It once seemed the Fed chairman could do no wrong but as the US economy flounders, his handling of it is under scrutiny

From the chief executive as hero to stock options and dotcom billionaires, few emblems of the 1990s bull market remain unsullied. Indeed, many of the hollow promises and dashed expectations arising from that era are now blamed for today's economic woes.

Only a few months ago, Mr Alan Greenspan would have seemed immune from such reappraisal, his place in history secure. He was the "maestro", to borrow the title of Bob Woodward's biography, who presided over the longest post-war expansion and then brought the US out of one of the shortest recessions in recent history.

Yet as the US economic recovery sputters and investors pick fractiously over their ravaged stock portfolios, Mr Greenspan's record is under scrutiny as never before. The reassessment now under way calls into question not only investors' unswerving faith in the "cult of Greenspan" but also the skilfulness of his month-by-month handling of the US economy.

As Mr Paul McCulley, managing director of Pimco, the California-based investment firm, puts it: "Unless there is a return of the feel-good factor in the next couple of years, Mr Greenspan's term will have the lustre of nickel rather than gold. The average investor feels suckered by his happy talk about the new economy."

Those economists who have long argued that the Fed should have pricked the incipient bubble early on - perhaps in December 1996, when Mr Greenspan famously warned against "irrational exuberance" - feel a warm glow of vindication.

That Mr Greenspan is acutely aware of this gathering chorus is evident from his speech last month at the Fed's annual retreat in Jackson Hole, Wyoming. Its vehemently defensive nature, and the extent to which it was apparently aimed at preserving his legacy, surprised many.

Critics have two main charges. The first, more difficult to make, is that Mr Greenspan should have used interest rates or lending controls to slow the surging stock markets. That equities were overvalued in the late 1990s is now accepted by all but a tiny group, but the case for using interest rates to attack asset price bubbles without also damaging the real economy is far less accepted and was even less well developed at the time.

Most economists accept a sharp monetary tightening in 1996 or 1997 would have been extremely risky, particularly given the political constraints under which the Fed acts. Indeed, Prof Janet Yellen, a former Fed governor and now an academic at Berkeley, suggests interest rate rises at a time of low and stable inflation would have been impossible. "The reaction in Congress would have been bipartisan and extremely negative. The Federal Open Market Committee would have been hauled up before Congress and shot."

Mr Lawrence Lindsey, former Fed governor and now chief economic adviser to President George W. Bush, gave the most cogent argument at the time in favour of action. As the transcripts of a September 1996 FOMC meeting show, he said it would be better to act "while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights".

But even he did not feel the case was sufficiently pressing to oppose Mr Greenspan and vote for higher rates.

After the decision not to raise interest rates sharply in 1996, a succession of shocks - the Asian crisis in 1997, the Russian debt default and near-collapse of Long-Term Capital Management in 1998, and risk of disruption from Y2K in 1999 - provided ample justification not to do so in subsequent years. Indeed, Mr Greenspan was widely praised at the time and since for restoring confidence to global financial markets with swift rate cuts.

Other critics say the Fed should have tried different tools to control equity prices, such as raising margin requirements - that is, the cost to investors of borrowing to speculate. But a longstanding Fed belief holds such measures to be ineffective and they were similarly rejected at the time.

The second and more damning charge made against Mr Greenspan is that he contributed to the bubble by cheerleading the economy. By making and, crucially, then failing to repeat the "irrational exuberance" warning, Mr Greenspan gave a green light to overexcited investors.

"I accept that the Fed should not stomp on the brakes to try to stop the stock market," says Mr Robert Shiller, a Yale economist and jeremiah of the 1990s equity boom. "But during that whole period, Mr Greenspan didn't act like he knew it was a bubble. He came across as a new economy cheerleader."

Some of Mr Greenspan's former colleagues share these concerns. "It might have been preferable for him to temper his discussion of the productivity boom by continuing to warn that stocks were overvalued," Prof Yellen concedes.

Mr Greenspan can point to warnings he did give at the time: in January 1999, for example, he said that internet stocks had "the appeal of a lottery" and that most small internet start-ups were doomed to fail. But these words of caution were drowned out by his repeated assertion that the US economy was in a once-in-a-century shift towards higher productivity.

He also maintains that there is little evidence that "talking the markets down" would have worked without monetary policy actions to back it up. Perhaps; but there might have been no harm in trying, critics counter. Moreover, by using a memorable phrase once and then not repeating it, Mr Greenspan seems to have given many investors the idea that he had changed his mind.

At the heart of this issue is the enormous cult that the markets built up round the seemingly omniscient chairman, elevating his every word - or at least investors' interpretations of it - to gospel.

Mr Barney Frank, a liberal Democrat who sits on the House financial services committee and is a constructive critic of the Fed, says any reassessment of the past decade should lead to a healthy scepticism towards the office, rather than the vilification of its current holder. "The aura of invincibility is very bad for democracy," he says. "Marx said he was not a Marxist; Greenspan was never a Greenspan worshipper."

A true judgment on the Greenspan era may not emerge until it becomes clearer, over the next couple of years, whether the deflation of the equity bubble has more serious consequences than last year's shallow recession. If it does, it invokes a deeper issue than that of one man's legacy: just how much, exactly, can central bankers achieve?

Future chairmen, unless they can manage asset markets more directly, may simply find their reputations rising and falling with the Nasdaq. As Mr Frank says: "The chairman finds himself in the position of a lot of people in public life. If you get credit for the sun, you can't bitch when you get blamed for the rain."