After being virtually deified amid booming financial markets and lionized in a book titled “Maestro,” Alan Greenspan has suddenly hit a rough patch.
The Federal Reserve chairman is being accused of engineering an economic slowdown, then acting too late to arrest it, as well as allegedly playing politics by endorsing a tax cut that gave a major boost to President Bush’s $1.6 trillion tax reduction proposal.
“The bloom is off the rose,” said economist David Jones, a veteran observer of the central bank. “The sheen is off.”
As a result, when Greenspan testifies Tuesday before Congress, he may not get the deferential reception that he has been accorded lately. Democrats, miffed that he endorsed a tax cut, are poised to grill him about the wisdom of that move.
His failure to discern that the economy was weakening rapidly in November and December, necessitating a surprise interest rate cut in early January and a second one later in the month, also will come under question.
The Fed chairman reports to Congress twice a year on American monetary policy and the state of the economy. Every utterance is weighed carefully in the United States and around the world.
Whenever he testifies, he is accorded the respect due a president or foreign head of state. Usually the questioning is gentle, and Greenspan is sparse with information. But the mood this time is different.
Many analysts say that though Greenspan has had a good 13-year performance, giving celebrity status to a Fed chairman is unrealistic, considering the central bank’s limited tools–namely, monetary policy–for tinkering with the economy.
“People are beginning to wonder whether he walks on water or whether he just swims very well,” said David Wyss, an economist at Standard & Poor’s who believes the U.S. will avoid a recession. “I think he’s going to prove to be a champion swimmer.”
Economists said they expect Greenspan on Tuesday will signal that he stands ready to cut interest rates again to restore consumer and business confidence so that fears of a recession will dissipate and Americans will spend at a higher pace.
Last month the Fed chairman pronounced that economic growth had slowed to “near zero.”
Not all agree that the current economic weakness will be over soon. Jones said the slowdown may last a year or two and could turn into a recession. Such a scenario likely would do severe damage to Greenspan’s reputation as all-knowing manipulator of the economy.
Stuart Hoffman, chief economist at PNC Financial Services Corp. in Pittsburgh, said that while Greenspan could be roughed up in his Senate Budget Committee appearance, “his focus will be on looking forward” to restoring economic growth.
Hoffman said he wouldn’t be surprised to see Greenspan reduce interest rates again before a March 20 meeting of Federal Reserve policymakers. Blue-chip stocks surged Monday in anticipation of such a move.
But Greenspan’s aggressiveness in attacking the slowdown has come too late, according to many economists. Allen Sinai, chief economist at Decision Economics Inc. in New York, said the Fed chairman made an obvious policy error by failing to act in December in the midst of numerous layoff announcements and weaker Christmas sales.
“All heroes at some point have feet of clay,” said Sinai, who said he could not fault Greenspan for making what essentially was a forecasting error. The Federal Reserve’s minutes from the December meeting indicated that the central bank’s staff did not pick up on the speed of the economic slide, he said.
Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., said Greenspan’s performance has been marred by the Fed’s decision to raise interest rates six times during an 18-month period ending last May.
That tightening, especially a one-half of 1 percent rate increase in May, went too far, Wesbury said, and was the spark for the slowdown and a declining stock market, particularly in high-technology stocks.
Other analysts agree that, like many of his predecessors, Greenspan committed the common sin of keeping interest rates too high for too long. Sinai said the chairman mistakenly acted to counter what he called “the phantom of inflation” that appeared in energy prices, tight labor markets and in stock market prices.
But these forces didn’t materialize into a sharply higher rate of inflation, Sinai said, and when the economic slowdown occurred as consumer spending started to slow, Greenspan wasn’t nimble enough.
Questions also have been raised on whether Greenspan should interpose himself and the central bank into a stock market boom. Four years ago he pricked a stock market bubble by referring to “irrational exuberance” and later raising interest rates.
Jones said the last thing Greenspan wanted to do was bail out investors. “I think he misjudged how much the market would fall after he raised interest rates,” he said.
Jones, chairman of Aubrey G. Lanston & Co., a government securities firm, said that over the years he had talked to Greenspan about the bubble in stock prices that boosted stock portfolios of millions of Americans and caused them to spend more money, threatening to overheat the economy.
According to Jones, Greenspan saw this bubble “as a big nightmare” that could cause economic troubles once it burst.
He first tried to use his position to talk the market down, by saying it was being driven by irrational exuberance. But that didn’t work, and he had to raise interest rates to drive home the point, Jones said.
Alan Blinder, a Princeton University economist and former vice chairman of the Fed under Greenspan, said that “there have been people in the market who have said that the Fed is undergirding the [stock] market and won’t let it fall too much.”
Sinai said the central bank does not base its monetary policy on the performance of stocks, but Blinder believes that, to a degree, it does happen. Falling stock prices can pull the economy down and breed instability, such as financial institutions getting into trouble, he said, which is the fear of every central banker.
