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Wednesday, 03/31/2004 4:13:51 AM

Wednesday, March 31, 2004 4:13:51 AM

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Reappointing Alan Greenspan as chairman of the Federal Reserve Board is like inviting the Titanic's captain back to the helm for another cruise.

The financial markets and the punditocracy continue to believe that Greenspan is the closest thing to God on Earth -- witness the market rally on April 22, when the White House announced the reappointment. But this faith in Mr. Greenspan says more about their continued lack of contact with reality than his merits as Fed chairman. After all, these are some of the same people who thought a 5,000 NASDAQ index made sense (it's now below 1,500).

Do they forget that Greenspan ignored the largest financial bubble in history, which led to a loss of more than $8 trillion in stock wealth? It should have been clear by 1997 that the stock market had entered a bubble, as at least a few economists were saying at the time. As a result of its bursting, the economy remains mired in stagnation.

It would not have been difficult for Greenspan to deflate this bubble, as he inadvertently demonstrated in late 1996, when he made his famous comment about the market's "irrational exuberance." The comment sent the market plummeting. If Greenspan hadn't reversed his position two days later, his comment might have, by itself, prevented further expansion of the bubble. If he had consistently berated the markets with "irrational exuberance" comments and supported his case with charts and graphs, it is unlikely the market would have reached the dizzying heights of 1999 and 2000. If talk proved insufficient, he could have raised the margin requirement (which restricts borrowing to buy stock), and if necessary, he could have raised interest rates.

But he didn't do any of that -- and arguably, he even may have promoted expansion of the bubble with his "new economy" rhetoric. The economy will suffer for years to come as a result.

The bad news is not all behind us. Greenspan continues to ignore a housing bubble, the collapse of which is likely to have even larger repercussions for the economy and the retirement security of millions of Americans. People are currently buying homes in the bubble-infected markets (mostly on the east and west coasts), which could lose 30 to 40 percent of their value in a drop. For most families, their home is their biggest investment. Tens of millions of baby boomers are counting on equity in their home to support them in retirement now that their 401(k) plans have suffered so drastically from the stock market retreat. Instead of warning of a housing bubble, Greenspan testified before Congress last summer that there is no such thing.

He also supports an over-valued dollar that is causing the nation to borrow more than $1.5 billion every day from abroad. This process cannot continue for long. At some point the country literally will run out of things to sell -- in about 20 years at the current rate, if foreigners don't lose interest in the United States long before that. Whenever it happens, the dollar will drop, sending import prices and inflation soaring, and U.S. living standards will plummet. Again, Greenspan could act now, but he seems happy to let this debt continue to grow, happy to pass this problem on to future generations.

Those generations will suffer, too, from his endorsement of Bush's first round of draconian tax cuts. It's not clear why Greenspan did it -- after all, the head of the Fed shouldn't be influenced by the political climate -- because it was crystal clear from the start that those cuts were reckless.

Yet, unlike the custodian or the factory worker who get fired for poor performance, Greenspan just keeps drawing praise and getting reappointed. Nice work, if you can get it.




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