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."
The chairman's Frankfurt remarks came as a surprise to even the closest Greenspan-watchers, and may be traced to deep distress in Europe over the U.S. presidential election returns. The European financial community was confident that Sen. John Kerry would be president and, as he promised, would force through Congress a series of U.S. tax increases that supposedly would end the decline of the dollar against the euro. To the Europeans then, Bush's unexpected survival means more of what European Central Bank President Jean-Claude Trichet has called a "brutal" rise of the euro.
Thus, Greenspan's speech sounded as though he was trying to get himself off the hook by acknowledging that Europe's economic plight was America's fault. But his placing the blame on the U.S. trade deficit did not cheer his colleagues in Berlin. As one American analyst puts it, it is Europe rather than the U.S. that has the dollar problem.
Part of the problem is that China's and other Asian currencies are pegged to the dollar. Just as Asia depends on exports to the U.S., Europe depends on exports to Asia. At the heart of this equation is global reliance on the American economy's dynamism and prosperity.
Since Greenspan often strays far from the conventional jurisdiction of a central banker, he might well have lectured his European listeners about the need for structural reform of their own economies to cut away the socialistic undergrowth. Instead, he did his imitation of Sen. Conrad fantasizing about the revenge of America's creditors. His speech's minimal negative impact on financial markets may suggest a new awareness that the chairman wears no clothes.