For the best part of 20 years Alan Greenspan has symbolised the stupidity of ageism. He became chairperson of the United States Federal Reserve at 61, when many people have been tossed on the scrapheap and others are winding down for retirement.
His golden years in charge of the US economy were when he was pushing 70 and he’s still there at 78.
Greenspan is the doyen of central bankers, still talked about in almost reverential terms by his peers. That the Fed chairperson rarely gives nterviews and makes public pronouncements that are to economics what Finnegan’s Wake is to literature only adds to the mystique.
So it is with some trepidation that I ask: Has Big Al finally lost the plot?
Last week Greenspan presided over a meeting of the Fed that kept interest rates on hold at 1%, where they have been pegged for nearly a year.
A statement said the risks to inflation were balanced, meaning the Fed thinks there is as much chance of the cost of living going up as going down.
Last Thursday new joblessness claims in the US fell to their lowest level in almost four years. The economy is expanding at an annual rate of 4,5%, surveys of both manufacturing and the service sector are strong, the housing market is booming and inflation has started to pick up.
Hardly surprisingly, Greenspan’s inflation call is now coming under the microscope, even by those on the Keynesian left who favour expansionary macroeconomic policies.
”Show me something, other than computers, where the price is falling,” says Dean Baker of the Centre for Economic Policy Research in Washington.
Baker is right. Clearly, inflationary risks are on the upside, and massively so. The economy has been injected with a cocktail of three growth- inducing drugs — negative real interest rates, a rising budget deficit and a falling currency. Oil prices have touched $40 a barrel and the labour market is tightening.
It is hard to believe that Greenspan, a junkie for economic data no matter how seemingly trivial, has not spotted this. Rates in the US are far below a neutral level, which would probably be around 5%, yet Greenspan is in no hurry to act.
Last Tuesday’s Fed statement did suggest a time might come for a bit of gradual monetary tightening — but not just yet.
The Bank of England has raised interest rates three times since November in a bid to ensure it stays on top of events, but even after last week’s strong employment data, some predicted Greenspan would wait until August before tweaking interest rates rather than moving at the next meeting, in June.
Greenspan’s apparent argument is that he wants to ensure that the recovery from the relatively mild recession of 2001 is firmly entren- ched — but the evidence could hardly be more conclusive.
The risk is that the Fed is now a long way behind the curve, with all factors in place for another spell of deep instability for the world’s biggest economy.
What, then, is Greenspan up to?
There are three possible explanations. The first is that he believes that 1% interest rates are appropriate at a time when fiscal prudence has been thrown to the winds by President George W Bush’s tax cuts and the extra spending needed for Iraq, when commodity prices are hardening across the globe and when US consumers are taking advantage of cheap money to load up on debt. If that is so, he really has lost it.
The second is that Greenspan believes the US economic recovery is much less robust than the public has been led to believe, and that withdrawing monetary stimulus could bring the house of cards down.
This is not a message much heard in the US (where Wall Street economists with a vested interest are talking up the stock market) but Greenspan did solve the problems caused by the collapse of the stock market bubble by creating two new bubbles — in the housing and bond markets.
Economist Kurt Richebacher puts it this way: ”The stock market bubble of the 1920s ended with an unprecedented consumption boom, and that has been happening again since 1997, and in particular since 2001.
Since then, consumer spending has accounted for 92% of GDP growth.
”Yet, to keep it rising in the face of grossly lacking income growth, the Fed has invented a policy stance that has no precedent in history: boosting home prices with artificially low interest rates in order to provide growing collateral for consumer borrowing.”
What next? Richebacher’s view is that Greenspan has papered over the ”maladjustments from the boom with even bigger, new bubbles and macro-economic maladjustments, heralding much worse to come in the future”.
The key question is what happens once policymakers try to wean the US off its growth drugs. Unless Bush pushes through new tax cuts — the ultimate dud cheque, given the size of the budget deficit —the boost to consumers from higher take-home pay will fade.
Raising interest rates would pull the rug from under the housing market, while if the Fed’s negligent approach allows inflation to pick up over the coming months, watch out for a crash in the bond market.
All that said, there is still enough momentum in the US economy to carry it along into next year, by which time the presidential election will be over.
This is the third possible explanation for Greenspan’s actions — that having been seen as a contributory factor in the downfall of one member of the Bush family, he is making sure he doesn’t fluff his lines the second time around.
If this is the case, it doesn’t say much for the Fed’s independence, and it will add to the economic problems of whoever wins in November. — Â