Investors look to the Federal Reserve chairman for a rate cut. They get it but the market keeps falling, tumbling towards bear territory. As US equities fall and the economy tanks, the dollar gets ever stronger. What is going on? And who, as Vladimir Lenin used to ask, is to blame?
Wall Street analysts are piling criticism on the maestro, saying he has lost his touch. "Alan Greenspan, the cock-of-the-walk on Wall Street for the last decade as the market soared, is suddenly the most reviled figure in the United States, cited as personally responsible for the wipeout of almost $4 trillion (€3.59 million) in wealth in the last year as the market tanked," said Mr David Callaway, executive editor of CBS.Market Watch.com.
Mr Greenspan has jolted monetary policy more aggressively than at any other time since the early 1980s. However, analysts such as Mr Jack Shaughnessy, chief market strategist of Advest - who has seen his recent buy recommendations go down the tubes - blame Mr Greenspan.
"The cut was not aggressive enough," he complained, referring to the half-point rate reduction announced on Tuesday.
Reducing rates has the effect of lowering the costs of borrowing for businesses and consumers, but clearly other factors are working against Mr Greenspan's attempts to prevent economic weakness becoming recession.
The magnitude of the stock market decline shows that investors do not believe the rate cut will reverse the slide in corporate profits in the near term. Many businesses have excess capacity and backed-up inventories and are reluctant to borrow more because of falling asset values, even as financing costs fall.
"The possibility of consumption and investment spending declining in the face of huge stock market losses and diminished confidence in the future is what could provoke a serious downturn," Ms Janet Yellen, a former Federal Reserve governor, told the Wall Street Journal.
The lack of confidence among investors has translated into low interest in buying and therefore lower stock prices on Wall Street, where people are deserting mutual funds to change their assets into dollars. Selling was also set off, analysts said, by widespread fears that the global economic downturn would not end in the near future.
"No one is stepping up to buy anything," said Mr Patrick Boyle, head financial trader for Credit Suisse First Boston, after the Dow Jones had fallen 252 points in two hours yesterday. "A lot of money is going to cash; only the bond market is performing well."
Investors withdrew a net $11.4 billion from stock funds in February, according to the fund-tracking firm, Lipper Inc. This was the first month that more money left stock funds than went in since August 1998 - the time of the Russian bond default.
February also saw the largest net stock-fund redemptions since $9 billion was pulled out in the market crash of October 1987. March could set new records.
The dilemma facing the Federal Reserve is that 48.2 per cent of all US households have part of their savings tied up in stock, compared with just 19 per cent in 1983.
The falling markets reduce across-the-board consumer spending, which drives two-thirds of the economy. "The Fed lowering interest rates is powerful medicine, but it takes nine to 12 months to fully affect the economy. The problem is we could have a recession before then," said Mr David Wyss, chief economist at Standard & Poor's.
Against this darkening background, the dollar has strengthened rather than weakened. Since the beginning of February, the dollar has risen by 4.6 cents against the euro and 5.9 cents against the yen.
"The dollar should be under pressure," said Mr Robert Sinche, head of currency strategy at Citibank. "What is going on in the currency market is more baffling than the recent plunges in the Dow," said the New York Times.
The consensus is that the US appears to investors to be handling the economy better than Japan or Europe. All around the world, markets are in trouble "and the dollar is where people want their money", said Mr Bill Seidman, CNBC chief commentator.
Among the world's central banks, the Fed "is going to be the most forceful in guiding us through these troubled waters", said Mr James Galassman, senior US economist at JP Morgan.
A strong dollar could slow growth by depressing exports but it could also encourage Mr Greenspan to lower interest rates again, analysts said. A weak dollar would make imports more expensive and increase inflationary pressures, and would also require higher interest rates to attract foreign capital to service the trade deficit.
