levitt too, as well as the SEC staff in the agency's Market Watch Room, was not so much concerned about the direction of stock prices as whether the crush of transactions could be processed in an orderly fashion. Bottlenecks in the 1987 crash exacerbated market swings.

As markets opened Tuesday, all eyes were on President Clinton, who was in Chicago speaking to students at the Oscar Mayer Elementary School. He couldn't ignore the situation, so the decision was made to expand on the soothing lullaby Rubin had sung the day before. But as the networks broke into their regular programming to carry his remarks, advisers in Washington gasped. Instead of the majestic head of state standing tall to deliver reassurance about the underlying economy, Clinton was drawing a hot dog from his pocket in honor of the school's eponym. When staff members had stopped trembling, they argued that the joke showed just how confident the President was that the market would turn around.

Working Group members networked by phone, and they quickly reached a consensus to stay the course. Not only would there be no measures to add liquidity or lower interest rates in the U.S. market, but little extra would be offered in Asia. Rubin later relented, recognizing that "the U.S. is the world's largest economy and, in some respects, indispensable to providing leadership." He backed an International Monetary Fund package that would make $23 billion in emergency facilities available to Indonesia. The U.S. would kick in $3 billion.

The IMF package seemed to calm world stock markets, at least temporarily, leaving the Fed chairman to puzzle anew over the combination of muscular economic growth and low inflation that have characterized the U.S. expansion since 1992. He frequently refers to the phenomenon as a "new paradigm," although he remains chary of how durable it will prove. Greenspan and other economists credit the spread of technology with improved productivity, which paves the way for faster economic growth without price increases. The problem: productivity increases are difficult and sometimes impossible to document. Nevertheless, there is no doubt about the spread of high technology: recent studies show it has powered 27% of the rise in GDP in the past three years.

Yet Greenspan remains skeptical of the prospects for a "new American economy" until more data are available. "Regrettably," he says, in a typically meandering turn of phrase, "the argument for the so-called new paradigm has slowly shifted from the not unreasonable notion that productivity is in the process of accelerating, to a less than credible view...that we need no longer be concerned about the risk that inflation can rise again."

By the end of last week, however, Greenspan had at least embraced the paradigm of the "new American husband." After his testimony on Wednesday, he and Mitchell attended a state dinner for Chinese President Jiang Zemin. Thursday was Mitchell's 51st birthday; the duo had planned to slip away to a hotel in the Virginia countryside, where they got married in April. But both were so exhausted that they decided to stay home. Alan presented Andrea with a gold necklace ("I was amazed he had the time to shop," she says). Meanwhile, Mitchell fixed dinner in their northwest Washington home. After feasting on pasta, salad and chocolate cake, the chairman of the Federal Reserve did the dishes. Unlike the chairman's other activities, it had no effect on world markets.

--With reporting by Melissa August, John F. Dickerson and Bruce van Voorst/Washington

With reporting by MELISSA AUGUST, JOHN F. DICKERSON AND BRUCE VAN VOORST/WASHINGTON