Atelier No.17, article 15

Fareed Zakaria :
© Newsweek, February 16, 2001

                          The Wide World's Banker of Last Resort Looks Overextended

                                  NEW YORK Alan Greenspan is surely the least criticized
                                  American public official since George Washington.
                                  However, looking at the U.S. economy today, one has to
                                  wonder if the Federal Reserve's handling of it in the past
                                  three years has been as wise or as consistent as the
                                  Greenspan myth makes out. Rather than keep a steely
                                  gaze on the core rate of inflation, the Federal Reserve's
                                  historical role, Mr. Greenspan has massaged interest
                                  rates in response to the crisis of the moment, whether it
                                  be Russia's default, failures of hedge funds or bubbling
                                  technology stocks. These are all serious concerns, but
                                  should the Fed be using its nuclear weapon - short-term
                                  interest rates - to coax and cajole global bankers and
                                  American investors to behave well?

                                  Consider what was supposed to have been Mr.
                                  Greenspan's finest hour. In the late fall of 1998, after
                                  Russia's default and a panic in global markets, Mr.
                                  Greenspan suddenly and dramatically cut interest rates.
                                  The markets rallied and, so the mythology goes, the global
                                  economy was saved.

                                  But it was exactly the wrong time to cut rates in America.
                                  The U.S. economy was roaring - growing at close to 6
                                  percent in the last quarter of 1998. The Fed boosted the
                                  economy when it was already on steroids.

                                  Mr. Greenspan's dilemma in 1998 was that the Federal
                                  Reserve Board had become the banker of last resort of
                                  the global economy. This was a contradiction of its role as
                                  watchman of American inflation and growth. In solving a
                                  global problem, Mr. Greenspan may have caused a local

                                  The rate cuts weren't all. He had bought into the
                                  over-hyped fears about Y2K, and in late 1999 the Federal
                                  Reserve swamped the markets with as much liquidity as
                                  the private sector wanted. The result of low rates and easy
                                  money at a time of galloping growth produced Mr.
                                  Greenspan's nightmare, an out-of-control stock market.

                                  Spooked by the spiraling stock market, Mr. Greenspan
                                  started raising rates in June 1999, only six months after he
                                  had cut them, and raised them six times to 6.75 in an
                                  economy in which inflation was virtually nonexistent except
                                  for energy costs, which Mr. Greenspan had long
                                  maintained should not be crucial in the Federal Reserve's
                                  considerations. The high interest rates proved to be an
                                  overdose. In his testimony on Jan. 25, Mr. Greenspan
                                  announced that growth had slowed to close to zero.
                                  Because the Fed could not have wanted zero growth, by
                                  his own admission he had gone too far.

                                  Now he has begun slashing rates in the hope that the
                                  stock market will rally and business and consumer
                                  confidence will rise. After these three years of seesawing
                                  rates, the image that emerges of Mr. Greenspan is quite
                                  different from the popular perception. He has veered from
                                  guardrail to guardrail, reacting to one crisis only to
                                  produce another.

                                  It is impossible to fault Mr. Greenspan for his choices at
                                  the time - he made brave and intelligent decisions in a
                                  brutal environment. The atmosphere in 1998 was spooky;
                                  the stock market was frothing in 1999. Hindsight is 20-20.
                                  But that is why we can learn something from it.

                                  Market volatility is here to stay. And the tension between
                                  the Fed's international role and its domestic one will
                                  increase as countries around the world, particularly in
                                  Latin America, link their currencies to the dollar.

                                  What we will rediscover in the next few months is that
                                  economics is a human science, full of uncertainty, intuition
                                  and psychology. From the purchasing manager of a store
                                  who must decide whether an economy is in a soft slump or
                                  a hard landing to the Fed chairman, people act on the
                                  basis of imperfect information. And they are all subject to
                                  human error, even Alan Greenspan.