Ornery bear rips Fed chief's cloak of invincibility

March 23, 2001|By William Patalon III | William Patalon III,SUN STAFF

Only a year ago, with a terrific Christmas retail season in the books, technology stocks at record highs and an economy that was continuing to sizzle, Federal Reserve Chairman Alan Greenspan was being deified as a genius whose deft stewardship of the economy made him more important than the president.

More recent events are dimming that aura of invincibility. Stocks, especially technology shares, are in a deep bear market, and the economy could see its first recession since the early 1990s. For the first time in years, investors are second-guessing the Fed: They are criticizing its most recent credit-tightening campaign as overly severe and questioning the time it took the central bank to reverse course and cut interest rates.

Greenspan-bashers - rare a year ago - are still in the minority, but their ranks are growing daily.

If there is a recession, "Greenspan will get a lot of the blame - and deservedly so," said Larry Chimerine, president of Radnor International Consulting, an economic consultant based in Radnor, Pa. "If that happens, and people start losing their jobs, that halo that sits on top of his head will disappear fairly quickly."

If anything has galvanized criticism of the longtime Fed chief, it was Tuesday's decision to cut short-term interest rates by half a percentage point. Investors wanted more, and stocks sold off sharply in response.

While most investors aren't saying that Greenspan has lost his touch, his reputation for always pulling the right lever "is certainly frayed around the edges," said Maureen Allyn, chief economist for Zurich Kemper Investments in New York.

This isn't the first time Greenspan has had doubters. A decade ago, he was assigned blame for the 1990-1991 recession by keeping rates too high just before it began.

But he's also enjoyed some huge successes. In October 1987, only months after Greenspan took over as head of the Federal Reserve, the stock market suffered its largest one-day point decline ever. He had money pumped into the financial system, and the country dodged the pain like that which followed the Great Crash of 1929. Then, in 1998, with the Asian financial crisis ballooning and a hedge fund failure threatening economies worldwide, the Fed cut rates three times in quick succession, averting a global meltdown.

"It's a lot like being a quarterback," said Joseph Cirelli, a financial consultant with the Baltimore office of Salomon Smith Barney. "When you win you get all the credit, and when you lose you get all the blame. We here continue to have faith in Mr. Greenspan and what he's done. The stock market over the last 10 years has predicted several recessions that never happened - including one in 1998 - because of his actions. "

During this dark stretch, however, many analysts are contending that those three 1998 rate cuts, coming on the heels of big stock market losses, actually created today's woes. Those rate cuts were overly aggressive, and created too much cheap money. That induced corporations to overinvest in technology, led to the speculative frenzy surrounding the Internet and created the bubble in the stock market, critics say. Investors came away with the belief that Greenspan would bail them out if the market dropped again.

"Investors took a cue from that and decided that the Federal Reserve was on their side," said John P. Hussman, portfolio manager of the Hussman Strategic Growth Fund, a mutual fund based in Ellicott City.

"That's a bad condition to create and is an inference the Federal Reserve never wanted those people to draw."

With the economy sagging, and with the stock market's swoon sapping consumers' confidence, Greenspan appears to have had an epiphany: The Fed can't permit a total collapse of the market, because that will torpedo consumer confidence, some experts say.

Fed policy-makers have slashed rates by half a percentage point three times already this year - including twice in January, the first time during Greenspan's tenure that there was a one-point rate reduction in a single month. For a central bank that typically moves a quarter-point at a time, this is a remarkable stretch, analysts say.

"By the Fed's own standards, they have been moving very aggressively" in an effort to improve both the economy and consumer confidence, said David L. Donabedian, a senior vice president with the Baltimore office of Pell Rudman Trust Co., a money-management firm. But those moves may not have been aggressive enough, others contend.

With inflation clearly not a problem right now, there was little keeping the Fed from slashing rates by three-quarters of a point - or even a full point, said Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis.

"The Fed did not move strongly enough or forcefully enough to convince the market that things are not going to get much worse," Sohn said.

But even if a recession does result, it probably would not tarnish Greenspan's ultimate legacy: A record-length boom with an unrivaled jump in the living standards of most Americans.

"We've had a 10-year-long economic expansion - that's the longest economic expansion in our economic history," said David Wyss, chief economist for Standard & Poor's Research in New York. "He's been in office since 1987, and we've had only one recession in that period of time ... inflation is at its lowest level in years, and unemployment is at its lowest level in years. It doesn't get much better than this. All this [the current slump] shows is that Alan Greenspan isn't perfect."

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