Greenspan and Bernanke clash on US economy

WASHINGTON - AS BUSINESSWEEK put it, it was like an economic clash of the titans.

In one corner: Former Federal Reserve chairman Alan 'the Maestro' Greenspan, who may have helped roil global markets on Tuesday by warning a day earlier that the United States economy could stumble into a recession by year-end.

In the opposing corner: His successor, Ben 'the Professor' Bernanke, whose assurances on Wednesday that markets were 'working well' and the outlook for the US economy was upbeat, helped US stocks stage a rebound.

The duelling viewpoints of both men, arguably the two most influential voices on the markets, reflected the broader uncertainty over where the US economy is heading next and left some investors debating which oracle of Wall Street has the greater insight.

Mr Bernanke, appearing on Wednesday before the US Congress in a scheduled appearance, had expressed little alarm at Tuesday's market rout, telling lawmakers that 'there didn't seem to be any single trigger' and that markets 'seem to be working well'.

Nor did he betray any worry about a new report, hours before his testimony, which sharply lowered its estimate of US economic growth during the final quarter of last year to 2.2 per cent from its earlier estimate of 3.5 per cent.

The Fed's view of the economy, Mr Bernanke said, remained unchanged. 'We are looking for moderate growth in the economy going forward', with a 'a reasonable possibility that we'll see some strengthening of the economy' towards the middle of the year, he said.

His calming words helped the Dow Jones Industrial Average recover 52 of the 416 points it lost on Tuesday.

Two days earlier on Monday, Mr Greenspan had expressed a strikingly different view about the economy, when speaking via satellite to a conference in Hong Kong. The former Fed chief said signs were emerging that a recession was possible later this year.

Though he did not go so far as to predict a recession, the mere fact that he mentioned the word was enough to aggravate a global market downswing that began with stocks plunging 9 per cent in Shanghai.

Yesterday, via satellite to an audience in Tokyo, Mr Greenspan reiterated the dreaded 'R' word that may have contributed to Tuesday's rout. A recession in the US this year was possible, he said, though he qualified, as he did on Monday, that it was not probable.

His latest remarks came after three economic reports released on Wednesday added to investors' concerns: revised US economic growth estimates; new home sales that fell by 16.6 per cent in January from the previous month, the steepest drop in 13 years; and a weaker-than-expected reading on business purchases in the Mid-west - a bellwether of manufacturing activity nationwide.

Mr Robert Barbera, chief economist of ITG, a financial advisory firm, said it is hard to ignore what Mr Greenspan says.

'Bernanke speaks as a top-elite economist,' he noted. 'But...Greenspan is a creature of the markets, and as a fellow creature of the markets, I tend to agree with him.'

Mr Alfred Goldman, a senior market strategist for AG Edwards, said he has learnt to trust Mr Bernanke.

'Who is the better forecaster? If you held a vote, people would say Greenspan because he was an icon for so long,' he said.

'But remember he doesn't have access to as much information as Bernanke has now.'

Some observers questioned Mr Greenspan's judgment in commenting on a possible recession, knowing well that his views are still so closely followed.

'I do think it was somewhat inappropriate,' said Professor Kenneth Thomas, who lectures in finance at the University of Pennsylvania's Wharton School.

'Bernanke is still relatively new. Greenspan had 18 years as Fed chairman and is an icon of sorts... He still has a tremendous impact on the markets. It makes life harder for Bernanke.'

WASHINGTON POST, NEW YORK TIMES, BLOOMBERG NEWS