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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Voltaire who wrote (55441)	9/27/2002 7:16:59 AM
From: stockman_scott	Respond to of 65232

Greenspan Honored but Faces Criticism Friday September 27, 12:43 am ET By Wayne Cole NEW YORK (Reuters) - Perhaps Alan Greenspan is human after all. On the day he was knighted by Britain's Queen Elizabeth for promoting global stability, the chairman of the Federal Reserve faced a tide of criticism over his handling of the 1990s stock market bubble. Then, he could do now wrong. Now, hardly a day passes without some newspaper carrying a column sniping that he did not do enough to prevent the explosion in asset prices and mismanaged its aftermath. Stung, Greenspan has argued that there was no way to know for certain when a bubble is forming and even if there were, there is nothing the Fed can do about it. That's a revealing admission for a man routinely described as the "world's most powerful central banker." "Perhaps that's the lesson from all this; that a central banker is only a human being and monetary policy is not all-important after all," said Robert Mellman, senior economist at J.P. Morgan. It is easy, with hindsight, to argue that Greenspan could have headed off the bubble through a rate hike or by talking the market down, he said. "But those were crazy times and I seriously doubt anyone would have noticed (a rate hike)," said Mellman. Neither are the critics entirely sure what to fault him on. Some complain Greenspan did too much to restrain equities. For instance, Larry Kudlow, a former Treasury official in the Reagan administration and now an economic consultant, argued on CNBC on Thursday that the Fed should never have raised interest rates in 1999 and 2000 and that was what precipitated the collapse in stock prices. To be sure, markets and the media played a major part in elevating Greenspan to the heights of Olympus. Bob Woodwood in his adulatory biography dubbed Greenspan the Maestro. Time Magazine nominated him to the Committee to Save the World for deft handling of the Asian debt crisis. During the bubble, when Wall Street was getting rich on the IPO and merger mania, it was a rare economist who called for the Fed to take the punch bowl away. Now the party's over and investment banks are warning on earnings, the outbreak of gainsaying can sound like the harping of fair-weather friends. This week alone two global chief economists on Wall Street took to the editorial pages of the world's top financial papers to criticize Greenspan. In the Wall Street Journal, David Malpass of Bear Stearns and Co. said the Fed chairman was "letting himself off the hook" by telling fellow central bankers at a Jackson Hole, Wyoming, retreat in August that monetary policymakers lack the tools to identify and tackle damaging asset bubbles. In the Financial Times, David Hale of Zurich Financial Services, suggested the "Order of the Bubble," not a knighthood, would perhaps be a more fitting award for Queen to bestow on the Fed chairman. BOOM TO BUST FOR EVER Critics say that Greenspan might be in a stronger position if at any time in the boom he had been more forceful in denying his omnipotence. Instead, they say his August speech reads as an attempt to defend his legacy by abrogating responsibility for managing economic cycles. In that speech, Greenspan said it was almost inevitable that a long period of economic expansion would lead investors to take ever greater risks -- thus appearing to imply that the economy is doomed to an endless cycle of booms and busts. "It's disturbing that to dodge culpability Greenspan had to say the Fed is impotent when it comes to bubbles," said David Resler, chief economist at Nomura Securities International. "It implies they have no power over deflation either; that they can't limit how fast the air leaves the bubble." This in turn raised the risk that should the central bank ease policy again, which Resler thought likely, it could actually make matters worse. "A cut would mean the Fed has moved from being uncertain about the outlook to being certain that the outlook is very gloomy indeed," he said. "That could undo any benefit markets might had gleaned from the easing." PRICKING THE BUBBLE But even if analysts accept Greenspan was powerless to avoid the bubble, they have a harder time forgiving his touting of the New Economy at a time when some investors were already well past irrational exuberance and heading for lunacy. "He never missed an opportunity to testify to the glory of productivity and he must have realized that, to some extent, he was endorsing equity valuations," said Nomura's Resler. Greenspan himself recognized the causality in a recent speech, noting bubbles are often precipitated by perceptions of improvements in productivity and corporate profitability. "As history attests, investors too often exaggerate the extent of the improvement in economic fundamentals," he told central bankers at a Jackson Hole. Perhaps the larger irony is that Greenspan's reputation as a "great" central banker is intrinsically tied to the bubble. biz.yahoo.com