Speculation Rises on Greenspan's Future

WASHINGTON - His pointed criticism of the Bush tax plan showed that Alan Greenspan (news - web sites), often taken to task for being too murky in his economic pronouncements, can be crystal clear when he wants to be

The Federal Reserve (news - web sites) chairman warned that further tax cuts should be paid for, leading Democrats to proclaim that Greenspan had delivered the "kiss of death" for President Bush (news - web sites)'s $1.3 trillion proposal.

GOP lawmakers fumed. Greenspan, himself a Republican, had stabbed them in the back, they said.

The White House went into damage-control mode, pointing out that Greenspan had endorsed the plan's centerpiece, elimination of the tax on stock dividends.

Private economists saw the episode last week as remarkable given Greenspan's deft touch, after more than 15 years on the job, in avoiding political mine fields. They wondered if Greenspan's blunt words were a sign of a man no longer worried about his future.

"It appears as though Greenspan either does not want to be reappointed as Fed chairman next year or has learned that he will not be reappointed," said Paul Kasriel, chief economist at Northern Trust Co. in Chicago.

Presidential aides quickly dismissed speculation that Greenspan's comments indicated a serious rift between the Fed and Bush, or that the administration had decided on Greenspan's successor.

"His term is not even expired until the middle of next year, so it's sort of silly to begin speculating about that," White House spokeswoman Claire Buchan said.

Greenspan's latest comments certainly differed from his remarks about Bush's first tax cut, a $1.35 trillion, 10-year reduction that Congress passed in 2001.

Greenspan came out in favor of a big tax cut that year and gave a major push to the new president. Greenspan reasoned that the 10-year projected surplus of $5.6 trillion gave Congress plenty of room to cut taxes and still accomplish his preferred goal: to reduce the national debt.

The surplus turned out to be illusory, however, eaten up by a recession, the fight against terrorism and the tax cut.

What was surprising about Greenspan's congressional testimony last week was not so much the warnings against further tax cuts, now that budget deficits have returned, but rather the extent of his criticism of the Bush program.

Greenspan said future tax cuts should be paid for, either by spending cuts or tax increases. Bush does not propose that. The Fed chairman also raised doubts about one of Bush's biggest selling points — that the economy needs another round of government stimulus.

Greenspan contended that once the uncertainty over war in Iraq passes, economic growth should accelerate without the need for additional tax cuts.

For good measure, he directly challenged the administration's "deficits don't matter" school of thought and the contention that economic growth alone can take care of the revenue lost from the tax cuts.

Some saw Greenspan's widespread critique as an effort to restore the credibility he lost on the deficit issue when he endorsed the 2001 tax cut. Others said Greenspan basically was doing what he always has done, calling it as he sees it, even at the risk of not being reappointed.

"If he had wanted to stay for another term, he might not have said anything different, but he might have said a little less," said David Wyss, chief economist at Standard & Poor's in New York.

Greenspan's current term as chairman runs until June 20, 2004. Some think that Bush will nominate a replacement early next year so the Senate can confirm a successor to Greenspan before the presidential campaign gets into full swing.

One problem with that scenario is that unlike 1987, when Greenspan was Wall Street's universal choice to succeed Paul Volcker, there is no front-runner this time.

Mentioned as possible choices are Harvard economist Martin Feldstein, chairman of the Council of Economic Advisers during the Reagan administration, and Peter Fisher, a Democrat who is Treasury's undersecretary for domestic finance.

David Jones, who has written four books on the Greenspan Fed, said as long as Greenspan, who turns 77 next month, stays healthy, he may well stay on as chairman until Jan. 31, 2006, the date his 14-year term as a Fed board member expires. Current law makes him ineligible for another term on the board.

"The administration is distracted by the war right now, and next year Bush will be up for re-election," Jones said.

"I am betting that Greenspan will end up being asked to serve out his current term and then stay on for a year or two longer so that his replacement can be picked at the beginning of the next presidential term," he said.

I can't come out in defense of Greenspan, but understand the dynamic that has changed his opinion.

In the first Bush tax cut, he was forcasting 10 years of surpluses; enough to pay off the entire national debt (hand job warning here) and more. He stated that the tax cuts were necessary to prevent the government from investing the surplus in the market and gaining control of the market.

At that time, the debt was under 6 trillion. However, the losses in the market after 9/11 (whether monitized or not) ranged from 9 to 13 trillion; depending on whose estimate you hear.

However, Alan Greenspan never gave up a single soundbite since taking the job in 1987, up until now. Why now?

He was not really expecting to be re-appointed by GWB, and had resigned himself to leave at the top of his game; especially since he and WJC had played the game so well. He, of all people was aware of the timebomb that Clinton had left behind for GWB, and why he decided to accept the re-appointment is beyond me, other than an admission that the fed can no longer control the money supply, and he wasn't aware at that time.

We are faced with a situation of the fed interest rate being lower than the inflation rate; which signals deflation, while acknowledging inflation at the same time. I think it would be safe to say that the Fed has lost control, and the moneysupply is in freefall. Unfortunately with the fed rate at 1 1/4%, there is little to no room to manipulate rates further downward to attempt the famous "Greenspan Soft Landing"; one of his specialties.

