Many factors, not just Fed, affect economy

Sunday, September 15, 2002

Nobody pays much attention to the policy makers when everything is going well -- particularly if our pocketbooks aren't adversely affected.

Over Alan Greenspan's 16 years as Federal Reserve chairman -- the second longest tenure in history -- the influence and impact of the Fed's economic tinkering have been little criticized and mostly applauded, except when the economy sours.

That's what happened in the 1990-91 recession. Second-guessing became the order of the day then just as it is now, thanks to an economic tailspin that began in March 2001. In between was a record decade-long economic expansion during which Greenspan was considered to be not only an economic wizard, but a hero as well.

Now Greenspan is being widely criticized for not doing enough to stabilize the economy. What "enough" is would be difficult for anyone to quantify, but clearly what the Fed chief's critics want is a return to the 1990s economic boom we all grew to love -- and take for granted.

Greenspan isn't the only target of those who complain about the change -- and, sometimes, depletion -- of fortunes in the past 18 months. The polices of George W. Bush's administration also have become fair game for those who think a bit of political fine-tuning here or a couple of tax changes there would sort everything out.

But many factors have had a hand in creating our current economic situation, one that has seen forecasts of vast government surpluses evaporate into renewed deficits. These are factors that would have produced much the same results regardless of who was at the helm of the Federal Reserve. Indeed, the tide of economic change very likely couldn't have been altered if George W. Bush, Al Gore or Bart Simpson had been elected president in 2000.

First on the list of factors responsible for today's economy is the fact that the stock market became so overpriced that paper fortunes were always in jeopardy. This was the "irrational exuberance" to which Greenspan referred and for which he was roundly chided.

Part of the exuberance was fueled by the dot.com wave of investment that produced instant millionaires one day and paupers the next. At its height, initial public offerings of any Internet-related enterprise produced a scramble of willing investors who pushed stock prices sky high.

Venture-capital activity also soared during the boom times, further contributing to the risky underpinnings of the inflated stock market.

Economic confidence was hit hard by a corporate ethics and accounting meltdown that left some new corporate giants in rubble. Once the dam broke, the flood of overstated earnings left a wake of jittery investors, a new wave of unemployment and the messy debris of deposed corporate executives and investor lawsuits.

Overall, last year's recession saw $7 trillion disappear from stock portfolios.

Thanks to sinking stock markets, baby boomers who never were poster children for systematic saving or retirement planning suddenly found what little they had set aside -- much of it in mutual funds -- was suddenly worth only a fraction of their former nest eggs. Most of these soon-to-be-retirees have never fully understood the stock market. And with dwindling quarterly reports from their 401(k) plans, they quickly became reluctant players.

Then came the terrorist attacks. Confidence in the economy was further eroded by security fears, a relatively new worry for most Americans.

Further uncertainty arises from the likelihood that the Bush administration will press its call for a "regime change" in Iraq into an all-out military invasion. While many Americans strongly support such action, the current uncertainty over what it will take to replace Saddam Hussein and the hesitation of most of our supposed allies are contributing to an overall malaise that does little to bolster the U.S. economy.

In congressional testimony last week, Greenspan offered little indication of what the Fed's next steps might be when policy makers meet Sept. 24. Interest rates, already at a 40-year low, have not prevented a bipartisan push for the Fed to do more to rekindle the economy.

The big question is: What is the magic formula? Once again, all eyes will be on Alan Greenspan and the Federal Reserve for an answer.

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