The man who stayed too long

Don't believe the headline writers -- higher interest rates won't beat inflation. But Alan Greenspan's successor might.

By James K. Galbraith

May 20, 2004 | Alan Greenspan plays the role of economist, on TV especially, better than any public official who ever lived. But that doesn't mean he is one.

Here is a man who spent the first half of his central-banking career fighting an inflation that did not exist. In so doing, the chairman of the Federal Reserve triggered the stock market crash of 1987, the recession of 1990-1991 and a "preemptive strike" on the dead beast in 1994. He had one period of glory, the late 1990s, when by doing nothing for four years he managed to bring on full employment without inflation. This was against the almost-unanimous received wisdom of the "real" economists, it should be said, and for this Greenspan should always be honored.

But then he blew it. He knew that the Internet bubble was getting out of hand. He held the power to do something about it without raising interest rates, but he declined to act. Let me quote myself here, speaking at the White House Conference on the New Economy in early April 2000:

"For its part, and instead of setting off to fight an inflation that is a pure product of academic imaginations, the Federal Reserve Board could control margin lending. Raising margin requirements is the direct approach to a stock bubble, more targeted than raising interest rates and more effective than jawboning the lenders. If a crash comes, sooner or later, a failure to have acted on margins will weigh on the record, and not for the first time."

Instead, just before and even after the Internet crash, Greenspan raised interest rates -- unsettling the markets and hitting hard at presidential candidate Al Gore. It was the wrong policy, attacking an inflation for which by then not a shred of evidence remained. And then, as the markets tumbled, Greenspan did nothing for six months. Only in December -- just as George W. Bush was anointed -- did he begin to cut rates. And while that surely helped soften the slump, allowing consumers to continue to borrow and spend through the Bush years, it came too late to save the "new economy" from a fiasco costing millions of jobs.

Greenspan has done two other key favors for Team Bush. In 2001, he famously spoke against his own convictions, expressed privately to former Treasury Secretary Paul O'Neill, that without triggers making them conditional on the vanishing surplus, the Bush tax cuts were "irresponsible." (Now he denies having said this, but there is no reason to believe him.) And in recent weeks he has tried to slit the throat of the Social Security program, calling for benefit cuts while supporting making Bush's tax cuts permanent. John Edwards correctly called this an "outrage" at the time, and John Kerry said, "We're simply not going to do it." But Greenspan is a stalking-horse for the next term of President Bush.

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