Fed symphony unfinished

Greenspan, the 'maestro' of the 1990s economic boom, risks rough final term

Senate hearings Tuesday moved Alan Greenspan a step closer to a fifth term that could either solidify or damage the mighty reputation of America's monetary guru in chief.

The Federal Reserve chairman is already a Washington fixture, for many the symbol of record economic expansion of the 1990s. The Senate Banking Committee, which formally heard Mr. Greenspan's pitch for reappointment Tuesday, will almost certainly confirm him for another term.

But some economists question how high a pedestal history should place him on, in the pantheon of Fed chiefs.

Greenspan often gets credit for rescuing the American economy from the stock market crash of 1987, only months after taking his job at Fed headquarters on Constitution Avenue.

No other Fed chief in history has been so active in providing emergency liquidity to the economy to stave off financial disaster, notes Tom Schlesinger, executive director of the Financial Markets Center in Philomont, Va. Greenspan gave the economy a jolt of credit during the bank failures of the early 1990s and the Asian financial crisis of 1997-98.

Fed watchers also give Greenspan praise for ignoring the common thesis among economists: that inflation would be reborn if unemployment went below 6 percent. As a result, the jobless rate fell below 4 percent during the late 1990s.

But Greenspan's prestige may be badly damaged if his easy-money policy produces more inflation in the years ahead. So far this year, the consumer price index has risen at a 5.1 percent annual rate, well above what is generally considered an acceptable rate.

Paul Kasriel, an economist with the Northern Trust Co. in Chicago, expects that inflation rate to fall in the months ahead, with a decline in energy prices. But even if food and energy prices are removed from the CPI, as they often are, the inflation rate this year stands at 2.9 percent - far different from the feared scenario of deflation that the Fed was talking about at the year's start.

Mr. Kasriel is a monetarist, of the school of economics that says the creation of too much money will boost inflation after a lag of a year or so. He holds that the Fed has been creating too much new money, putting the US in danger of repeating the high inflation of the 1970s.

"We are a no-pain society," he says. "If something doesn't work, we figure Uncle Al will come along and bail you out. But printing money leads to bad things."

Kasriel adds: "The final chapter is not written until Greenspan is forced to raise interest rates and cut off the supply of credit to the United States and the rest of the world. My suspicion is that will do real damage to the world."

The Fed is expected to tackle such fears at the end of the month when its policymakers meet by raising short-term interest rates above 1 percent, the lowest in more than 40 years. Wall Street expects a hike of 0.25 percentage points, though it could be more. And financial markets anticipate more rate hikes in the months ahead.

Another criticism of Greenspan is that he allowed stock market prices to bubble up to unrealistic levels at the end of the 1990s. Mr. Schlesinger and others argue that the Fed should have tightened up on the margin loans that investors often use to add stock to their portfolios. The bursting of that bubble was one factor in the recession of 2001.

"He has encouraged the leveraging of America," complains Kasriel, who sees the rise in house prices as another bubble. Cheap credit, he adds, has given too big a lift to junk bonds and the bonds of emerging markets - two investment areas where risk is considered high.

Cheap credit has also encouraged the so-called "carry trade," in which investment banks and others borrow cheap short-term money to buy 10-year Treasuries that offer a better return - also something of a gamble on interest rates.

The two recessions during Greenspan's tenure - in the early 1990s and 2001 - were shallow and short. He gets kudos for that, but also some blame for "jobless" recoveries that followed.

In any case, another criticism of Greenspan - almost buried in the praise - is that he went "way overboard in deregulating and liberalizing the financial sector," as Schlesinger puts it.

That "worship of decontrol," he argues, led to some of the financial scandals of the last couple of years.

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