Cashing In Fed Credibility To Campaign

I now have it on good authority that Alan Greenspan has decided not to seek reappointment as chairman of the Federal Reserve Board when his term expires in June.

Indeed, the unwitting source is none other than Greenspan himself.

We know this because, over the last week, in a remarkable series of talks, Greenspan has decided to cash in his personal credibility, as well as the reputation of the Federal Reserve System, to push a radically conservative agenda while serving as cheerleader for the Bush-Cheney reelection campaign. In doing so, the politically savvy Greenspan must surely have realized he was putting his reconfirmation in this election year into serious jeopardy.

Even before this week, Greenspan had provided hints of retirement during what looked like a global victory lap, telling audiences from London to Omaha the economy was fine and there was nothing to fear from record trade deficits, the falling dollar, a housing bubble, the boom in financial derivatives or rising job losses due to trade.

On Monday, Greenspan added to his lengthening list of "not-to-worries" when he told credit union officials that the record level of household debt is really a good sign. Then, without provocation, he launched into a critique of the 30-year fixed mortgage, the foundation of the most successful housing-financing system the world has ever known, explaining how it cost consumers more over the long run than adjustable-rate loans.

Greenspan's sudden interest in the 30-year mortgage became clear the next day, when he used a Senate Banking Committee hearing to push again for the "privatization" of Fannie Mae and Freddie Mac. As the experience in other countries shows, markets left to their own devices would not offer an affordable 30-year mortgage, which is essentially why Fan and Fred were created. But what really bothers Greenspan is that a successful government program might actually deliver a social and economic good -- home ownership with financial peace of mind -- that markets by themselves cannot.

As he has before, Greenspan couched his concerns about Fannie and Freddie in terms of the "systemic risks" posed by such large and focused financial institutions. This concern over size, mind you, comes from a bank regulator who flouted the law for years to let banks back into investment banking, who never met a bank merger he didn't like and who bailed out big banks rather than let them fail. When one senator pressed Greenspan on why the doctrine of "too big to fail" was okay for Citigroup but not for Fan and Fred, the chairman could only dissemble.

Greenspan was in full Republican dress Wednesday during his appearance before the House Budget Committee. Describing the long-term deficit outlook in bleak terms, he urged Congress to cut back on future benefit levels for Social Security and Medicare -- not coincidentally, the necessary political predicate to the private accounts that top the Bush-Cheney agenda.

Then, without missing a beat, Greenspan declared that it would be a bad idea to try to balance the budget by raising taxes in any way, effectively embracing the lunatic notion that cutting taxes will generate more government revenue, not less, by stimulating additional economic growth. This theory, of course, was disproved both during the 1980s, when taxes were cut and the deficit swelled, and the 1990s, when taxes were raised and deficits turned to surplus. It also suggests the intriguing proposition that the optimal tax rate is zero, which no doubt has some appeal to Greenspan's inner libertarian.

When pressed by House members to suggest where, other than Social Security, he might cut spending, Greenspan demurred. Reaching conveniently for his Fed hat, the chairman explained that that was really a political question best answered by elected officials, as if he hadn't been up to his famously hooded eyeballs in politics all week.

Perhaps Greenspan figures he would be able to overcome a Democratic filibuster and win reconfirmation in the Senate after this impressive partisan display. Or then again, maybe he doesn't care.

Steven Pearlstein can be reached at pearlsteins@washpost.com.