Thursday, August 18, 2005

Paper Tiger

Nice article from FT about AG:

Short View: Greenspan - to love him or fear him?
By Stephen Schurr
Published: August 18 2005 20:19 | Last updated: August 18 2005 20:19

Candidates to succeed Alan Greenspan as US Federal Reserve chairman should be asked one question: would you rather be feared or loved?


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Chairman Greenspan is widely loved. He has piloted the Fed during nearly two decades of robust economic expansion and market appreciation. Thanks to massive stimulus, the post-bubble suffering has been far less painful than previous hangovers.

Of course, there is an anti-Greenspan contingent that says he has been blithely accommodative of rampant speculation. This led not only to the stock market bubble of the late 1990s, but also to today's housing bubble. The more irreverent have taken to calling him "Easy Al".

Paul Volcker, Mr Greenspan's predecessor, was not always loved - but he was feared at times. Faithful to the notion that the Fed's main role is to take away the punch bowl just as the party gets going, Mr Volcker embarked on a difficult but necessary mission to tame the inflation beast through severe interest rate increases.

Critics of Mr Greenspan, whose 18-year tenure comes to a close in January, contend that he never removed the punch bowl, but at best stood near it and explained to party-goers how ill they might feel tomorrow morning.

The problem is that people don't always listen. Mr Greenspan has been warning that people still engaged in pursuits such as the carry trade - short-term borrowing to invest in longer-dated debt - amid rising interest rates must be "desirous of losing money". But animal spirits are undimmed. That suggests to some that Mr Greenspan lacks the necessary ability to scare the market.

Because of this, the Fed's interest rate increases may cause short-term rates to rise above longer rates - forming an inverted yield curve that almost always presages a recession. Mr Greenspan has said an inverted yield curve may no longer be an effective forecasting tool, but such "new era" predictions are always troubling.

Mr Volcker may have been feared at times, but by the time he left the Fed he was widely loved. The irony of Mr Greenspan's tenure may be that he spent most of it loved, but may depart feared - or at least something less than loved.

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