What is Greenspan Really Worried About?

A casual glance at the financial headlines this past week might have lead a person to conclude that Alan Greenspan was still Chairman of the Federal Reserve and Ben Bernanke was still giving lectures at Princeton U. The financial pages were full of Greenspan speaking on a wide range of matters related to the US economy. Significantly, he has had almost a quote a day on the subprime mortage crisis and how it relates to the overall real estate market and, ultimately, to the overall economy. I have spent most of my professional life trying to learn "Greenspeak." I claim no fluency in this arcane language, but I have have picked up an understanding of a few of its words and principles. The main thing to understand about Mr. Greenspan is that his primary goal in his public statements is to initiate debate, shape it, or correct it. Do not make the mistake of thinking that he is talking in some attempt to remain in the spotlight. He knows his place in history is secure. In my mind, if he is talking, it is because his take on the economy is different from the consensus. Here is a short list of what I think Mr. Greenspan is trying to say by his recent public comments.

1. He genuinely believes the subprime real estates woes will spill over into the prime real estate market, at some level.
2. Although there is no evidence, yet, the poor real estate market will slow the overall economy, perhaps, into negative territory.
3. He believes the primary problem the Federal Reserve should be addressing is economic growth and not inflation.
4. If the Fed waits for core CPI to fall to the comfort level before starting to cut rates, they risk letting recession take hold.
5. A time to "break the rules" is at hand. The Fed must have the boldness to start cutting rates when the economy appears to be growing at its optimal level and core CPI is above the comfort level.
6. He is doing this because he does not believe there is a consensus for this action either in the market or at the Fed.
7. Finally, heaven forbid, that the Fed should hike rates to fight inflation in the face of the coming economic slow down.

Mr. Bernanke and his fellow members of the Federal Reserve are meeting this week. We'll listen carefully to their official statement. If it is primarily aimed at fighting inflation, I have the strong feeling that Mr. Greenspan will stay on the offensive. If they emphasize that economic growth prospects appear to be dimming, I think Mr. Greenspan will stand down.