Saturday April 8 10:22 AM ET
Greenspan Theories Don't Tell Real Story
By Pierre Belec
NEW YORK (Reuters) - ``New economy' enthusiasts say Federal Reserve Chairman Alan Greenspan is living on a different planet and needs to go back to the drawing board to really figure out what makes this economy tick.
Through words and deeds, Greenspan has launched a series of interest-rate increases to put the brakes on the economy and head off inflation.
But some critics say Greenspan subscribes to academic theories that are quickly losing popularity.
They believe the Fed is in too much of a rush to link theories and policies on inflation before it sees the whites of inflation's eyes. Its pre-emptive money policy, which has spurred five interest-rate hikes since last June, has cast a big dark cloud over the economy and the stock market.
The central banker has been spinning theories and the economists have been peddling their nostrums in increasingly more worried tones that a low jobless rate can cause inflation and a booming economy will inevitably lead to demand that outstrips supply.
It isn't so, some analysts say.
What is happening, they say, is that there has been an important shift in the way the economy works, which is something that the Fed may not have noticed. Or perhaps, the old guard at the central bank prefers to ignore the profound changes that have been going on in the new economy until they become more widely accepted.
The Fed, analysts say, is applying ``old economy' rules to the technology-powered new economy, prescribing interest-rate increases as antidotes to snuff out inflation pressures that have yet to show up on the radar screen. Higher interest rates have traditionally been used to dampen inflation, which can heat up in a rapidly growing economy.
For a quarter century, economists have clung to the belief that the trigger for inflation is a jobless rate of 6.0 percent or less. Unemployment is hovering at a 30-year low of 4.1 percent, yet, there is still no inflation.
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