MARTS NEED GREENSPAN AS DESIGNATED DRIVER
By JOHN CRUDELE
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THE Federal Reserve's job, as pundits put it, is to take the punch bowl away before the party gets too rowdy.
It's in the job description, right next to being independent of any political influence.
But this Fed hasn't been doing that job. And that's why Alan Greenspan will have to increase interest rates in the months ahead if there is any chance that he will salvage his legacy.
Such a move will be a shock to the financial system - the kind of shock that could have been avoided if Greenspan hadn't been so willing to serve the needs of cronies on Wall Street, mismanaged hedge funds and an embattled president who needs the distraction of a bubble economy.
You might not have noticed but Greenspan started moving toward the punch bowl this week. Twice he had the Fed do something called "matched sales," which actually drain money out of the financial system - the opposite effect of lowering interest rates.
And two Fed governors - presumably at Greenspan's behest, since nothing happens at the Fed without his say-so - stepped forward to publicly warn about the stock market's unruly behavior.
After Greenspan's dim record protecting the punch bowl, the result was predictable.
Wall Street said, "To hell with the Fed." Laughed at it. By the end of last week, the major market indices all had another big gain to record levels.
The bubble got bigger. The stocks of Internet companies were indicative. Without even the prospect of earnings, some of these shares rose 10 percent, 20 percent, 30 percent - in a single day.
The Federal Reserve is supposed to keep things from getting out of hand like this. It is supposed to keep the stock market and the economy sober so that the United States doesn't suffer the morning-after calamity that befell us in 1987, and especially in 1929.
Alan Greenspan hasn't done his job. And he knows it.
According to people who know him well enough to understand his innermost thoughts, the Fed chairman is now panicked about the stock market's behavior. He's petrified that the market will go much higher on his watch; even more horrified that the bubble might burst.
He's frozen with indecision.
And make no mistake about it, this stock market bubble is entirely Alan Greenspan's credit. He created it by allowing too much money to flow into the monetary system and by running to the stock market's rescue at the smallest sign of trouble.
In just the last few weeks, for instance, one broad money supply figure has increased 14 percent. And since the slowing economy isn't using this extra liquidity, it flows easily into the financial market's bubble.
But this sort of stuff has been going on for years.
So long, in fact, that the foreign press rails daily against the Fed's irresponsibility within earshot of international investors who might not want to play in Greenspan's casino.
Alan Greenspan had his chance to stop all this.
A few years ago, the Fed increased interest rates a couple of times. And Greenspan even went out of his way to speak in uncharacteristically frank terms about the "irrational exuberance" of investors.
That will be Greenspan's defense to historians. "I tried to take the bowl away," he'll say.
But he really didn't.
Greenspan's warnings were merely words. His actions spoke louder - including repeated rate cuts and increases in the money supply that have given investors a false sense of security that stock prices will never retreat.
And if - as I suspect - Greenspan's Fed has actually taken an active role in preventing the markets from having their normal corrections, then you are looking at policies that border on the criminal.
Remember, the Fed has already admitted to bailing out at least one private Wall Street firm, called Long-Term Capital, last year on the belief that it was too important to fail. And it has been dropping loud hints in the press that it will act if the stock market should happen to collapse.
Such reassurances are like spiking the punch bowl with 100-proof hooch and then giving Wall Street the keys to a car parked on a curving, tree-lined road.
A disaster waiting to happen.
As this column has said for years, there is a lot of money to be made during financial bubbles. A lot of money.
But if you stay along for this ride, you should understand that the driver is very drunk and Federal Reserve will soon have Wall Street breathing into a bag.
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