The Greenspan hangover

CENTRAL BANKERS seldom inspire cults of personality, and former Federal Reserve chairman Alan Greenspan has had a better run than any of his predecessors. But as time goes by - and the long-term consequences of some of his decisions become clear - Greenspan may be remembered not for knowing all and seeing all, but for the remarkable fact that so many people thought he did.

As Greenspan promotes his new memoir, "The Age of Turbulence," much of the commentary on it has focused on its dishier parts. He recalls that Richard Nixon disliked everyone and expresses disappointment with Bill Clinton's dalliance with Monica Lewinsky. More substantively, he faults his fellow Republicans, under the current President Bush, for throwing fiscal restraint to the wind.

But wait a minute. When Bush and Congress were poised in early 2001 to approve budget-busting tax cuts that would eventually erase Clinton-era surpluses, Greenspan was in a better position than anyone to point out the folly of the idea. After arguing throughout 2000 that budget surpluses were better spent on paying down the national debt than on tax cuts, Greenspan suddenly seemed to reverse himself just before Bush's inauguration and gave testimony widely interpreted as endorsing the new president's plan.

The former Fed chief now expresses surprise that his comments turned out to be so "politically explosive," as his memoir puts it. But Greenspan was a public-policy rock star. If he didn't know how much influence his pronouncements had with policy makers and average Americans, he was the only one.

That wasn't his only misstep. His successor, Ben Bernanke, is trying to cope with an orgy of over-borrowing by underqualified homebuyers - a problem that Greenspan, at best, failed to foresee. He pushed interest rates to historic lows, which was great for economic growth in the short term. Yet this approach didn't just encourage a lot of people to borrow heavily to buy homes; it also warped homebuyers' perceptions, convincing them that real estate prices would climb ever higher - and that only a chump would stay out of the housing game. Rather than red-flagging dicey loan products, Greenspan publicly touted the virtues of adjustable-rate mortgages.

Now Greenspan's legacy is limiting Bernanke's options. Last week, to keep the mortgage mess from metastasizing into a broad credit crunch, the Fed announced a half-point interest rate cut. Yet with fears of inflation on the rise after years of low interest rates, Bernanke may have little room to make further cuts if economic signs continue to worsen.

Greenspan made his name by presiding over years of economic expansion. But the party fueled by big tax cuts and rising housing prices has ended, and the worst of the hangover may be yet to come.