Greenspan's halo dims with economy

Despite his button-down demeanor and obfuscating rhetoric, or perhaps because of it, Alan Greenspan is America's first celebrity central banker.

The basset-like chairman of the Federal Reserve is an indisputable world figure - the Tiger Woods of finance.

Even now, with the US possibly poised on the edge of recession, a recent Wall Street/NBC News poll found that 55 percent of Americans have "positive" feelings toward Mr. Greenspan.

Yet some tarnish is beginning to appear on his halo. In fact, his reputation today stands at greater risk than at any time since the stock-market tumble that greeted his arrival as Fed chairman in 1987.

Economists, the media, and some politicians are showing increasing willingness to criticize him as slow to respond to the economy's recent downturn. Some even blame him for causing it with tight monetary policy.

How pointed such criticism becomes will hinge in part on how much the Fed decides to lower interest rates again next Tuesday - and what that ultimately does for the economy.

"His halo is slipping because the economy is slowing down and the stock market is falling," says Paul Kasriel, chief economist at MANY MASKS OF ALAN GREENSPAN: The Fed chair listens to senators last month. Some say Greenspan's popularity is at risk.

Northern Trust Co. in Chicago.

If the American economy and stock prices do snap back, though, high public esteem for the long-serving Fed chairman should remain fairly intact.

But for now, the criticism in some quarters is intense.

Perhaps aided by hindsight, several economists now charge that the Fed erred last May when it raised short-term interest rates one-half a percentage point to 6.5 percent. Its intent was to slow the fast-paced economy to prevent a recurrence of rapid inflation. It had already hiked rates 1.25 percentage points since June 1999.

It was "a mistake," says Robert Genetski, economist at Chicago Capital Inc. It was a "further mistake" when the Fed did not cut rates this past December or earlier, when many indicators signaled a slowdown.

The Fed did cut rates one percentage point in two bites in early and late January. It has not made further moves, apparently waiting for its March 20 meeting in Washington.

"Simply unconscionable," maintains Mr. Genetski, who sees a real recession risk. "There's [a] total collapse in sales going on."

Whether or not the Fed is the culprit in the current slump, Greenspan remains revered to a degree most central bankers could only dream of. Criticism goes with their jobs, and they know it.

Once Paul Volcker, his lanky predecessor at the Fed, while walking through the Museum of Anthropology in Vancouver, B.C., with a group of bankers and reporters, noted a particularly frightening native-American mask. Must have been the tribe's central banker, he said.

And Guido Carli, for years head of the Bank of Italy, kept a startling, gory painting of St. Bartholomew on the cross hanging on the wall behind his desk. It was, he said, appropriate.

Central bankers become unpopular when they brake an economy, end an inflationary boom, and create a slump. This adds to joblessness and business bankruptcies, budget deficits, and other economic misery.

Not all economists see the current situation as dire. Some are encouraged by last week's employment numbers for February. The unemployment rate held at 4.2 percent.

Richard DeKaser, chief economist at National City Corp., already sees a "picture-perfect soft landing" for the economy - a slowdown but not a recession.

Greenspan's reputation stems in part from strong economic tailwinds. He has guided monetary policy during the longest economic expansion ever: 10 years old this month, assuming the slowdown since December to near-zero growth hasn't become a recession.

Greenspan will be correctly remembered for his willingness in the second half of the 1990s to let unemployment drop to 4 percent, says Fed watcher Tom Schlesinger. In effect, the Fed chairman challenged and proved wrong the accepted view that inflation would rise again if joblessness fell below 6 percent.

But his critics also charge that Greenspan was responsible for causing the mild 1990-91 recession with too-tight monetary policy in 1989. Nor did he see the recession until well after it had started and was thus slow on trimming interest rates.

Some also say he overstimulated the economy in the financial crisis following Russia's default on its debt in 1998, and again in the over-hyped run-up to the tricky transition of computers to the year 2000. One result, it is held, was the technology-stock bubble.

Kasriel is critical of Greenspan for speaking out on other policy issues, as he did recently on a tax cut and, earlier, on the China-trade issue.

"That is not his bailiwick," he says. "He should stick to monetary policy."

Despite Greenspan's famously convoluted language in hearings, the Fed actually has become more open under his regime. It usually hints broadly in advance of a forthcoming interest-rate change.

At the same time, Greenspan is praised for his "deftness" in handling his political relations with Congress and the White House, including four presidents.

"He has wrapped the media around his finger, played them like a violin for the last five years," adds Mr. Schlesinger, director of the Financial Markets Center in Philomont, Va.

And despite criticism, even Genetski terms Greenspan's overall record "very good."

(c) Copyright 2001. The Christian Science Monitor

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