Greenspan Talks

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Federal Reserve Chairman Alan Greenspan smiles before business leaders

In his first public diagnosis of the economy since October — and with both stock and bond markets hanging on his every word — Alan Greenspan knew better than to play headline-grabbing forecaster in his speech to small business leaders in San Francisco. He limited his outlook for the recovery to another acknowledgement that economic indicators have gone from "unremittingly bad" to "increasingly mixed," and that "significant risks remain." (That much we got from the Fed last dose of boilerplate in December, although ambivalence-ridden stocks still sold into Friday's bell on the restatement.)

He also knew better (after last January's debacle about those dangerously high surpluses) than to play policymaker, limiting his politically mine-able comments to one about looming deficits helping nudge up long-term interest rates (score one for Tom Daschle), and one about looming tax-cut phase-ins providing needed economic stimulus (and one for Bush).

But he still tells a nice, uplifting economic story. Greenspan practically leaned back in his armchair and lit a pipe as he recounted, as if to the grandkids, the U.S. economy's bumpy journey from the "frenetic" tech investment boom of the late '90s to the "fierce and unrelenting" decline in same that, sharpened by Sept. 11, has landed us in our current predicament. Considering the height of our heights, this recession — if indeed 2002 is a recovery year — has been a "relatively mild downturn."

Greenspan credited the piper's relatively modest demands this year to an economy fundamentally changed in the middle of the last decade to one with "an improved degree of resiliency, flexibility and adaptability" driven by information technology and unbound by globalization and deregulation. "To be sure, a great deal of real economic pain has been felt over the past year and a half," he said. But for the economy to have weathered the NASDAQ crash of 2000 and the terrorist attacks of Sept. 11 "as well as it has is truly impressive."

And the future still looks bright. Globalization and competition continue to keep prices (and profit margins) low, and while that means layoffs now, as soon as demand picks up and companies stabilize their cash flow, they will be driven to make another (if more modest) round of those productivity-enhancing investments in high technology that made the '90s so wonderful. And new, better technology "will present ample opportunities" to do so.

And of course no grandfather's tale would be complete without some moralizing. Sept 11 "left marks on the economy that will not soon fade," and in an irrational-exuberance moment Greenspan reminded his audience that economic forecasting — and its kissin' cousin, investing — has been made even more difficult by the "major uncertainty that we all must deal with these days: The specter of further terrorist incidents on American soil. It simply is not possible to predict whether there will be any such incidents or to forecast their possible consequences for the economy."

And so the short term remains laced with dangers. Household spenders are vulnerable to the triple-threat of high unemployment, rising long-term interest rates and the negative wealth effect of what Greenspan euphemized as "equity deflation." (Interestingly, Greenspan lent no overt credence to the worries about consumer debt that have cropped up lately, though rising mortgage rates are certainly part of that.) Businesses, without consumer demand (or, for that matter, much in the way of profits) to inspire them, may be slow to begin the capital investments that will fuel the next expansion.

But "imbalances have not been allowed to fester" — whatever that means — and "if the recent, more favorable developments continue and gain momentum, uncertainties will diminish" and good times will soon follow. It might take another interest-rate cut at the next Fed get-together ending Jan. 30, and then again it might not; media consensus on the speech's portent was that Big Al "left the door open" to another cut.

Leaving the door ajar is one thing Greenspan has always known how to do, and anyone expecting a rate-policy telegraph Friday from the FOMC was deluding themselves. But whether it's the prospect of the end of his long tenure as Fed head — his term runs out in June 2004 — or just his place at the center of some truly historic economic times, Greenspan has become rather fond of telling the story of the last few years, and he tells it pretty lucidly for a man who spent the first ten years of his chairmanship elevating inscrutable "Fed-speak" to an art. The stuff of Greenspan's speeches aren't often news, as much as we'd like them to be. But at least they're starting to border on entertainment.