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To: Lucretius who wrote (71006)	10/22/1999 7:25:00 AM
From: Giordano Bruno	Read Replies (1) \| Respond to of 86076

Fed Learns Bartenders Are More Popular Than Bouncers <Picture: I>s Alan Greenspan yesterday's hero? It was only eight months ago that Greenspan was on the cover of Time as the most prominent member of "The Committee to Save the World," a man who had prevented a global economic meltdown by reducing interest rates. Politicians fell all over themselves to praise the Federal Reserve chairman while interpreting his sometimes Delphic words as an endorsement of their views. But now his halo is slipping, and the muttering is increasing. How dare he raise interest rates? Who is he to question the stock market's valuation? William McChesney Martin Jr., the Fed chairman during the great economic expansion of the 1950s and 1960s, once said that the role of the Fed was "to take away the punch bowl just when the party gets going." Greenspan is learning what happens to Fed officials who wait too long to try to grab the bowl. The revelers resent it. Deep into the longest peacetime recovery in American history, business feels it has a right to continued economic growth more or less forever. Deep into the biggest bull market ever, more and more investors believe that 20 percent-plus annual stock market gains are a birthright. Seventy years ago, another generation of Fed officials learned the same lesson. In 1929, the Fed had the gall to tell banks to reduce lending to stock speculators. The stock market plunged, only to rally after Charles Mitchell, the president of National City Bank, a predecessor of today's Citibank, defied the Fed and said lending would continue. Mitchell "saved the day" and averted calamity, said the Financial Chronicle, a Wall Street publication. The Fed, it added, "can act the part of a bull in a china shop and cause a lot of destruction and damage, or, Samson-like, it can pull the whole financial structure down about its head. But that is no reason why it should not be checked in the attempt by those who would be involved in the ruin." That Fed quickly lost its nerve. The stock market rallied more than 30 percent from the March lows brought on by the Fed's effort to slow speculation. Then it crashed. Greenspan and his colleagues at the Fed face a difficult situation now. There is scattered evidence that the economy is slowing, and there is reason to believe that the current rate of growth is overstated because it reflects inventory accumulation by people and companies fearful of Year 2000 glitches. Both are reasons not to raise rates. On the other side, there is equally scattered evidence that inflation is rising, and there is concern over the soaring current account deficit. A failure to act could cause stock prices to rise to completely unreasonable levels, making an eventual crash more likely. Action, on the other hand, might scare jittery investors and bring on a crash. Back when people remembered 1929, it was taken for granted that the Fed should act to rein in a frothy stock market. It raised the margin requirement -- the amount investors had to put down to buy stocks -- when markets were high, and cut it when share prices were depressed. The last change, from 65 percent to 50 percent in 1974, came during a severe bear market. Because it no longer pays attention to margins, the Fed has created the impression that stock prices are irrelevant and that inflation is the only reason to apply economic brakes. Without clear evidence of inflation, Greenspan risks losing popularity if he keeps raising rates. Seventy years ago, the Fed backed down under attack from the party crowd. Will Greenspan do the same?