GREENSPAN'S ADMISSION.(ISSUES & INSIGHTS)(EDITORIALS)

The "wealth effect" -- the impact rising stock prices have on the economy -- has been hotly debated in recent years. And nowhere more hotly than at the Federal Reserve. Now we get a stunning admission: The Fed doesn't fully understand it.

At least that's what Fed Chairman Alan Greenspan now says.

Ever since his famed "irrational exuberance" speech way back on Dec. 6, 1996 -- in which he suggested that soaring share prices might be some sort of bubble -- Greenspan has seemed to have mixed feelings about their impact on the economy.

When the Fed jacked up interest rates from mid-1999 to mid-2000, it did so, in part, to prick the bubble of rising U.S. stock market prices. The result has been predictable.

Depending on how you count it, American investors -- who now make up more than half of all households -- have lost somewhere between $4 trillion and $7 trillion in wealth the past year. That's roughly half the value of our total GDP.

Of course, the Fed has been working furiously since Jan. 3 to undo the damage, cutting interest rates seven times for a total of 300 basis points. The economy has yet to respond.

Now, Greenspan says, the Fed never really understood the magnitude of the impact of changes in capital gains. It still doesn't. All the Fed can really say is that capital gains do matter -- a lot.