May 9, 2005


Greenspan's final days (Robert Novak, May 9, 2005, Townhall)

Alan Greenspan, in the last year of his long tenure as chairman of the Federal Reserve Board, is described by close onlookers as confused by the economic data. He confronts this question in his final months as America's central banker: Can he avoid the legacy of either a "Greenspan inflation" or a "Greenspan recession"?

Contrary to the conventional wisdom, recession might be the more realistic danger. The army of number-crunchers at the Fed does not give Greenspan the statistical security blanket he craves. The Consumer Price Index's warning of inflation ahead is regarded by one Federal Reserve governor as "phony." Nevertheless, inflation concerns were rising at the Fed until weaker economic news prevailed going into last Tuesday's meeting of the Federal Open Market Committee (FOMC). Then, three days later, gains in employment reported on Friday suggested greater inflationary danger.

So, what's a central banker to do? The Greenspan-led Fed ploughs ahead with an inflexible determination to increase the inter-bank interest rate by one-quarter of one percent every time the FOMC meets, no matter what the economy looks like. It did so Tuesday for the eighth consecutive meeting, and there is no end in sight.

The problem is that, historically, central banks go too far in tightening money, to overshoot their anti-inflation goals. Greenspan famously overshot when the federal funds rate reached 6.5 percent in May 2000, ushering in recession to start George W. Bush's presidency. That ended a doubling of the rate. With last week's increase, Greenspan now has tripled the low of 1 percent. That raises the question of whether the Fed already has tightened enough.

Fed chairmen never grow up, which is why no one over 30 years old should hold the job.

Posted by Orrin Judd at May 9, 2005 8:51 AM

Greenspan forgot he works for us, not the Democratic party.

Posted by: erp at May 9, 2005 8:55 AM

Bob Brinker just came out w/his newsletter, very interesting. Optimistic one might say.

Posted by: Sandy P. at May 9, 2005 11:53 AM

Greenspan may think we're heading back into the early 70s again.

You can't put a kid in charge at the Fed. It is important to have lived through the wars, to have seen a few iterations of the business cycle in order to gain perspective. Greenspan may be a good Fed chair or a bad one, as I think, but he is certainly respected by the people who matter in financial markets all across the world. That confidence factor is a major plus in his favor because so much of the market is psychology.

My objections to Greenspan are stylistic as much as anything. He treats his deliberations like a closed-book exam, when openness is necessary for financial markets to operate accurately. He testifies before Congress and leaves one more confused than before he got there due to his Delphic pronouncements. And he is entirely too fixated on inflation. Let there be inflation before we try to correct it, it is a leading not a lagging indicator.

Posted by: bart at May 10, 2005 9:11 AM


Yes, they always think they face the problem of their youth. It would be true for a youth.

Posted by: oj at May 10, 2005 9:15 AM

Putting some newly minted MBA even from Harvard, Wharton or Sloan in as Fed Chair would frighten the markets from Wall Street to Warsaw. It would be suicide.

Posted by: bart at May 10, 2005 1:29 PM

Only the first time and only for a few hours. When he reduced rates by 4% they'd be over it.

Posted by: oj at May 10, 2005 3:22 PM

In a world where you can move capital to Timbuktu in a nanosecond, a few hours is an eternity.

Posted by: bart at May 10, 2005 7:24 PM

For those few hours.

Posted by: oj at May 10, 2005 8:01 PM