Greenspan's judgement is questioned as US recovery falters

FEDERAL US chairman Alan Greenspan has backed himself into a corner.

For the past 18 months he has been hailed as a genius, but the recovery he looked to have engineered looks to have blown up in his face.

If true then watch out for further carnage on global stock markets in the near future.

Greenspan's problem at this point seems to be as much about credibility as much as anything else and therein lies a grave danger for the US economy and the rest of the world.

By slashing US interest rates to 40 year lows, at 1.75% over the past 18 months, he kept the US consumer buying and prevented the economy from going into serious recession.

It was assumed by the markets, who wanted to believe the Fed chairman who had presided over the best period of economic growth ever in the US had single handedly kept the economy from going under.

To date that seems to have been the case, but the cracks are beginning to appear yet again.

Critics argue the cracks never disappeared. They point out that the citizens of the US have moved from being net savers to net borrowers.

And they fear that when US interest rates start to move back up that millions of people will be over extended.

Concern also is growing that the much vaunted recovery in the US is not emerging.

At end of quarter one the US said annual growth of 5.8% had been achieved. Then it revised that figure upwards to over 6% but few believe that the economy will deliver that kind of annual growth in the current calendar year.

When recent data showed second quarter growth down as low as 0.3% it became apparent that the much talked US recovery was far from certain.

That 0.3% growth implies growth of 1.2%, and that figure is far removed from the bloated 6% the US government trotted out after the Q1 figure emerged.

Serious concern has arisen also by the sharp shift in sentiment from Greenspan.

Just a month back he told Congress that the recovery was underway.

Earlier this week he said the total opposite and said the prospects of another cut in interest rates had increased.

This is where the entire plot gets decidedly muggy andUncertainty about where precisely the US economy is headed has become a key concern once more.

Greenspan ought to have known a month ago that the data for the economy was less than favourable when he endorsed the recovery.

If he did not then some serious deception has been going on about the actual depth of the recovery in the world's biggest economy and if the administration has been doctoring the figures as well as big business then much worse may be on the way.

The point is that whatever about Greenspan's judgement on monetary policy he has never had to back track on his assessment of where the economy is at in his so far distinguished chairman of the US Federal Reserve.

When Greenspan has to retract it is time for the rest of the world to start getting really worried.

That has damaged his credibility. The other credibility question facing the still highly esteemed Fed boss, is in a peculiar sort of way the thrust of his interest rate policy the past 18 months.

Remember he warned the stock markets were over priced back in 1996 and again in 1998 when he coined the famous phrase "irrational exuberance" which has been done to death ever since.

Apologies for the further repetition, but that phrase captured the madness in the markets at the time that continued into 2000 before the Nasdaq crashed.

Despite that correction shares on the Dow are still well up above the 6,000 mark when Greenspan gave his initial warning.

In the case of the Dow the index is well up above 8,000 and until recently was over 9,000.

Where Greenspan's credibility has to be questioned in that regard is why, if he believed stock markets were seriously over priced he lowered the cost of money 11 times in less than two years thereby making it significantly cheaper for all to keep the bubble going.

If as many still believe the markets are over priced what will in a month's time if the markets start to fall further.

By then it is expected that another interest rate cut will have been implemented in the US while the economy and the markets are still heading south.

The next few months are likely to prove the stiffest test of Greenspan's so far illustrious career. Some fear he has ridden his luck once too often and that his monetary policy ploy was nothing short of misplaced pride in his belief in himself and in the role of monetary policy to defy the age old economic principle that periods of boom are followed by periods of serious slow down and in some cases serious recession To cut to the point one senior Dublin economist wondered publicly in a recent statement on developments in the US if Greenspan was trying to put the 'Con' back in confidence.