It is the aftermath of that policy that now threatens Greenspan, not to mention the rest of us. Starting about a year ago, he and the Fed board began raising interest rates — even though there were no signs of inflation — because the stock-market bubble had reached absurd proportions. He never said that talking down the stock market was his aim, but most analysts concluded that he was seeking to bring about a gentle fall in prices and thus avoid a crash. It didn’t work. Last spring, numerous dot-com companies, many of which had no hope of ever making a profit, started crashing and burning. Companies such as Pets.com, DrKoop.com, and eToys.com went out of business. Mighty Amazon.com, the very symbol of dot-com investing, saw its stock price drop from more than $100 a share to (as of the past week) about $10.
In an effort to stem the carnage, he’s cut interest rates three times since the beginning of this year. Still, his critics say, he isn’t moving quickly or boldly enough. Last week, when he cut interest rates by a half-point instead of the hoped-for three-quarters of a point, the market went into a tailspin. Paul Krugman and other critics charge that Greenspan has to do much more, and he needs to do it now. In a March 12 Wall Street Journal column, Greenspan’s former Fed colleague Wayne Angell, now a private economist, wrote, “It seems to me that backing away from rapid and forceful easings poses significant and unnecessary risks to a V-shaped recovery later this year.” (That’s econ-speak for “Holy shit, Batman! We’re going down the tubes!”)
Yet, as the Boston Globe’s Kimberly Blanton reported on March 20, Greenspan’s dilemma is that the stock market is in much worse shape than the real economy, which is slowing down but is still characterized by low inflation, low unemployment, and even rising consumer confidence. The last thing Greenspan wants to do is overstimulate the economy and risk re-inflating the stock-market bubble.
Given Greenspan’s sphinx-like silence, one can only speculate; but it could be that he sees his position as similar to that of his predecessor, Paul Volcker. In the late 1970s and early ’80s, Volcker put the clamps on the money supply so tightly that interest rates shot into the high teens, even the low 20s. Volcker’s actions caused the most serious recession since the Great Depression of the 1930s. But by breaking the back of inflation once and for all, Volcker set the stage for nearly 20 years of prosperity. Similarly, Greenspan, by refusing to cut interest rates as quickly as his critics would like, may have set a goal of bringing stock prices in line with their true value, even if there’s some short-term suffering in the process.
The criticism that’s being directed at Greenspan now may seem like something new; but even at the height of his popularity, there were some naysayers. Greenspan has long been criticized for writing a letter of recommendation on behalf of savings-and-loan criminal Charles Keating, whose corrupt practices ended up costing taxpayers $2 billion. (Greenspan later said he was “embarrassed” that he had been unaware of what Keating was up to.) In 1998 Greenspan helped engineer the bailout of the hedge fund Long-Term Capital Management, which may well have averted a crisis but which was also conducted on terms that were highly advantageous to a few inside players. That prompted a furious piece by self-made Wall Street millionaire Michael Thomas for the New York Observer in which he referred to Greenspan as the “butt-boy of Wall Street” and added, colorfully if semi-coherently, that the affair “raises the question whether, at some future date, Mr. Greenspan will, like Robert McNamara, come clean with a mea culpa, or will he, like Henry Kissinger, be so transfixed by the success of his dissemblances and deceptions in this world as to assume that he will get away with them in the next?” (Greenspan also comes off looking none too good in a book on the Long-Term affair, Roger Lowenstein’s When Genius Failed, [Random House, 2000].)
On a more macro scale, William Greider — the man who exposed the cynicism behind Reaganomics in the Atlantic Monthly a generation ago — has been banging loudly on the warning bell for quite some time. In a piece for the Nation nearly a year and a half ago, Greider criticized Greenspan for lowering the amount of cash that banks have to hold in reserve and for refusing to raise margin requirements on individual investors — steps that could have brought the runaway stock market under control. “The giddy adoration of Alan Greenspan has come to resemble the stock market bubble itself and, when one phenomenon comes to its end, so will the other,” Greider wrote.
As the stock market’s recent problems show, the voices of those naysayers are sure to grow. Greenspan made a rare public-relations misstep shortly after George W. Bush became the president-elect by joining with Bush in endorsing a large tax cut. As a New Republic Notebook item observed, Greenspan opened himself up to accusations that he was relying on his authority in one arena (monetary policy) to make it look as if he had equal authority in another (tax policy). “It’s the Federal Reserve chairman’s job to react to short-term fluctuations in economic growth and inflation. It’s not his job to decide the size and shape of government,” lectured TNR.
The demystification of Greenspan has also unleashed right-wing conspiracy theorists, who were fairly quiet when Mr. Chairman could do no wrong. The ultraconservative Web site WorldNetDaily.com is hyping a story in its print edition that begins: “Congress passed the Federal Reserve Act on the 22nd of December 1913, and from that day forward the United States of America ceased to be a Republic.”
Black helicopters at 12 o’clock!
ALAN GREENSPAN reportedly has long been troubled by an economic idea known as “moral hazard” — the notion that if some people get bailed out after making risky investment decisions, others will be encouraged to make similarly risky decisions on the assumption that they, too, will be held harmless if anything goes wrong. Greenspan was reportedly uncomfortable with the intervention in Mexico on just those grounds, although in the end he agreed with the Clinton administration that there was no good alternative.
In a very real sense, Greenspan may be dealing with a similar moral-hazard situation right now. Millions of Americans who’ve watched their investments tank may be waiting for Greenspan to ride to the rescue, as he has in the past, and cut interest rates enough to goose their flagging portfolios. So hey, let’s buy some more Amazon.com while it’s still a bargain. “I think he is a danger to himself, in that excessive public confidence in the Fed can itself be a source of problems,” economist Milton Friedman told Fortune magazine recently.
But though faith in Greenspan may be wavering, it flickers still. In a front-page story in the Wall Street Journal on Monday, the irrationally exuberant Goldman Sachs analyst Abby Joseph Cohen offered a little ditty based on Ernest Lawrence Thayer’s “Casey at the Bat”: “They saw his face grow stern and bold, they saw his intellect strain/And they knew that Alan wouldn’t let the economy go low again.”
Cohen had better hope that Greenspan does better for investors than Casey did for the Mudville Nine.
Oh! somewhere in this favored land the sun is shining bright;
The band is playing somewhere, and somewhere hearts are light.
And somewhere men are laughing, and somewhere children shout;
But there is no joy in Mudville — mighty Casey has Struck Out.
Dan Kennedy can be reached at dkennedy[a]phx.com.
