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Upstaging 'Maestro' Greenspan

February 14, 2003|Peter G. Gosselin | Times Staff Writer

WASHINGTON — Federal Reserve Chairman Alan Greenspan ends this week a diminished figure, unsure of both the economy's direction and his own political standing in a Washington now thoroughly dominated by President Bush.

Just a few short years ago, no praise seemed too extravagant for Greenspan. He was dubbed "Maestro" by Washington Post writer Bob Woodward; leader of "the Committee to Save the World" by Time magazine and actually received an honorary knighthood from Queen Elizabeth.

But when Greenspan cautiously criticized Bush's new budget in congressional testimony this week, White House aides reacted with cold disdain.

"The president simply has a different view on the importance of helping those who are out of work," a spokeswoman told reporters aboard Air Force One on Thursday -- a remark that left hanging the damaging implication that Greenspan thinks such help unimportant.

In some ways, Greenspan, who turns 77 next month, was due for a comeuppance. After being widely credited with helping to cause the boom of the 1990s, it was all but certain he would catch flak for the slump of the 2000s. And with the Fed having used almost all of its interest rate powers without delivering a robust recovery so far, the central banker was marked for criticism.

But Greenspan made the critics' job easier this week. He uncharacteristically singled out details of the president's plan like the dividend tax cut for comment, rather than sticking to the economic fundamentals. "That was a mistake," said Allan Meltzer, a Carnegie Mellon University economist and author of the definitive history of the Fed.

And he let himself get caught in a series of rhetorical traps. For instance, he warned against the danger of deficits expected when the baby boomers begin retiring at the end of the decade.

But at the same time, he said that the deficits the administration expects to run up between now and then are entirely manageable.

"He acted as if the two were completely disconnected," complained Rep. Barney Frank (D-Mass.), a member of the House Financial Services Committee, one of two panels before which the Fed chairman appeared.

"That's like the guy who's jumping off the Empire State Building and passing the fourth floor saying, 'I'm not doing too bad,' '' quipped Frank.

Greenspan might be forgiven such slips if it were not for what they mean for the economy and economic policymaking.

In essence, the Fed chairman has given Bush the opening the president apparently wanted to claim that the White House, and not the Fed, is now the nation's premier economic policymaker.

"Here you have the first president in nearly two decades who claims fiscal policy can work and wants to reassert its preeminence," said University of Wisconsin political scientist Donald Kettl. "Bush thinks he can make the supply-side dream come true, that if you cut taxes growth will come."

Such claims have got to come as a painful surprise to Greenspan.

For most of his time in office and for most of his predecessor Paul A. Volcker's, the prevailing wisdom was that fiscal policy -- the tax and spending plans under the control of the White House and Congress -- was at best a necessary evil and at worst a terrible threat.

As a result, both men were given wide latitude to manage the economy using Washington's other major policy tools, interest rates and money supply, and they did so with impunity.

Indeed, some observers see an element of payback in some of the current president's recent moves for Greenspan's refusal to pump up the economy during the failed reelection bid of Bush's father in 1992.

In a recent article in International Economy magazine, conservative commentator Fred Barnes quotes an unnamed administration official as describing the president's December firing of Greenspan friend and former Treasury Secretary Paul H. O'Neill as "a shot across the bow" of the Fed chairman.

Barnes describes Greenspan as "hardly a friend of the Bush family after his tight money policy helped doom the reelection chances of President Bush senior."

Barnes said in an interview that virtually every administration official with whom he has spoken can recite the date -- June 2004 -- when Greenspan's current term as chairman ends. By then 78, he is not expected to seek another term.

But Greenspan's problems go well beyond grudges.

After a decade of near-untrammeled influence in which he helped push former President Clinton into the unlikely role of deficit cutter, then presided over an explosion of growth, he has been forced to admit that his powers to direct growth may not have been as great as he -- and much of the public -- thought.

Since last summer, he has argued there was nothing that he or the Fed could have done about the stock market bubble before it popped of its own accord beginning in early 2000. Critics charge that his enthusiastic rhetoric about productivity and the central bank's willingness to run low interest rates even in the face of spiraling share prices delayed the day of reckoning.

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