Greenspan takes heat for stock bubble but remains popular

Chairman could fall out of favor if economy stays in doldrums, expert says

January 05, 2003|By HEARST NEWSPAPERS

WASHINGTON - During the past year, Alan Greenspan, the respected Federal Reserve chairman, has been accused of failing to prevent the stock market bubble of the late 1990s.

But while his halo may have been tarnished, he remains popular and continues to have the support of the financial and political communities, analysts say. "Greenspan has taken some hits this past year, but he is still trusted by both Wall Street and Main Street," says Joel Naroff, chief economist for Naroff Economic Advisors in Philadelphia.

Over the past decade, Greenspan was praised for helping guide a booming economy and stock market while holding down inflation and unemployment.

In controlling the nation's money supply, the Fed can increase or decrease interest rates. Higher rates typically slow the economy, while lower ones can help boost it.

For years Greenspan's power has been unchallenged.

Last year, Queen Elizabeth awarded him the title of Honorary Knight Commander of the British Empire for his "contribution to global economic stability." In 2000 author-journalist Bob Woodward titled his book on Greenspan Maestro.

But the three-year slide of the stock market has hurt that reputation. Since 1999, the Standard & Poor's 500 index - a measure of the stock performance of 500 leading companies - has fallen 40 percent. Some economists and financial experts now argue that Greenspan contributed to the bubble by cheerleading the economic expansion.

Tom Schlesinger, executive director of the Financial Markets Center, an economic consulting firm in Philomont, Va., says that while Greenspan occasionally cautioned investors on the rapidly rising stock market, he drowned the warnings with his repeated assertions that the economy was in a once-in-a-century shift toward higher productivity.

"It might have been preferable for him to temper his discussion of the productivity boom by continuing to warn that stocks were overvalued," Schlesinger says, adding that Greenspan should have used the Fed's tools to slow the market in the late 1990s.

Lyle Gramley, a former Fed governor now with Schwab Washington Research Group in Washington, defends Greenspan, saying his warnings were clear and numerous.

In January 1999, for example, Greenspan said that Internet company stocks had "the appeal of a lottery" and that most small Internet start-up firms were doomed to fail. Gramley also notes that the most famous phrase used to describe the stock market bubble - "irrational exuberance" - was coined by Greenspan in 1996.

But Gramley says that Greenspan feared that raising interest rates, which might have slowed the stock market, might have also hurt the underlying economy and led to a recession.

The criticism that began last year was muted. Yet Greenspan saw fit to defend himself in August at a conference of central bankers in Jackson Hole, Wyo., and in December at the Economic Club of New York. He said in August, "It was very difficult to definitively identify a bubble until after the fact."

New York Times writer Gretchen Morgenson said in a recent column in the newspaper's business section that the Fed chairman should get the "somebody else's fault award" because he has been "busily ducking any blame for failing to prevent the stock market bubble and its awful aftermath."

Still, Greenspan enjoys wide support. Naroff says that, apart from his sheer technical mastery of the economy, the chairman "knows how to work with politicians and the press."

Greenspan became a member of the Federal Reserve Board in 1987 when Republican President Ronald Reagan appointed him chairman. In 1992, President George H.W. Bush re-appointed him to the board for a full 14-year term and to the chairmanship for four years. He served eight years under Bill Clinton, a Democrat.

Gramley predicts that Greenspan, 76, will serve as long as he wishes. "It's been a tough year, but he's still the person the public wants to guide the economy," Gramley says.

Greenspan's term as chairman ends in June 2004. Because of his age, he might want to leave early. However, he could stay on as the Fed's de-facto leader until 2006, when his term as a board member ends, if the current President Bush chooses not to appoint a new chairman in two years.

But Schlesinger cautions that Greenspan's popularity could fall quickly if the economy remains sluggish and the stock market continues to fall.

If the chairman's "past decisions are seen in a harsh light," Schlesinger says, "Greenspan could be a political liability to Bush."

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