Greenspan's doomsaying is belatedly intelligible

May 30, 2007|By Jay Hancock | Jay Hancock,Sun Columnist

Alan Greenspan foresees unpleasantness and is not afraid to say so.

The recent increase in Chinese stocks is "clearly unsustainable," the former Federal Reserve chairman warned last week. The United States isn't doing so great, either. "It is possible we can get a recession in the latter months of 2007," he said three months ago.

Now he pipes up. Where were his courageous forecasts when we needed them - during the buildup of the 1999-2000 technology-stock bubble? And why is everybody listening now?

We should be happy for Mr. Greenspan personally. He seems to have overcome a long struggle with diffidence and inarticulateness.

In contrast to his years at the Federal Reserve, he now speaks in short, direct sentences that do not contain the words "arguably" or "accommodative."

"There is going to be a dramatic contraction at some point" in Chinese stocks, he told a group in Madrid, Spain, via satellite last week. He could have said the same thing about technology stocks a few years ago.

Instead, he said of the ballooning Nasdaq: "The key question is whether the recent decline in equity premiums is permanent or temporary." (The "equity premium" was investors' historical aversion to stock-market risk.)

This, even though he knew stocks were doomed.

"If I were allowed to invest in the market, which they do not allow around here, I don't think I would be doing it very forcefully!" Greenspan said privately in 1997, according to a Federal Reserve transcripts.

Yes, in late 1996 he publicly wondered how to tell if "irrational exuberance" had inflated shares into a bubble. The remark was interpreted as applying to U.S. stocks, and it caused a temporary slump.

But he pretty much zipped his lip for the rest of the decade, even as the Nasdaq went from 1,500 to 5,000.

He had his reasons. He didn't want to go down in history as the Federal Reserve boss whose mouth caused a market crash.

He correctly theorized that technological improvements enabled the economy and corporate profits to grow more smoothly. He wanted investors and consumers to find their own way, without hints from the audience.

But he's sure not operating that way now. Current Fed Chairman Ben S. Bernanke must wake every day and wonder what havoc his voluble predecessor will cause next.

Paul A. Volcker, who preceded Greenspan as Fed chairman, gracefully disappeared into the Wall Street upholstery, rarely speaking publicly and never making macroeconomic pronouncements.

True, Greenspan, 81, wants to make some money after working for the government for nearly two decades. Giving speeches via satellite is an easy way to do so.

For many investors, old habits die hard, and the alleged maestro still moves markets whether or not he actually says anything.

On two occasions this year, Greenspan has caused turbulence for stocks.

Asian and New York shares dipped last week after his comments on the Chinese market became public. The Dow Jones industrial average, which had just hit a record intra-day high, fell 200 points.

In March, when he talked about the possibility of a U.S. recession, it was worse: Shanghai lost 8 percent, and the Dow lost 3 percent.

But why is everybody paying attention?

Without the power to create money and steer the world economy, Greenspan is just another forecaster. And not a very good one. His firm, Townsend Greenspan, was famous for making bad forecasts - particularly on inflation - before he joined the Fed.

The Shanghai stock market is a bubble, but we don't need him to tell us. Put a chart of Shanghai's "A" shares next to one of the last stages of the Nasdaq ascent, and they look very similar.

The only possible conclusion is that Greenspan is making up for lost time.

Inside that opaque, mush-mouthed gnome lurked an eloquent commentator waiting to get out, and now he's indulging all the urges that he stifled in the 1990s.

But it's too late. They don't allow do-overs on Wall Street.

jay.hancock@baltsun.com

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