There has never been a co-chairman to serve their entire term since Greenspan took the helm. He insisted on absolute control of the Fed and the FOMC. Greenspan was once a staunch defender of gold against Fiat money, now he is the king of Fiat money. He was in Ayn Rand's inner circle of intellectuals while in his mid 20s. He is considered to be an intellectual pragmatist. Also,he seems to be smart enough to know when to leave a sinking ship, and rather than publically resign and admit responsibility for what the Fed has caused, it seems he would rather be booted out for his comments and let the chips fall where they may. There are some of the Fed board and FOMC members smart enough to predict where the economy is headed, but the question is whether or not they will tell the public, and admit defeat. Any Fed official will tell that it takes 18 months to 2 years to feel te full effect of a Fed decision, and they don't have the reserve intellectual collateral to issue many more rate changes before bottoming out. At present, the unemployment rate is .3% below the figure of 6%; a benchmark for rising inflation. Whenever it falls below 6%; inflation typically rises. It also doesn't take too much imagination to predict that the rising tide of National Guard being called up and deployed will give way to many more jobs; even if only temporary. This will probably affect unemployment, causing that number to becomne smaller still; indication further inflation.

Greenspan admitted in the mid 90s that there were forces on the economy that the normal Fed policies couldn't control. He first thought it was improved efficientcy, then decided it may be just-in-time manufacturers, then considered it to be caused by the rise in computer assisted inventory and automation. He never seemed to put a label on it. However, he admitted it existed. Now, the current shape of our economy shows that the Fed no longer have the economy under control, and the only thing that can be done now is to raise interest rates, a tactic reserved for slowing down a "heated" economy. FWIW, I don't think we have a heated economy. At 1 1/4% interest rate, the money "velocity" (how quickly it is spent or changes hands) should be just under the speed of light. Do any of you see that happening anywhere? Further rate decreases (usually 1/4% at a time) are usually employed to get the economy moving again, but at present rate of projected inflation, any more rate cuts would only serve to deepen the bite of deflation that the current ratio already shows. War usually heats up a failing economy, but even Greenspan is abandoning that concept of Keneysian economics. It just doesn't look like normal fed smoke and mirrors is going to get the beast eating again. No wonder he is throwing temper tantrums and giving the press soundbites...

Look, Greenspan did his job and more in order to keep our economy running. He was abused by the Democrats - that doesn't make him a bad guy. I can sum up the Clinton economic policy with one statement "The market has the jitters over whether Greenspan will lower rates another quarter point..." That isn't Greenspan's fault - it's the fault of the Democrats and of Clinton and of all americans who bought it without actually thinking.

Why does everyone seem to forget that the market burst it seems during the election mess that Gore started. A good foundation holds up under slight pressure. A bad foundation goes to pieces. And as soon as the market started shedding foreign money during the crisis, the downward spiral began. It didn't stop. The tweeking of the market by greenspan was the equivalent of sewing a suit of crepe paper on a pig. When the pig outgrew the hems, the suit went to pieces. If the Pig had managed it's weight, then the clothier and the clothe would have become less important.

But then to add insult to injury, the Democrats want to say the mess is Bush's fault. It was made over 8 years, blew up just in time for Bush to take office, and then was decimated further by a blow from terrorists. But it's Bush's fault.. That's like saying you bought a house yesterday that was poorly wired, plumbed and otherwise managed by the prior owner but all craftily hidden. When it burns down on day 2 and the plumbing bursts once the fire is out, it's your fault - you did it all because you own it. Guess how long that would hold up in court..

But let's not imagine the way things are in the real world should effect politics. Reagan was blamed endlessly for the mess Carter left. It took Reagan a full term to get a handle on it. By the end of his second term, he'd turned the economy around and grew it at a good rate.. so good that the Democrats main complaint about the 80s was that so many people got rich. "The rich got richer and the poor got poorer." Is what they kept shouting. Not exactly the truth; but, it made a good sound bite when repeated endlessly by the democrats, the press and a charismatic tramp from Arkansas. Bush 41 didn't much do anything with the economy save to let the Democrats begin tearing down the Reagan economic strengths. They even stated they would do as much - said they would that is. Go back and look at what was actually done to the economy during Clinton. They played zero sum balanced on the existing system. Take amount "x" out and put amount "x" back in. Simple algebra as it were. 1 -x + x = 1.

Clinton thrived on the legacy of Reagan and threw it away. He didn't expand on it - didn't prop it up, extend it and finally didn't replace it. When the policies ran their course, the vacuum left was managed by interest rate adjustments - kindof like putting a girdle on at 40 and throwing a shirt over it to convince yourself you still look 20. When you pull the strings on the girdle beneath the tight shirt, you'd best be in a small uncluttered room if you ever plan to see the buttons again. Yet Democrats acted shocked at what happened to the market when the Goron decided to take back his concession speach. The market tanked, the strings were pulled loose and instead of finding the buttons, Dems did their best to change the subject and hide the buttons from the curious. The press willingly helped just as they willingly helped in the election.

It was too obvious When Bush took office that the economy had fallen to pieces. But the press and the Democrats had a problem - The truth painted them in a seriously bad position. One, they couldn't blame Bush for it. And two, how'd we get in this mess when we were supposed to be in the greatest economic times ever in history... Easy. Same way Enron stayed in business. There just seems little will to handle the politicians as forcefully as corporate crooks when the label on their lapel is 'democrat'.

Greenspan is not the problem. Nor is Greenspan to blame. You don't blame the abused child for the conduct of the abusive parent. But when you know the parent is abusive and you stand by and let them do as they will, you've little room to complain. How then should we act if that same abuser then claims credit for the work of others before him and puts off his pathetic inaction on his successors in hopes that people will blame the recipient of the problem rather than the creator of it. Best thing Bush can do now is what he's been doing - becoming a new Reagan. Makes me all fuzzy inside to contemplate it. Of course he isn't Reagan; but, he's getting there. To me, this is Reagan's third term. He should get a fourth.

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