FEBRUARY 11, 2002
During the 1990s boom, Alan Greenspan was considered almost
superhuman--a crinkled sorcerer whose cryptic words wielded magical
power over the markets. But as the economy slid into recession a
year ago, Wall Street grew increasingly immune to Greenspan's
hypnotic sway, and the financial world began to turn on him. "A
stream of disappointing profit announcements, and growing worries
about what lies ahead, are undermining confidence in the powers of
Alan Greenspan, the chairman of the Federal Reserve," noted The
Economist last February. "Perhaps the real problem was the world
placed too much faith in Greenspan all along," William Dudley,
chief economist at Goldman Sachs, told The Financial Times. "In the
end, no one is superhuman." Wall Street certainly doesn't consider
Greenspan an idiot, but his reputation, like the stock market, has
undergone a serious correction. He may be respected, but no longer
is he worshiped.The news of Greenspan's fall, though, has not reached Washington.
Here, things go on as before, as if the curtain had never been
pulled back from the Wizard of Oz. The Fed chairman's continued
esteem can be measured by his periodic trips to Capitol Hill, where
assembled members of Congress ritualistically prostrate themselves
before him. The sessions resemble a kind of game wherein each
member of Congress beseeches Greenspan to endorse his or her views,
even on matters on which Greenspan lacks authority or expertise.
Any idea the Fed chairman approves immediately takes on the aura of
If ever the time had come for Congress to abandon its Greenspan
veneration, it would have been last week. Greenspan's testimony
before the Senate Budget Committee last Thursday came just a day
after Congressional Budget Office projections showed that the
federal budget would run deficits for the next several years. And
these deficits are due in part to Greenspan's own advice. A year
before, he had testified in favor of large tax cuts by painting a
fantastic scenario: Projected surpluses would soon grow so huge that
the national debt would disappear completely. That would leave the
government with a terrible choice: cut taxes and increase spending
all at once (which would overheat the economy) or, worse, use
surplus revenue to buy up private industry (which would amount to
socialism). A large tax cut, he concluded, was the only way to
prevent fiscal calamity.
Greenspan's advice was akin to a doctor urging an overweight person
who has lost a couple of pounds to stop exercising lest he die of
emaciation. To begin with, the notion that members of Congress
would allow a massive surplus to accumulate for years on end
without sending any of it back to their constituents is bizarre.
And recent events have so dramatically contradicted Greenspan's
scenario that it may well go down as one of the dumbest economic
predictions in American history. Last week's testimony, therefore,
seemed like a natural occasion for Congress to abandon its
reverential ways. "When Greenspan appears this week before the
Senate Budget Committee," predicted The Washington Post, "he may
face tough questions from Democrats about his testimony a year
Kent Conrad, the Budget Committee chairman and the Senate's most
dogged fiscal scold, opened the hearings by invoking the collapse
of the surplus. "Last year, Chairman Greenspan, you testified that
we were in danger of paying off the debt too quickly," he observed.
For a moment it appeared that Conrad would call Greenspan to task.
But in the very next sentence, he veered away. "And while you
sounded cautionary notes and sent many signals in your testimony
that we've got to be careful not to return to deficits and debt," he
continued, "unfortunately very few in this town paid much attention
to your cautionary notes." (It should come as no surprise that
nobody paid attention to Greenspan's cautionary notes, because
everything he says comes attached with cautionary notes.) In
Conrad's telling, the problem wasn't that Congress heeded
Greenspan's advice, but that it didn't heed his advice carefully
enough. What fools we mortals be!
Conrad went on to quote Greenspan last year praising the economic
benefits of debt reduction. "I believe you were right then, and
you're right now to make that point," he said. Then the senator
reached his primary theme: an appeal for Greenspan to endorse a
budget "trigger"--a device to cancel tax cuts if surpluses
dwindle--a proposal Conrad is desperately pushing. "[Y]ou warned us
that budget projections are highly uncertain, and you urged us to
have a plan to protect surpluses and debt reduction. You suggested
something like a trigger. We did not follow that advice,
regrettably ...," Conrad implored. "[P]erhaps you can give us
counsel on how we best do that now."
But even this was not quite reverent enough for some of Conrad's
colleagues. His oblique reference to Greenspan's misguided counsel
had left an opening. And the next speaker, Republican Pete
Domenici, pounced on it. "Some of my colleagues may try to get you
to apologize or issue some sort of mea culpa for your testimony
last year," Domenici told Greenspan. "But the way I see it, we are
now in exactly the fiscal situation you suggested we should be in."
Conrad-- perhaps fearing that he was being outflanked--scrambled
back to safer turf, once again imploring Greenspan to endorse a
trigger. And Greenspan complied.
The rest of the hearing was dominated by other senators pleading
with the Fed chairman to smile upon their sundry causes. Chuck
Hagel tried to win an endorsement of a tax-cut-laden stimulus bill.
(Greenspan replied skeptically.) Ron Wyden asked about a tax credit
for displaced workers. (Greenspan replied vaguely.) Wayne Allard
fished for a denunciation of excessive spending and the capital
gains tax. (Greenspan heartily concurred.)
The hearings ended, and the press reported them as a success for the
Democrats: Greenspan had expressed doubt about the stimulus bill,
and he had endorsed a trigger. Instead of pointing out how wrong
Greenspan was last year, the Democrats had tried to use his
testimony this year to undo the damage--all the while feverishly
denying that he bore any responsibility for that damage at all.
Conrad quickly distributed a press release trumpeting his victory:
"SENATE BUDGET COMMITTEE CHAIRMAN CONRAD WELCOMES FED CHAIRMAN'S
CALL FOR TRIGGER MECHANISM." The press release quotes Greenspan
recommending a trigger, followed by Conrad replying, "I agree with
you, Chairman Greenspan...." And if Greenspan agrees with you, you
must be right.