Suddenly, Greenspan Is, Well, Mortal
By GRETCHEN MORGENSON
nytimes.com
LIKE the statues of dictators, investment icons have toppled one by one since
the stock market peaked in 2000. Chief executives, once lionized by their
shareholders, are now often viewed with mistrust. Stock analysts who were
once Wall Street's equivalent of rock stars are now seen as carnival
barkers.
But through it all, Alan Greenspan, chairman of the Federal Reserve Board,
kept deity status. Not long ago, one lawmaker predicted that Mr. Greenspan
would be remembered as the greatest central banker of all time. Even after
years of falling stock prices, the Fed chairman was a man that investors
still found worthy of worship.
Until last week, that is, when the bowing and scraping stopped. And from
Washington to Wall Street, deep skepticism took its place.
Last week, Mr. Greenspan visited Capitol Hill for his regular testimony on
monetary policy. It was not the usual love fest. He was questioned sharply
by some lawmakers, who appear to have grown tired of waiting for the
economic recovery that he has regarded as imminent for almost two years now.
Some of the hostility was politically motivated, of course. Most of the
toughest questioning came from Democrats and an independent; they expressed
concerns about burgeoning deficits, rising unemployment and low rates for
savers. But the hectoring, nonetheless, represented a significant shift.
On Wall Street, Mr. Greenspan's comments prompted a sell-off in Treasury
securities, pushing up interest rates significantly. Stocks also fell. Bond
traders did not like his tepid promise, made in his first day of testimony,
to keep monetary policy accommodating as long as necessary. Indirectly, he
made it clear that the minute the economy picks up, rates will rise. And
some traders noted how odd it seemed that he mentioned nothing about
deflation, a popular Fed topic recently. Jawboning about deflation by Fed
officials helped propel interest rates to their lows in mid-June.
Doug Kass, a hedge fund manager at Seabreeze Partners in Palm Beach, Fla.,
said the reactions last week from both Washington and Wall Street were a
watershed. "Chairman Greenspan has now officially lost the confidence of the
bond market," he said. "Market participants are now going to begin
questioning past cycle and current cycle policies by the Fed."
MR. GREENSPAN said that the bond market's move indicated that traders, too,
saw signs of an economic recovery. But some bond traders disputed this
assessment and said the move showed the market's concern over rising trade
and budget deficits, and the inflation risks that will result from the Fed's
ballooning of the money supply.
By driving rates so low, Mr. Greenspan has created two new manias, one in
bonds and one in real estate, Mr. Kass said. "The Fed has been unwilling to
accept a normal business cycle," he added. "It's relying on extending
overvalued assets in order for consumption to be continued at very high
levels."
Now, interest rates are rising, threatening an economy kept moving only by
heavily leveraged consumers. For example, homeowners' equity as a percentage
of their real-estate holdings is at 55.2 percent, according to Federal
Reserve figures. In 1982, homeowners' equity stood at 69.9 percent.
Homeowners have been taking equity out of their homes and spending it. If
mortgage rates rise, home prices will fall, driving down this equity stake
even further.
"Once you start down this path of not letting the destructive side of
capitalism work, you build a bigger and bigger edifice so each time you've
got to bet the ranch to make sure it doesn't collapse." said Bill
Fleckenstein, head of Fleckenstein Capital in Seattle. "Everyone has
believed for at least 5 or 10 years that Greenspan could wave his magic wand
and fix any problem. When people start to turn on him, that's when the music
finally stops." |
