Monday, September 09, 2002

Greenspan under fire over interest rate policies

The Associated Press

        WASHINGTON — As he begins his 16th year in America's toughest economic policy post, Federal Reserve Chairman Alan Greenspan has seen better days. He is beset by second-guessers who blame him for a range of economic woes, from last year's recession to the $7 trillion meltdown on Wall Street.

        Greenspan himself set off the latest round of nay-saying. In a recent speech, he addressed one of critics' biggest complaints — that the Fed was asleep at the switch in the late 1990s and failed to avert Wall Street's speculative bubble.

        Instead of resolving the debate, Greenspan generated more heat. Princeton economist Paul Krugman, for one, contended that Greenspan had been “disturbingly evasive.”

        It is all a marked reversal from the view of Greenspan during the heady 1990s. Then, he held a near cult-like status on Wall Street. Books such as the best seller “Maestro” praised his management of the U.S. economy and cited his steady hand in helping world markets recovery from the Asian financial crisis.

        But America's record 10-year-long economic expansion ended in March 2001 and Wall Street has racked up huge losses over the past two years.

        “Greenspan was a great hero when everybody was getting wealthy, but now that people have lost a lot of money, he is the goat,” former Fed board member Lyle Gramley said.

        Critics fault Greenspan on both sides of the interest rate equation.

        They complain he failed to raise interest rates soon enough in the late 1990s to keep the speculative stock market frenzy from getting out of control. They say he overdid the credit tightening in 2000, thereby triggering a full recession.

        Greenspan's tenure as Fed chairman is exceeded only by William McChesney Martin, who had a 19-year run in the 1950s and 1960s.

        The current chairman has been the target of second-guessing before — during the only other recession on his watch, in 1990-91.

        At that time, much of the criticism came not from economists but from the administration of the first President Bush. His economic team tried to get Greenspan to cut rates more aggressively before the 1992 presidential race. Greenspan and the Fed resisted; Bush blamed his defeat in part on Greenspan's obstinacy.

        By contrast, the current Bush administration has given no hints of unhappiness with Greenspan. Treasury Secretary Paul O'Neill takes every opportunity to link his economic views with those of Greenspan, who has been content to leave interest rates at a 40-year low this year in an effort to revive the economy.

        Despite those low rates, Democrats and Republicans outside the administration have challenged the Fed to do more to spur growth. Greenspan probably will hear those demands repeated Thursday when he delivers his latest assessment of economic conditions in congressional testimony.

        Greenspan's main argument in his recent speech to a Fed symposium was that any effort to prick the stock bubble would have required pushing interest rates so high as to bring on that which policy-makers wanted to avoid: a recession.

        Noted Wall Street economist Henry Kaufman and other analysts say the Fed could have used interest rates and other tools to keep stock prices from rising so high. One example: the Fed's power to increase margin requirements, the amount of cash an investor must put up when financing a stock purchase with a loan.

        Some economists say Greenspan himself had considered trying to tame the market's frenzy but backed away after the storm raised by his famous question in December 1996 about whether it was possible to know when markets were in the grip of “irrational exuberance.”

        “Greenspan made one effort to tackle the bubble and when he did the whole world came down on him asking what right he had to substitute his judgment for thousands of investors,” said David Jones, whose third book on the Greenspan Fed will be published this month.

        Greenspan's supporters say a chief reason that Greenspan cited during the boom years for leaving interest rates alone has proved — that the country had entered a new era of higher productivity growth.

        Because of this belief that American workers were becoming more efficient, Greenspan was willing to let the good times roll and watch as the economic boom pushed unemployment to a three-decade low of 3.9 percent. That was far below the 6 percent floor once viewed as the point when tight labor markets began to push up inflation.

        This job prosperity would have been jeopardized if the Fed decided to raise interest rates to slow stock prices, supporters argue.

        “In the 15 years he has been chairman of the Fed, the United States has had only two mild recessions, remarkably low inflation and stronger economic growth than most people might have felt was possible,” said Michael Mussa, former chief economist at the International Monetary Fund. “Overall, his record has been very good.”


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