Alan Greenspan has pulled off many an economic miracle as chairman of the Federal Reserve Board.
Remember the Crash of '87, when, as the newly minted Fed chief, Greenspan stepped off an airplane in Dallas to learn that the Dow had dropped 508 points? He averted a crisis by boosting liquidity, and the expansion continued for another three years.
In 1994, with the U.S. economy accelerating and inflation worries spiraling, the Greenspan-led Fed boosted interest rates enough to engineer a "soft landing" - and in 1995 the central bank cut rates fast enough and deep enough to avert a recession and continue the expansion.
And in 1998, when the so-called "Asian contagion" and the collapse of the Long Term Capital Management Hedge Fund threatened to swamp the U.S. economy, Greenspan worked his economic magic yet again. The Fed reduced interest rates three times in a short stretch, dodging still another recessionary bullet and ultimately nurturing the expansion into record territory.
And now another chapter of the Greenspan economy-management manual is being written. In hopes of slowing an economy whose breakneck growth pace was threatening to stoke inflation, the Fed boosted short-term interest rates six times from June 1999 to May 2000, and waited until this month to reverse course. Some economists and investment experts now fear that Greenspan was too aggressive in raising rates and waited to long to start cutting them.
The rate increases crushed stock prices, vaporized consumer confidence and took the economy from a 5.2 percent pace in the first half of last year to a 2.2 percent pace in the third quarter - and perhaps lower still in the fourth quarter.
"In hindsight, it's clear that the final interest-rate increases made in 2000 were overkill, given that inflation was in check, that consumer spending was beginning to slow and that employee cost indices were very, very benign," said Jonathan Murray, first vice president of investments for Legg Mason in Baltimore.
Only time will tell whether that overkill translates into the first U.S. recession since 1990-1991. Although recession talk first surfaced before a holiday shopping season that ultimately was quite lackluster, only in recent weeks have economists acknowledged any real chance of a recession.
