Critics chide Greenspan but maestro legacy endures

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WASHINGTON, Sep 18 (Reuters) Alan Greenspan's record was under attack as his memoir hit bookstores with critics lambasting him for inflating asset bubbles and undermining fiscal discipline in Washington. But his reputation as one of the world's best-ever central bankers will endure.

New York Times columnist Paul Krugman was scathing of the former Federal Reserve chairman's admission of disappointment in the fiscal policy of US President George W. Bush.

''That criticism comes six years late and a trillion dollars short,'' Krugman wrote in the Times yesterday.

Greenspan is at pains in the book to point out that while he advocated lower taxes, he called for them to be twinned with spending restraint. In fact, this fiscal discipline was not forthcoming from the White House, which placed ''little value'' on the long-term consequences of their action, he wrote.

Critics also say ultra-low interest rates on Greenspan's watch are partly to blame for getting the economy into its current predicament, in which a deflating housing bubble has raised the risk of a recession.

Greenspan disagrees.

''I'm fully aware of the fact that everyone thinks that the Federal Reserve, back when I was chairman, inflated the economy.

Well, we didn't,'' he told the cable channel CNBC.

''What we were responding to was global forces which every central bank was responding to. We had a continual, gradual decline in the rate of inflation,'' he said.

SOFTENING RECESSION'S BLOW The Greenspan-led Fed slashed rates following the March 2000 collapse in technology stocks and the Sept. 11 attacks on the United States in 2001. The fed funds rate target reached an ultra-low 1 per cent in June 2003 and was held there for a full year, although the United States suffered only a mild recession in 2001.

The shallowness of the 2001 recession was the sort of result that had already earned Greenspan the sobriquet 'maestro' in a biography by journalist Bob Woodward.

Critics argue, and have done so for years, that Greenspan was a serial bubble blower, who championed asymmetric monetary policy that slashed credit costs when US markets or growth stumbled, but who was tardy in raising them when the economy was strong.

''When there was anticipation of deflation, the Greenspan Fed was very pro-active. When there was evidence of actual inflation, or other signs of overheating, the Fed was usually a little more dismissive,'' said Gregory Hess, an economics professor at Claremont McKenna College in Claremont, California.

This behavior -- termed the 'Greenspan Put' -- has been blamed variously for surging emerging markets in the mid-1990s, the dot-com stock market bubble from 1997 until early 2000, and the red-hot US housing market whose speedy cooling has triggered a global credit crunch.

''There was a bias to his design. That being said, there was also a lot of success in what he accomplished,'' Hess said. ''Both the public and Federal Reserve historians will see that his run was better than most, and that he did not squander the benefits that (preceding Fed Chairman) Paul Volcker provided the economy.'' GETTING BEYOND BLACK MONDAY Investors fondly recalled the days of prompt Fed action last month when credit dried up as problems in the US subprime mortgage market spread fear around the world, and some slammed his successor, Ben Bernanke, for not responding with maestro-type speed.

But hindsight is a beautiful thing. And as fellow policy-makers who sat with Greenspan in the Fed's boardroom early this decade recall, the downside risks felt real enough at the time to call for aggressive Fed action and a lengthy period of unusually low rates.

''We had been looking at a year and a half of disinflation as we got into 2003,'' said Alfred Broaddus, who retired as the president of the Richmond Federal Reserve Bank in July 2004.

The core personal consumption expenditures prices index, the Fed's favored inflation gauge, hit a year-over-year low of 1.2 per cent in September 2003 and was hovering at just 1.4 per cent in November that year.

''You can make a limited case that we should have begun the tightening cycle a little sooner ... It is hard for me to see how that could threaten his entire legacy,'' Broaddus said.

''He was in office for 18 years ... He got us through that whole period -- 1987, 1998, the early 1990s (savings and loan) crisis -- and we got through all of that with two relatively mild recessions,'' he added.

He was, of course, recalling the US stock market's crash 20 years ago on October 19, known as ''Black Monday,'' as well as the near collapse of hedge fund Long-Term Capital Management in October 1998.

REUTERS RC BST0517

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