Robert Novak

WASHINGTON -- Alan Greenspan had acted like a closet Republican all during the presidential election campaign, doing nothing by word or deed that would impede George W. Bush achieving a second term as he had impeded the president's father's re-election 12 years earlier. But in Germany last week, the Federal Reserve chairman sounded like a Democrat on the U.S. Senate floor inveighing against Bush administration deficits.

 Greenspan's speech last Friday at the European Banking Congress in Frankfurt could just as easily have been written for Sen. Kent Conrad of North Dakota, the deficit-obsessed Democrat. Free-market conservative Greenspan warned that the U.S. current accounts deficit (largely the trade deficit) is unsupportable and that sooner or later foreign investors will either stop buying American assets or ask for a higher return. That outcome, he warned, pointed to a further decline in the dollar against the euro, to the dismay of Europeans.

 Greenspan, at age 78 nearing the end in 2006 of his long tenure as Fed chairman, in Frankfurt was performing his unofficial function as central banker for the world. What he said, however, was anything but reassuring. While his comments did not appear to seriously roil financial markets, his underlying message was that the world's financial problems were not his fault and there was nothing he could do about them. He confirmed this on Saturday in Berlin at the meeting of the Group of 20 (industrialized plus emerging nations) when he rejected any intervention in the decline of the dollar.

 Nearly all Fed-watchers are loath to criticize the iconic Greenspan, or do so only in guarded language. In his Monday report to clients, Bear Stearns economist David Malpass began: "We're increasingly concerned about U.S. policy on the dollar." He noted that Greenspan "seemed to link the dollar's value to the trade deficit." He indicated that "acceptance of dollar weakness" is cause for "concern." What supply-sider Malpass did not address is whether the current accounts deficit is really unsupportable for the foreseeable future. He probably does not think so.

 Consultant and supply-side pioneer Jude Wanniski, who does not mince words, in his Monday report to clients declared that Greenspan has "run out of reasons why Fed policy is not stabilizing the value of the dollar" and is blaming activity outside his jurisdiction. Wanniski continued: "The most worrisome aspect of Greenspan's European remarks is that he is in denial, and as long as the most powerful central banker in the world is kidding himself that he knows what he is doing, we all have to fasten our seatbelts."

Robert Novak

Robert Novak (1931-2009) was a syndicated columnist and editor of the Evans-Novak Political Report.

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