While Greenspan Treads Water, Markets Tumble

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It wasn't Greenspan's fault.

Yes, the markets started Tuesday in quicksand and kept sinking steadily during the Fed chairman's testimony before the Senate Banking Committee, and wound up with the Dow shedding 183 points and NASDAQ 29 points. But you'd sell, too, in Lucent was practically running out of employees after cutting 20,000 more jobs, selling $2.75 billion worth of assets to raise cash and embarking on yet another desperate restructuring, if Amazon.com suddenly looked even less like it would ever make money, if manufacturing outfits like Alcoa, 3M and International Paper served up another painful reminder that inventories were nowhere near gone and manufacturing was nowhere near a comeback from the dead.

In other words, if Alan Greenspan was ever planning to unspool some additional optimism on the state of the economy in his return to the Hill after last week's semi-sanguine appearance before the House Financial Services Committee last Wednesday, he'd have known by Tuesday's opening bell that he'd have been shouting into a pretty stiff wind.

In any case, he stood pat, re-reading — verbatim — the same prepared remarks he dished to the House and using a shockingly intelligent Q&A session with senators to elaborate further on his reading of not only the last few years of economic history but the next few, too. But he added nothing about what he might be doing in four weeks or so when the FOMC sits down again — or about when the rest of us might expect to feel good about our economy again.

But for cocktail-party purposes, according to Greenspan:

The housing market has saved us all. Greenspan again credited the go-go housing market with providing consumers with the rosy outlook — and, with mortgage refinancing hitting record highs all spring, the ready cash — that has carried consumer spending through these bumpy times. It's thanks to housing, he told senators, that "the litany of negatives you can line up has not cracked the economy's underlying stability." All of which means that housing-related reports — and there are a few due this very week — are now officially prime Fed-watching territory. (For the politically-minded, Greenspan also said that immigration was a major force in keeping the market booming.)

Despite the global problems from Europe to Japan to Argentina, this ain't 1997. "The tinder out there is much less" for a major, contagious currency-style meltdown infecting the U.S. at a time when it's much less able to withstand it than four years ago. "The problems we have seen are in one sense, more domestic than international" — and trust me, senators, we're not, nor will be in any imminent future, Japan.

He's still got no regrets. Greenspan had told the House panel that he had begun to worry about the economy eight or nine months ago, which of course was two months before he actually stepped in to start cutting rates Jan. 3. Under heavy fire from new Senate Banking chairman Paul Sarbanes (D-Md.) over that lag, Greenspan copped to a slip of the calendar. "Let me amend my remarks from last week," he said, smiling — he'd meant to say December.

Sarbanes, who usually greets the Fed chairman with bared teeth at these things, opened the hearing by cross-examining Greenspan on one particularly quotable passage in his remarks, a rhetorical question whether the Fed had "the capability to eliminate booms and busts in economic activity… Can fiscal and monetary policy acting at their optimum eliminate the business cycle, as some of the more optimistic followers of J.M. Keynes seemed to believe several decades ago?"

Greenspan answered no — swings between optimism and pessimism were part of human nature — and Sarbanes wanted to know whether the "no" was for the business cycle or the booms and busts. In other words, didn't the Fed actually blow it by letting the speculative fever run too hot, and did it then act too harshly to cool it off, and then did it really blow it by not stepping back in to ease earlier?

Greenspan has heard this too many times before, and he gave Sarbanes little in the way of remorse. But it was deposed committee head Phil Gramm, going next as the top Republican, who voiced the defense Greenspan must have in his head when lawmakers start carping. Gramm got a vigorous nod from Greenspan — and a big laugh from the room — when the tax-cutting Texan delivered the pungent-analysis quote of the day:

"If this is the bust," Gramm said, "the boom was sure as hell worth it."