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Greenspan Legacy Rides on a Wobbly Economy

Profile: Has Fed chief lost the Midas touch? Or is it a case of too much credit?


WASHINGTON — In Alan Greenspan's case, it's hard to say that "pride goeth before the fall." He's too self-effacing for the charge to stick.

But how about "public adulation goeth . . . " ?

No sooner had the Federal Reserve chairman won that Oscar for Washington power brokers--a worshipful book published in November by Washington Post editor Bob Woodward--than the U.S. economy, which Greenspan is as responsible as anybody for managing, began to unravel in earnest.

Now the 75-year-old economist is in a frantic scramble to keep the country from slipping into recession and to preserve his reputation, which until recently was among the most sterling of any public official's in the land.

His efforts are haunted by two dark possibilities. The first is that interest rate cuts, which the Fed has been wielding more fiercely than at any time in almost two decades, are blunt weapons against current conditions. The second is that the golden age of economic growth, which Greenspan desperately wants to be remembered as having ushered in, turns out not to have been so golden after all.

Friday's announcement that the economy had shed 114,000 more jobs and a string of disappointing profit announcements have only worsened the picture and sent the stock market falling. It raises the pressure on Greenspan for more rate cuts.

"In the public's perception, the gloss has come off him," said Neal Soss, chief economist of Credit Suisse First Boston Corp. and a former aide to Greenspan's predecessor, Paul A. Volcker. "He won the accolades when things were going well, so he's going to get the blame when they're not.

"After all, it's not like he went out of his way to say, 'Don't praise me.' "

Still, the consensus is that Greenspan will pull off another turnaround. The economy looks as if it will avoid an outright contraction, although it may grow only 1% to 1.5% this year compared with an annual average of better than 4% during the late 1990s. Many Americans--for example, home buyers--are behaving as if nothing is wrong. At the 4.5% rate announced Friday, the nation's unemployment is still about a point and a half below its five-decade average. The Dow Jones industrial average is about 12% off its all-time high, but it still closed Friday above 10,200. So what's the problem?

The problem, as Greenspan knows, is that corporate America has fallen into a deep funk from which it shows few signs of emerging quickly. Its worries threaten to do some serious economic harm.

Where only a few years ago companies were stocking up on technology and workers, now they're laying off employees and slashing everything from capital spending to corporate expense accounts. Where once they posted double-digit growth in profits and spectacular share price increases, now they waste no time to warn they won't make their own already-reduced earnings targets.

Greenspan and the Fed got pummeled this spring for having helped cause this corporate reversal of fortune. Critics charged that the central bank let stocks and the economy get out of hand by keeping interest rates too low in 1998 and early 1999. Then it caused both to stall by raising rates too high in the rest of 1999 and the first half of 2000. And finally, it failed to keep the two from tumbling by not starting to slash rates until early this year.

Those attacks largely have abated now that the Fed has whacked a full 2 3/4 points from its key signal-sending interest rate. The latest quarter-point cut June 27 in the fed funds rate came along with the promise of still more if necessary. The reductions have been the swiftest and steepest by the central bank since 1982.

But what has taken the place of the criticism seems more frightening: a sneaking suspicion that rate cuts can't make much difference when the problem is that companies think they already have spent too much and consumers feel poorer because a stock bubble has burst.

There always has been a possibility that the Fed's rate cut weapon could lose some of its edge, and not just because of the peculiar circumstances of the current downturn. The Fed system was designed for a world in which people needing money borrowed it from banks, which are extremely sensitive to Fed action; today two-thirds of the country's credit comes from the stock and bond markets.

In Greenspan's defense, he has regularly reminded congressional committees and others that the Fed's power to manage growth is limited. And, in public, he has deflected most of the praise that came his way with the boom of the late 1990s.

(It is not quite as clear how he has behaved behind the scenes. Most veteran Fed watchers believe he contributed heavily on a background basis to Woodward's book about him, titled "Maestro.")

But Washington is unkind to power brokers who lose even a smidgen of their force, and Greenspan is beginning to experience some small indignities that come with a slip-up.

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