Should Greenspan resign? Probably, if he wants to stop the stock bubble inflation. JB -------------------------------

http://www.usatoday.com/money/columns/henry.htm

Greenspan could stop stocks if he resigned By David Henry, USA TODAY

NEW YORK - If Fed Chairman Alan Greenspan is serious about wanting to stop rising stock prices, his best alternative now is to announce his resignation.

Nov. 7, Election Day, would be a good effective date, providing cover for the Fed from presidential politics and giving investors time to adjust to the loss of the man they've come to view as their patron saint.

Why should he walk away less than three months after agreeing to a fourth term?

Because Greenspan has become a legend in his own time, making his job perhaps impossible. His reputation for saving the markets from ruin and nurturing the U.S. economy's longest expansion ever has encouraged investors to take more risk, to bid stock prices higher, to create the excessive wealth that he now publicly laments. Quick gains in stock wealth, he has said, are encouraging consumer and corporate spending, adding a percentage point of annual growth to the economy and threatening instability.

Fed rate increases are supposed to act like brakes. If they work any more, it is hard to tell. Compared with June 30, when Greenspan's Fed set out raising overnight interest rates five times in quarter-point moves, the Nasdaq is up 81%, 30-year Treasury bond yields are roughly the same, corporate bond yields are up slightly and the economy has gained speed. Many individual stocks have dropped along the way. But the broad Wilshire 5000 index is up 15.4%.

Instead, the increases are viewed as proof that Greenspan is working his magic again, engineering a gentle slowing for the economy and keeping inflation at bay and the world safe for investors. That view was highlighted by Tuesday's 2.1% surge in the Dow Jones industrials as the Fed announced the latest increase. Ditto Wednesday's 3.3% gain in the Nasdaq.

He's also seen as the inevitable savior if something goes wrong. He nursed the stock market back from the 1987 crash, helped banks recover in the early 1990s from bad real estate loans and helped save world finance in 1998 from the Russian debt default and the collapse of hedge fund Long-Term Capital Management. Greenspan has become a larger-than-life character in what Yale economist Robert Shiller calls a naturally occurring pyramid scheme.

"In a strange way, his very success becomes detrimental to his continued success," says fan John Manley, a stock strategist at Salomon Smith Barney.

Says veteran economist Henry Kaufman: "It is difficult for him to be a folk hero. You cannot be a friend to your child. You have to be a parent, and there is a difference."

Some say Greenspan could cool the markets by raising interest rates more dramatically, in half-point increments at the least. But he likes to act gradually, having raised rates quickly right before the 1987 crash. More aggressive action can hurt the economy too much. He could tighten one control on the amount of stock individuals can buy with borrowed money. But that would be a largely symbolic move. And, Kaufman laments, there's no constituency deeply concerned about speculation in the stock market. "Everybody is feeding at the trough," he says. Even most economists say Greenspan should not focus on stock prices.

Resigning would require no political support, just courage and self-denial. It would remind investors of the risk of change. Manley scoffs at the idea, "To deny the country the best man for the job would not be something he should do." Kaufman chuckles, "I think he truly likes what he is doing."

When Greenspan was renominated in January, he said he savored his success and the chance to put his economic theory to work. He said he likes the job the more he does it, like eating peanuts. Will the taste turn bitter?

-- Jackson Brown (Jackson_Brown@deja.com), March 23, 2000

Answers

Should Greenspan resign?

nope...clinton should and gore should withdraw...what a dream that would be.

-- Uncle Bob (unclb0b@aol.com), March 23, 2000.

Greenspan is really caught in a bind this time. The bizarre inverted yield curve limits his flexibility, least he trip one of the vulnerable hedge funds into an LTCM-type situation.

You've got to wonder: what kind of Alphonse-Gaston act will he pull now.

-- Uncle Fred (dogboy45@bigfoot.com), March 24, 2000.