Greenspan Dethroned

March 27 -- The law that what goes up must come down has lately applied not just to overpriced stocks, but also to reputations.

Case in point: Alan Greenspan, the owlish, likeably jug-eared Fed chiefwhose standing was elevated to absurd heights in the good times by afawning media and Wall Street. "He was revered prior to '98, but he wasanointed in '98," says David Orr, chief economist at First Union CapitalMarkets. "It was a coronation."

The level of adulation for Greenspan was off the scale compared withearlier Fed chairmen, as was the tremendous expansion of the economy,which began 10 years ago.

But lately that invincible image has started to fray around the edgesas companies have retrenched, laying off employees and slashing spending,and the Nasdaq and S&P 500 stock indexes have stumbled into bear market territory.

The Wizard Is Only Human

One analogy compares Greenspan to the Wizard of Oz — right now investors are alot like Dorothy, just discovering that the Wizard is only a human being.

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The question, says finance professor Meir Statman of Santa ClaraUniversity, is "whether what is happening now is something that was boundto happen, a wave much too powerful even for Greenspan [to withstand], orwhether he was sluggish in his response."

Critics on Wall Street say the Fed chief deserves blame for the slumping stock markets. Some complain the Fed hiked rates too aggressively last year, contributing to the currenteconomic slowdown. Between June 1999 and the following May, the Fed raisedinterest rates by 1.75 percent, to 6.5 percent.

Since January the Fed has changed its course. It's proceeded to cutrates by almost as much, slashing 150 basis points in less than threemonths.

But even that's not enough to appease some critics. In a Wall StreetJournal editorial last month, Wayne Angell, chief economist at BearSterns and a former governor of the Fed, argued that the times call formore aggressive cuts, given the dramatic drop in annual economic growthfrom 5 percent to 1 percent last year.