BLOWING BUBBLES.(The Talk of the Town)(Federal Reserve Chairman Alan Greenspan's cheap-money policy has escaped attention, but may lead to collapse in currency, stick market crash and severe recession)

Next March, Alan Greenspan will turn seventy-nine. Sound health persisting--he plays tennis and golf regularly--he will be well into his eighteenth year as chairman of the Federal Reserve Board and, depending on what happens in November, will be serving his fourth or his fifth President. Greenspan's lugubrious face and nasal monotone are as familiar and as comforting to ordinary Americans as Prozac and "The Simpsons," both of which debuted in 1987, the same year President Reagan appointed him to office. Greenspan's absence, like that of Lord Palmerston in Victorian Britain, has come to seem unthinkable.

But, in our system of checks and balances, Greenspan's position is an anomaly. The Fed is at once an independent institution and part of the government. Its chairman is Presidentially nominated and senatorially confirmed, but he takes orders from no one. The Fed's decision last week to raise short-term interest rates by a quarter of a point cannot be appealed--not to the White House, not to Capitol Hill, not to the Supreme Court. Although Congress obliges the Fed chairman to report to it twice a year on the conduct of monetary policy, politicians rarely challenge his authority. Last month, when the Senate Banking Committee endorsed Greenspan's nomination for a fifth four-year term, Senator Jim Bunning, Republican of Kentucky, cast the only vote against him. (Bunning objected to Greenspan's voicing opinions on subjects such as tax cuts and the budget deficit, which he believes are outside the Fed's jurisdiction.)

Given Greenspan's role in promoting and prolonging the stock-market bubble that burst in 2000, the deference that surrounds him seems a little overdone. A few months ago, he argued that the unusually mild recession in 2001, and the subsequent recovery, however uncertain, had vindicated the Fed. "There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble's consequences rather than the bubble itself has been successful," Greenspan told a meeting of economists. Perhaps. It's true that he has quashed fears that post-bubble, post-9/11 America would resemble post-bubble Japan, which experienced a decade of economic stagnation following the 1991 collapse of the Nikkei. He has also done his best to boost the election prospects of George W. Bush. With four months left until Election Day, employers are finally creating jobs in significant numbers--more than a million of them in the past four months, according to the Labor Department. The rise in business productivity that began in 1995 appears to have accelerated since 2001, with the annual growth rate approaching five per cent. Since productivity ultimately determines wages and living standards, this is an important development.

Nevertheless, Greenspan's claim of vindication is premature. Although the recovery looks genuine, there are serious questions about its sustainability. Between the start of 2001 and the middle of 2003, the Fed cut its target interest rate from 6.5 per cent to one per cent, the lowest level since the Eisenhower Administration. With the cost of borrowing lower than the rate of inflation, the Fed was essentially giving money away. At the ...