His report to Congress Tuesday was surprisingly tough on corporate executives, calling for stronger regulation. But more surprising was his upbeat forecast that despite the stock meltdown, economic growth will nonetheless stay in a healthy range of 3.5 to 3.75 percent and that unemployment will actually drop.
In fairness, Greenspan's first job is to restore confidence. Some of what's going on is panic selling -- the flip side of the hysterical stock buying of the giddy 1990s. But much of the selling is a belated acknowledgement of economic reality and the market was unimpressed by Greenspan's comments. Also, Greenspan needed to signal that he has no intention of lowering interest rates. The dollar is sinking against other major currencies because foreign investors are pulling back from US financial markets. Cutting interest rates would only cause the dollar to sink further. But if the economy is as basically sound as Greenspan says, there's no need for a rate cut.
Still, there was a kind of unreality to the confidence of the usually dour Fed chairman. Look around the economy for a place to invest and it's hard to find a really healthy sector.
Telecommunications, yesterday's darling of deregulation, is a disaster. Too many miles of optical fiber were laid, too many companies tried to start up, too much money was spent on mergers.
The pharmaceutical industry, despite skyrocketing drug prices, has taken some of the worst hits. But if anyone is unhappier than drug company investors, it is hard-pressed drug consumers. Congress may soon approve a prescription drug benefit, which will include some kind of price restraint; otherwise the benefit is unaffordable. That will only reduce company margins.
Other parts of the biomedical industry such as hospitals, HMOs, and nursing homes are in a new cost squeeze. This means both layoffs and increased charges to consumers, neither of which is good for the economy.
Silicon Valley keeps looking for a turnaround, but the demand just isn't there. You can buy only so many computers so often.
The wave of profit restatements and bankruptcies is taking its toll on banks. This past week, Fleet Bank, New England's largest, announced a big loss.
And state and local governments find themselves in a bout of belt-tightening not seen since the 1970s. This will result in tax increases, service cuts, or layoffs -- and often all three.
Basically, there is no source of economic news that is likely to ignite a stock market turnaround any time soon. Will the real economy follow?
For now, consumer spending is holding up (thanks to record debt), but polls show consumer confidence eroding. Last week alone, the market lost $1.2 trillion of its value. Many people in their 50s and 60s are putting off plans to retire and are pinching pennies.
As long as working-age people have jobs, their core spending tends to hold up. But they, too, are beginning to defer discretionary purchases.
Of course, though the financial scandals are eerily similar, this stock market implosion is very different from that of the 1930s. Today's economy still has many automatic stabilizers that didn't exist back then.
It has Social Security, unemployment insurance, welfare spending, federal deposit insurance, and a larger military. Together, all public spending equals about one-third of national income, and this spending is largely immune to stock market crashes.
Government tax revenues may decline, but the government tends automatically to slip into deficit spending during downturns, which is just what the economy needs.
So while Greenspan may be too optimistic when he predicts rising growth and falling unemployment, he is right that we are not on the verge of a depression.
In many respects, this stock market collapse, like the last one, was brought to us courtesy of free-market ideology. The speculative abuses of the 1920s were re invented in the 1980s and 1990s. Until the scandals broke, the political and ideological power of organized business blocked regulatory interventions.
However, despite their political influence, the market fundamentalists did not succeed in repealing the core achievements of the New Deal. Social Security and Medicare remain government-guaranteed. Welfare and unemployment insurance were trimmed but not repealed. Government deposit insurance was condemned as an outrage against the free market, but it's still there.
In a market panic like this, even free-market gurus like Alan Greenspan turn to government regulation to restore confidence. If this corporate implosion is short of a general economic disaster, it's government we should all thank.
