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What’s Alan’s Line?
It's getting tougher to pin the Fed chairman down.


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Larry Kudlow

These days, rumors that Alan Greenspan is putting the final touches on his letter of resignation are about a dime a dozen. But then again, the issue of a midterm resignation for the 75-year-old Fed chairman does have some plausibility.

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When then-President Clinton reappointed Greenspan to an unprecedented fourth term, there were numerous rumors that he would not stick around for the full four years. Instead, he would permit the next president to name his own head of the Central Bank. At the time, you may recall, it was widely believed that Al Gore would be the next president. And Greenspan has frequently said on the record that he believed Fed chairmen should serve “co-terminously,” meaning presidents have the right to appoint their own Fed chiefs.

But it’s difficult to pin Alan Greenspan down these days. Is he quitting or not quitting? Who knows. It’s hard enough to get a reading on his policy direction.

Greenspan was first appointed to the Fed by Ronald Reagan and has a long history as a Republican economic adviser. But numerous observers noted during the 1990s how close Greenspan had become to Bill Clinton and his Treasury Secretary Robert Rubin. The recent book Maestro, by Bob Woodward, confirms this, as did an earlier Woodward book on the first days of the Clinton administration.

All that said, there is considerable nervousness in George Bush’s Washington about the current state of the U.S. economy, and whether or not economic recovery over the near-term is truly in the cards. Over this last winter and spring, the Fed chairman and numerous reserve bank presidents put out the word that there would surely be a second-half recovery following the Fed’s interest-rate cuts. Treasury Secretary Paul O’Neill, a longtime Greenspan friend, bought into this view. Lately, however, the deflation of technology and manufacturing has led to deeper cutbacks of inventories and jobs than anyone thought probable 90 days ago. So, once again, Greenspan has changed his line.

Now, the official word is that there will be a fourth-quarter recovery and nothing to write home about this summer. Recently, the estimable Fed chairman has even told Congress that “we’re not out of the woods yet.” The Bushies know full well that this year is Clinton’s recession, but without clear signs of an upturn, next year it becomes a Bush problem.

Surely, political historian Karl Rove recalls that Ronald Reagan’s prolonged 1982 downturn contributed mightily to a 25-seat Republican loss in the House that year. A repeat performance next November would be devastating to George Bush’s political fortunes.

Numerous economic analysts in Washington, on Wall Street, and around the county have become somewhat impatient with Greenspan’s Delphic statements on the economy. Very much like the old quiz show, What’s My Line, hosted by the elegant newsman John Daly in the ’50s and ’60s, many economists are now demanding, “Will the real Alan Greenspan please stand up.”

In order to justify the Fed’s scorched-earth deflation policies, Greenspan has at various times cited the so-called diminishing pool of available workers, an alleged excess of demand over supply, productivity gains (that he first argued as positive and then negative), M2 money-supply growth (that he first said was unimportant but recently noted is important), and the significance of consumer confidence as a recovery indicator (a measure he backed off once recovery failed to materialize).

During the early 1990s, Greenspan argued that financial- and commodity-market signals were the best Fed policy guides, but just last week he told Sen. Bob Bennett (R., Utah) that those indicators had no real monetary content. Sometimes the chairman throws in real corporate bond rates, other times he argues a short-term Phillips Curve trade-off between unemployment and inflation. In fact, at bottom, no one knows what the Fed is targeting. There are no clear rules or guidelines. And it is precisely this confusion that is keeping venture capitalists, ordinary investors, and corporate CEOs from taking risks and making new investments.

In the old days of What’s My Line, stylish panelists like Dorothy Kilgallen and Kitty Carlisle could always make clear-sounding judgments when the mystery guest finally stood up. Would that today’s markets could do likewise.

Perhaps it is time for some new blood at the nation’s Central Bank.



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