Greenspan's Deficits

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Not long ago, of course, Greenspan was the one trusted oracle who Wall Street and Washington believed could steer through such choppy waters. After taking over from inflation slayer Paul Volcker in 1987, Greenspan greatly expanded the role and influence of the Fed Chairman, whose principal job is to oversee monetary policy. His economic mission creep included commenting on everything from tax cuts and the housing market to entitlement programs. In 1996 he warned investors of "irrational exuberance," only to turn around and exacerbate the stock market bubble, his critics allege, by becoming a cheerleader for the New Economy. Many Fed watchers believe that by injecting himself--usually at Congress's request--into issues outside his official domain, he could have set a dangerous precedent for his successor, who could be blamed for problems beyond the Fed's control. "If you get someone who is not as good as Greenspan, it can lead to attacks on the Fed," says Frederic Mishkin, an economics professor at Columbia Business School and a former research director at the New York City branch of the Federal Reserve.

The gloves are already off. Senator Hillary Clinton chastised Greenspan at a Senate hearing when he tried to square his support for the 2001 tax cuts with his current dire warnings about the budget deficits and unsustainable entitlement programs. "If confronted with the same evidence we had back then, I would recommend exactly what I recommended then," he said, referring to the rosy budget-surplus projections at the time. "It turns out we were all wrong."

Considering that many economists never believe such long-range forecasts, Greenspan's defense left many observers shaking their heads. His argument that he supported tax cuts only in general--not the Bush tax cuts--has also tarnished his credibility. "What the U.S. needs is a truly politically independent central banker," says Morgan Stanley chief economist Stephen Roach. "When Greenspan expresses his opinions on nonmonetary policy issues, whether he wants to admit it or not, he becomes identified as an advocate and it influences the decision making."

With his carefully cultivated image as a wonk, Greenspan has been heard to say that he is a prop in the long-running political theater that is Washington. But he is also clearly an actor--one of Washington's shrewdest power brokers. He plays politics just as he plays his favorite sport, tennis, in which he is known on occasion to switch his racquet from his right hand to his left in the middle of a point to avoid using his weaker backhand. So it was that during the 1990s the onetime adviser to Presidents Richard Nixon, Gerald Ford and Ronald Reagan joined the deficit hawks in Bill Clinton's Administration to support raising taxes, only to bless, however obliquely, President Bush's 2001 cuts in the wake of projected surpluses.

Ironically, much of Greenspan's success is attributed to his obsession with data and his uncanny ability to obfuscate. Known around Washington as Greenspeak, his signature style is marked by drawn-out, cryptic statements on the economy that leave listeners alternately impressed and befuddled. "His style of speaking reflects his style of thinking--careful, very nuanced, analytically driven and balanced," says a Fed official.