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To: Lucretius who wrote (312979)	9/30/2005 10:26:13 AM
From: MythMan	Read Replies (4) \| Respond to of 436258

September 30, 2005 Will Bubbles Spoil Fed's Reputation? By FLOYD NORRIS MAYBE they should call him J. Edgar Greenspan. Not since J. Edgar Hoover approached the supposed mandatory retirement age as director of the F.B.I. has an American official seemed to be as indispensable as Alan Greenspan, whose tenure as Federal Reserve chairman must end early next year. Hoover managed to persuade two presidents to waive the rule, and he died in the job. If Mr. Greenspan wanted to do so, he too might be able to get the rules changed. But he evidently has no intention of doing so, and in his final months on the job he is dealing with the only realistic threat to his reputation: that he failed to deal with the stock market bubble of the late 1990's and, perhaps, with a current housing bubble. Edward Yardeni, an economist and chief investment strategist at Oak Associates, is one who thinks that Mr. Greenspan has failed to act responsibly. As he wrote this spring: "The Fed chairman cleaned up the mess caused by the bursting of the tech and telecom bubble by creating another bubble. This time it is in real estate finance. He refused to raise stock margin requirements to stop the previous bubble. Now he has failed to stop the alarming deterioration of mortgage lending standards to stop the housing bubble." Mr. Greenspan answered such criticism this week. "Relying on policy makers to perceive when speculative asset bubbles have developed and then to implement timely policies to address successfully these misalignments in asset prices is simply not realistic," he said, adding that "we at the Fed were uncomfortable with a stock market that appeared as early as 1996 to disconnect from its moorings." Transcripts of Fed meetings do show that, but they also show that by the time the bubble really started to expand, the talk of stocks in Fed meetings dealt mostly with how much impact the rising stock market was having on consumption. WHEN the Fed met on Nov. 16, 1999, the technology-heavy Nasdaq 100 index was hitting records every day and was up 35 percent over the previous six months, but Mr. Greenspan did not call attention to that index. Perhaps thinking of the Dow Jones industrial average, he pointed to "the fact the stock market is unchanged over the past six months" as evidence that the Fed's rate increases were starting to have some impact on the economy. A month later, Mr. Greenspan allowed that some arguments for still higher Internet stock prices were nonsense, but he seemed sanguine. What was "really quite unprecedented," he said, was "that productivity growth continues to rise." Now Mr. Greenspan is worried about housing speculation. He warned bankers this week that borrowers using the more exotic mortgages - and the banks that made the loans - "could be exposed to significant losses" if home prices fell. He is frustrated that 30-year mortgage rates are now lower than they were when the Fed began to raise short-term rates 15 months ago. The "greatest irony of economic policy making," Mr. Greenspan said, is that successful monetary policy over a long period can lead people to think that there is less risk than there really is. That is a good argument, but if the American economy were to have significant problems dealing with the aftermath of a housing bubble, then future historians may conclude that Mr. Yardeni was right to say, as he did this week, that the Fed failed to live up to a responsibility to deal with bubbles as they expanded. "Bubbles," Mr. Yardeni said, "are always created by easy money. That is all there is to it, and it is something that the Fed chairman has never addressed."