During the boom years Greenspan was a god. Now, he's incompetent. I think the reality is much more complex. The US is suffering from an investment boom and bust, something we haven't seen this century. Previously recessions were caused mostly by policy errors(monetary or fiscal) and the remedies were relatively straight forward. Cut interest rates, cut taxes and increase gov't spending.


Things are a lot different this time around. The Fed has cut interest rates dramatically and this has probably prevented a deep recession by keeping the consumer afloat and the housing market intact. Until recently, the economic recovery seemed on track and the ever tumbling stock market was just the unwinding of the bubble. Now, it seems that the recovery is very much in jeopardy. ISM this week was extremely weak as was today's payroll and workweek numbers. GDP at 1.1% is low, but not too bad when you look at the sub components. Both consumer spending and business investment were only marginally weaker than expected... most of it was due to imports and lack of inventory rebuilding, which is a bit puzzling.


Anyways, we've had a downturn in stock markets, which in turn has knocked confidence(both business and consumer) and now it appears that the final leg- business investment and consumer spending might be next. If it happens, we're going back into recession.


Greenspan is in a very tight spot. The economy continues to go south, but just maybe it will pull through this very dangerous time. If the consumer can just hang in there until business spending picks up again, then we will return to trend growth(nothing like the late 90s but reasonbaly strong). Thats why he's trying to talk up the economy... so that consumer confidence, and spending doesn't collapse before business spending recovers.


The alternative is to cut rates again, but there is huge danger in that strategy. The market is already pricing in a 25 cut by year end and today Goldman came out with a 75 bps cut prediction. Having cut so much, Greenspan only has one bullet left before we hit the Japan problem of monetary policy. And if he does cut, he's got to make it count. The risk is that the market views it as sheer desperation and confidence actually falls even more.


So, Greenspan is waiting and will try to talk up the economy, praying that the consumer once again pulls the US economy through.


Should make for an intersting few months.