The Fed chairman has held the same job at the same institution for 15 years, and that's long enough for anyone, even a maestro
Congress has always gone out of its way to seek Federal Reserve Chairman Alan Greenspan's counsel on fiscal policy.
Yet at no time has Greenspan taken the initiative the way he did on Capitol Hill with his six-monthly report.
It was a bolder, hungrier Greenspan. It was also an exercise in bad judgement. His previous attempts to influence fiscal policy were more subtle.
During the 1990s, he was an omniscient presence guiding Congress toward deficit reduction, even dangling the carrot of monetary stimulus in front of President George Bush (the father) as a quid-pro-quo for a deficit-reduction package.
This time around, Greenspan didn't wait to speak until spoken to. He devoted more than half the Fed's semi-annual monetary policy report to Congress, something of a ritual for the financial markets, to fiscal policy. It was as if he were invited to a black-tie affair and showed up in drag.
'Elected officials from every state are responsible for setting fiscal policy,'' said Joe Carson, an economist at Alliance Capital Management. 'Those decisions should be left at the doorstep of Congress.''
At least Greenspan had the good sense to state the views were his own, not those of his colleagues at the Federal Reserve. In July, without such differentiation, Greenspan used his Capitol Hill appearance to lecture the US on corporate greed.
These lapses in judgement alone would be enough to damage the 77-year-old Greenspan's chances of reappointment. His term as chairman ends in June 2004 while his term as a governor of the Federal Reserve runs through early 2006. Add to that the fact that he's never been a Bush family favourite, and this guy's days may be numbered.
Greenspan willingly offered his list of 'good'' and 'bad'' fiscal initiatives to Congress: elimination of the double taxation of dividends (good), unless it raises the deficit (bad); aid to states (bad); the debt ceiling (bad); caps on discretionary spending (good); fiscal stimulus (bad now, good later).
Members of the Senate Banking Committee showed no shame in using Greenspan to their political advantage.
Senator Jon Corzine, Democrat from New Jersey, bore down on Greenspan on the subject of deficits and interest rates.
'I just want to make sure I heard you say deficits impact long-term interest rates, in your view, and have an impact, then, on the investment function over a period of time,'' Corzine said.
'You heard me correctly, sir,'' Greenspan replied.
Usually Greenspan is equally deft in turning these appearances to his political advantage. Recently, he failed miserably.
The headlines were devastating to Greenspan's re-appointment effort: 'Greenspan is Tepid on Bush Package'' (Wall Street Journal); 'Greenspan Throws Cold Water on Bush Arguments for Tax Cut'' (New York Times); 'Greenspan Says Tax Cuts Are Premature'' (Washington Post); and 'Greenspan Warns of Deficit Dangers'' (Financial Times).
Greenspan tried to soft-pedal his differences with the Bush administration recently in the Q&A following day two of his congressional testimony, this time to the House Financial Services Committee. Eliminating the double-taxation of dividends, 'does have some short-term stimulus,'' Greenspan said. The day before, the benefits were long-term. Tuesday's problematic deficit was deferred to 'the end of the decade'' on Wednesday.
The flip-flop did not escape the notice of Barney Frank, Democratic congressman from Massachusetts.
'My strong impression today is that you are seeking now to find the maximum points of agreement to diminish the impression created that your longstanding positions would be somewhat negative of the tax cut,'' Frank said.
The second-day testimony didn't make the front pages; the damage was done.
The White House expressed its confidence in Greenspan. But remember, Treasury Secretary Paul O'Neill had Bush's confidence until the day he was sacked.
Like all powerful people, Greenspan has his share of critics. He's had lousy forecasts. He overreacts to every global crisis as if it posed a systemic risk. He plucks these obscure indicators out of nowhere to justify adjustments in interest rates. He's astute politically, generally an undesirable trait in the person entrusted with running an independent central bank.
A former deficit-hawk, Greenspan somehow got behind George W. Bush's $1.35 trillion tax cut just when the new Republican president moved into that big White House on Pennsylvania Ave. His reason? Unless the US cut taxes, there would be no more Treasury securities for the government to buy, based on 10-year budget projections. Previously a sceptic of 10-year budget forecasts, Greenspan bought that one hook, line and sinker.
Greenspan was probably the last person to acknowledge that soaring stock prices of the late 1990s represented an asset bubble. Now he says a housing bubble is unlikely. Why should we trust his bubble-detection kit?
It may be that Greenspan's judgment is being clouded by an attempt to salvage his legacy in the wake of a burst stock market bubble that he fuelled.
And it's his judgment that's the issue. He seems to have a belief in his innate ability to micro-manage the economy via his informed touchy-feely approach. Now he wants to add fiscal policy to his portfolio.
Greenspan has been around so long that he's become synonymous with the institution over which he presides. That's bad. People should never become synonymous with institutions: People are dispensable; institutions that ensure our free society are not.
Greenspan has held the same job at the same institution for 15 years, and that's long enough for anyone, even a maestro like Greenspan.
Bloomberg New York newsroom
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