Fed Defends Stock 'Bubble' Performance
Greenspan Attempts To Restore His Image
URL:http://www.washingtonpost.com/wp-dyn/articles/A24128-2002Dec21.html
By Steven Pearlstein
Washington Post Staff Writer
Sunday, December 22, 2002; Page A01
Responding to criticism that it helped create and sustain the stock market "bubble" of the late 1990s, the Federal Reserve Board has recently launched a vigorous defense, arguing that it was better to have boomed and busted than never to have boomed at all.
The campaign represents a determined effort by Fed Chairman Alan Greenspan to restore the luster to his reputation as the maestro of global economic policy that has recently been tarnished by the worst stock market crash in 30 years and an economic slowdown that has still not run its course. Greenspan, 76, is widely expected to step down when his fourth four-year term as chairman expires in 2004.
More recently, there have been questions about whether the Greenspan Fed has been ignoring another possible bubble -- this one in house prices -- that may be about to burst.
The Fed's defense is waged in the arcane locution of macroeconomics, infused with free-market ideology and reflective of the sometimes narrow viewpoint of central bankers. But essentially it boils down to this: The economic dangers involved in trying to pop a stock market bubble are greater than the risks of letting the bubble pop on its own and then lowering interest rates to try to limit the economic damage after it does.
Fed officials acknowledge that some individuals and companies may now be worse off because of the boom and bust in stock prices. But overall, they contend, the substantial social and economic benefits of the long boom of the 1990s -- low unemployment, rising incomes, a boom in innovation and productivity -- far outweigh the temporary economic pain caused by the bust.
"In my view, somehow preventing the boom in stock prices between 1995 and 2000, if it could have been done, would have throttled a great deal of technological progress and sustainable growth in productivity and output," said the Fed's newest member, Ben Bernanke, in one of eight recent speeches by Fed governors on the subject.
Alan S. Blinder, a Princeton University economist who stepped down as the Fed's vice chairman in 1996, agreed.
"To those who say the Fed failed to prevent this catastrophe I say, 'What catastrophe?' " said Blinder, co-author of "The Fabulous Decade," a book about the 1990s economy. "As far as I can see, the damage to the real economy and to the financial system has been somewhere between little and none."
Still, even Greenspan acknowledged in a speech last week that the final judgment on the Fed's handling of the bubble will have to wait until all the financial damage has been tallied and the economy has fully recovered.
"It is too soon to judge the final outcome of the strategy that we adopted," he told the Economic Club of New York.
A Tarnished Legacy?
Most of the criticism of the Fed's bubble policies has come from Wall Street, where the vaporization of $7 trillion in market value has been keenly felt, as well as in the columns of a number of influential newspapers, magazines and newsletters, where Fed-bashing is a long-established sport.
"Pure and simple, save for the Fed, the stock market bubble could never have reached the monstrous dimensions it did, and its bursting would never have caused such a widespread and profound misery as it has," wrote Alan Abelson, whose weekly column in Barron's is read religiously on Wall Street. "The Fed wasn't just relaxed through the better part of the '90s -- it was out to lunch."
"If anyone had the legal, moral and intellectual authority to prick the bubble, it was Alan Greenspan," John Cassidy wrote last year in his book, "Dot.con," reprising earlier critiques published in the New Yorker.
Journalistic criticism has come both from the left (Nation columnist William Greider accused Greenspan of "gross duplicity and monumental error") and the right (the Economist and the Financial Times, which headlined a recent editorial "Mr. Greenspan's Tarnished Legacy").
"He seeded it, accommodated it, celebrated it and defended it from those who believed they saw it turn into a bubble," declared Jim Grant, publisher of a bearish investment newsletter easily given to Fed bashing. "It was a terrifically costly lapse of judgment."
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