The Landing Ahead: Hard or Soft?; It's the Hot Debate on Wall Street, and Two Economists Are Its Leading Protagonists
With the exquisite timing of a master politician, Federal Reserve Chairman Alan Greenspan last week thrust himself into the middle of what has become a raging debate over the near-term prospects for the U.S. economy.</br></br>Will the U.S. economy be able to manage a soft landing from the heights of spectacular and speculative growth of the past two years, as Greenspan had hoped when he initiated a series of interest-rate increases last year? Or has the economy now slowed so far so fast in the past few months that a recessionary hard landing is as likely as not?</br></br>Back in 1996, Greenspan had warned Wall Street of an "irrational exuberance" that, if not contained, could eventually derail the American economy. His plea for moderation, while widely noted, was also widely ignored, and the Fed was forced to step in last year and raise interest rates in an effort to slow U.S economic growth to a less threatening pace.</br></br>Now, four years later to the day, Greenspan was in New York before a group of bankers pleading for moderation once again. This time his concern was about an irrational foreboding that seems to have gripped Wall Street, which Greenspan warned could be a self-fulfilling prophecy if investors refuse to invest and lenders refuse to lend. Signaling an imminent change in Fed policy later this month, he hinted that the Fed was ready to cut interest rates at the first credible signs that the economy was headed for a crash landing.</br></br>Although Greenspan's calming words triggered a brief rally in the financial markets, they were quickly drowned out by another wave of gloomy news coming out of corporate America--bad-loan problems at the country's biggest bank, declining sales of personal computers and computer chips, and holiday shutdowns of many of the nation's auto plants. And just Friday, the index of consumer confidence recorded its largest monthly drop in a decade.