What He Leaves Behind

Which brings us to current circumstances. The Greenspan era, unfortunately, will not end when he departs. The instabilities and ruptures he sowed will still be with us, and he would be wise to get out of town before people recognize the full depth of his destructive legacy. The US economy is not strong and self-confident or even especially efficient. It is stumbling along under subnormal conditions, losing ground and taking on enormous debt from abroad. Nor is the United States free of the follies and risks generated during Greenspan's reign, including financial delusions and the threat of deflation. His successor will presumably be a right-winger too, but one hopes for a more supple, flexible intellect.

The weak-willed economy is an apt illustration of where Greenspan's lopsided policies have led. Four years after the 2001 recession ended, the economy is still struggling to overcome its "jobless" recovery (or "job-loss" recovery, as manufacturing unions call it). Corporate profits have rebounded to extraordinary levels, but companies are reluctant to invest the capital. Wages, meanwhile, remain flat or falling, especially for working-class occupations. Forty-six months into this expansion cycle, the total hours worked in nonsupervisory jobs have risen only 2 percent since the recession ended--compared with rebounds of 9-16 percent after the four previous recessions. Manufacturing, once the vital core of US prosperity, is still losing jobs every month. Its total working hours are down 9 percent since 2001.

This is the most sluggish recovery on record, which seems to puzzle the Fed chairman. But it reflects the Greenspan style of running things; he presided over a similarly tepid recovery in the early 1990s. Tom Schlesinger, director of the Financial Markets Center, a monetary-policy watchdog, thinks the lopsided economy is the most disturbing hallmark of Greenspan's governance. "The Fed has said almost nothing about this, except [vice chairman] Roger Ferguson says there's nothing the Fed can do particularly," Schlesinger complains. "The jobless recovery appears to be a new feature of the US business cycle. Yet the principal agent of economic management says nothing."

In fact, Americans seem to be confronted with the very conditions Keynes warned against: an economy performing, more or less permanently, far below its potential. That situation proves satisfactory for the affluent and for business enterprise, since wage pressures are muted, but it makes life insecure or miserable for most everyone else. The logical response is a fundamental policy shift in favor of work and wages--boosting incomes and demand--but that approach would require taboo measures from the Keynesian past that even most Democrats don't understand or support.

Meanwhile, the financial froth of speculative bubbles--and their dangers--are another enduring legacy of the Greenspan era. "Irrational exuberance really is still with us," Robert Shiller wrote in the new, revised edition of his book. Notwithstanding the earlier meltdown, the stock market remains dangerously overvalued by historical measures, Shiller warns, and is now accompanied by dramatic price inflation in real estate. These two bubbles are false valuations by markets and will burst sooner or later. Shiller urges investors to recognize the "risk that in 2010 or even 2015, the stock market will be lower still in real, inflation-corrected terms, than it was in 2005."

Why do these financial delusions keep arising among investors? Shiller describes many causes, and they include Alan Greenspan's Fed. The chairman's earnest solicitude for financial markets, Shiller explains, contributed to the "gold rush" psychology, convincing financial players that the central bank would always come to their rescue and never turn against them. Their sloppy exuberance is the opposite of the manly competitive ethos and market discipline preached by Greenspan and the right. Worse, it is bound to injure innocent people. "Things happen during a speculative bubble that can ruin people's lives," Shiller noted. "Little will be done to stop these things if public figures consider themselves beholden to some overarching efficient markets principle and do not even recognize over-speculation as a real phenomenon."

The specter of deflation is, meanwhile, still hanging over the United States. Greenspan initially took dramatic action to avoid the same fate Japan suffered after its financial bubble collapsed in 1990--a low-grade depression and a decade of sputtering stagnation. Cutting interest rates to near zero, the Fed succeeded, at least for the short run. But unless the economy gains more normal balance and energies in the next year or so, the United States may yet be facing the same ditch. The problem, explains William Gross, managing director of PIMCO, a major bond investment house, is that long-term rates have already fallen about as far as they can in real terms. "The Fed may soon be running out of fuel," Gross warns. "If the asset pumps run dry and the kerosene cans empty, the inevitable path of the US economy will reflect slow growth at best and recession as a realistic alternative."

Greenspan, meanwhile, is once again targeting the real economy, raising interest rates to gain some leverage but also flirting with a recession of his own making. He appears to be slyly hoping that higher rates will moderate the speculative bubbles without crashing the economy. Let's hope he wins the gamble this time.

The one-eyed king is in a corner and running out of moves, yet sticking with his failed convictions. Like it or not, we are still living in the lopsided world he made. And this half-blind king is still scary.

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