Greenspan — Fed Chairman Maestro

Mike Norman
After a brief lull Greenspan bashing is back with a vengeance. Some of his critics say that his rate hike campaign of the past 11 months is hurting the market and the economy. Others argue that he has kept rates too low for too long, and that has fueled inflation. Poor Alan. Has The Maestro lost his touch?

You’d better think again. Alan Greenspan has masterfully piloted the U.S. economy through some very rough seas in the past four years. Think about it: 9/11, the corporate scandals, war in Iraq, record oil prices, and despite all this, not even the smallest recession. True, President Bush’s tax cuts had a lot to do with that as well, but Greenspan easily deserves a big share of the credit.

The Fed is now slowly bringing rates back up, and I emphasize slowly. The so-called “real” interest rate (Fed funds rate minus the inflation rate) is still only about 0.5 percent after eight consecutive interest rate hikes since last June. That is low by any historical measure, so it would make sense for the folks who are screaming and yelling about rising rates to calm down.

Furthermore there is little sign that these modestly higher rates are having a negative impact on the economy. Recent statistics on household debt service burdens show fewer problems servicing debt now than in 2001 and 2002.

Why then is the stock market struggling and the economy showing signs of deceleration? The Greenspan bashers point to Sir Alan, of course. But they’re wrong. Turn those misguided fingers around and point them at the real culprit — a certain cartel that goes by the name of OPEC.

In its statement on Tuesday the Fed said oil prices were having a negative effect on consumer spending. That’s right, oil prices have had far more impact on the economy so far this year than the rise in the Fed funds rate, yet the Greenspan bashing continues and the president holds hands with the Saudi crown prince. Go figure.

Perhaps Greenspan’s greatest feat has been his ability to resist calls that he jack interest rates up hard and fast. Some “economists” actually say we need this to make the economy grow faster. Yeah, we need this about as badly as we need a bullet in the head.

The fact is that his management of interest rate policy has been nothing short of masterful, and it has garnered the praise of the world’s greatest and most influential critic — the U.S. Treasury bond market. Since guiding short-term rates higher, long-term bond yields have come down and economic growth has remained the strongest in the industrial world. How’s that for a performance!

Sorry, Alan Greenspan has done a great job, and his detractors are just flat-out wrong. The irony is, for a guy who was not very good as a money manager, he really is The Maestro when it comes to being Fed chairman. Whoever succeeds him will have big shoes to fill.

This weekend our Business Block has much more on how interest rate hikes will affect the economy and YOUR wallet. Tune in Saturday 10am — noon ET.

Mike Norman is the founder and publisher of the Economic Contrarian Update and a frequent guest on the Business Block.