Greenspan is damaging recovery

Every time Alan Greenspan opens his mouth these days, it sends a ripple of shudders throughout the U.S. economy.

That’s disturbing because the Fed chairman often departs from his prime mission of controlling the nation’s monetary policy to launch verbal warning shells at the so-called irrational exuberance in America’s housing and stock markets. So far his recent off-the-wall comments have triggered only a few tremors in the marketplace.

There is a growing danger, however, that Greenspan’s continually expressed “confusion” over today’s low-inflation, steady growth economy could lead him to take actions that would trigger a recession like the one he helped create in the late 1990s with six rapid-fire interest rate hikes.

While Greenspan, rightly, garners heaps of praise for keeping the inflation rate at a remarkably low-rate of around 3 percent during his long run at the Fed, the media overwhelmingly overlook the fact that his unwise utterances often cause stock market swings that cost typical Americans billions of dollars in pension fund losses. His recent remarks fretting about a potential “housing bubble” are a good example.

Here, Greenspan confuses a few red-hot local real estate markets like Los Angeles and Washington with the nation’s overall housing climate. With at least a 10-year pent-up demand for new home construction in this country and home builders posting record sales while their stocks maintain exceptionally low price-to-earnings ratios, Greenspan clearly is talking out of his hat.

And he does the nation a disservice when he regularly bad mouths robust growth. For instance, when Greenspan first warned about the “irrational exuberance” of an overvalued stock market during a Dec. 5, 1996, speech to the American Enterprise Institute, major stock indexes plunged 4 percent overnight.

Thankfully, investors came to their senses, quickly discounted his words and rebounded into a long-running bull market.

In addition to shooting off his mouth on matters inappropriate, Greenspan has not shown a deft hand in managing interest rates. His six interest rates increases in the waning days of the Clinton administration were a major contributor to a stock market crash and triggered a recession that didn’t end until 2002.

Unfortunately, Greenspan still tends to put on blue-tinted glasses when most Americans are wearing rose-colored ones and enjoying the economic view. He already has instituted eight interest rates to slow down the current recovery, and it is hoped, as a member of the Dallas Federal Reserve recently suggested, Greenspan’s next increase will be “a ninth-inning” one.

Greenspan also should drop his current vendetta against Fannie Mae and Freddie Mac before he encourages a majority of House members and senators to impose overly stringent controls that hamper the mortgage giants’ ability to expand homeownership.

Fortunately, the Oxley-Baker reform bill just approved by the House Financial Services Committee shunned a provision proposed by the Bush administration that would have forced Fannie and Freddie to dump most of their own holdings of mortgage loans and related securities as recommended by Greenspan.

Despite leading economists warning committee members that handcuffing the two companies’ activities could sabotage a strong housing market, Greenspan has urged that Fannie and Freddie sell-off about 80 percent of their $1.5 trillion portfolio.

A child born in 1987 when President Reagan appointed Greenspan as Fed chairman already has entered the age of majority. No one person should be in control of the nation’s monetary controls for nearly two decades. Greenspan will be almost 80 when his term comes up for renewal next year.

Given his recent missteps on interest rates and his inclination to venture into areas beyond his territorial imperative, he shouldn’t wait until January to end his public career. He could make a small fortune selling his condo at the Watergate and investing in a villa by the sea at some nice Florida retirement community. And he should do it before his so-called bubble bursts.