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THE DAY AHEAD: Greenspan, economy at a crossroads

There's been a lot of talk in recent days about the complexities of the "new economy" compared to the "old economy," especially by Fed Chairman Alan Greenspan. But does this guy really understand the new economy and, more important, does it matter?

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Conventional wisdom suggests that Greenspan deserves a ton of praise for overseeing the greatest economic expansion in our history. Some even say he's the "most important" man in America with powers far more daunting than even those of the President.

Maybe. Maybe not.

Since taking over for Paul Volcker in 1987, Greenspan has been witness to an incredible revolution in technology and on Wall Street. Some cynics might say he's been more of a bystander than a caretaker.

By all accounts, he's circumspect to a fault. That's been his greatest strength.

While there's no doubting Greenspan's credentials or intentions, an argument could be made that he doesn't have the capacity to understand and therefore react to the instantaneous evolution of today's global economy.

To be fair, no one could.

This isn't your father's economy

Thanks to the Internet and the technological innovations that have impacted every conceivable aspect of our lives, things that were simply out of the realm of possibility just 10 years ago seem to happen with regularity every day.

Okay, you say, we already know this. So what?

After steadily increasing interest rates over the past year, and the possibility of more in the offing later this year, Greenspan is facing a dilemma that none of his predecessors could have imagined. Namely, how do you gauge when an economy is overheating or destined for a stall when the parameters for measuring the economy change at Internet-like speed?

In Greenspanese, he's flatly told investors that the market's gotten far ahead of itself and that he'll use the power of interest-rate hikes to slow it down. He's been saying that for the past year. And he's been following through.

But a funny thing happened on the road to rational exuberance.

The Nasdaq has picked up even more momentum, pushing it to within an eyelash of the 5,000-point threshold this week while the old economy-laden Dow has struggled.

In fact, following a profit warning from Procter & Gamble and a surge in crude oil prices to a nine-year high, the Dow Jones industrial average fell 347 points to 9,796.03 Tuesday, its lowest level since closing at 9,786.16 on March 31, 1999.

The Dow has now erased all the huge gains it made in the past year in less than two months, falling from an all-time high of 11,750.28 in mid-January.

All this comes one day after Greenspan celebrated his 74th birthday with a speech on "Technology and the Economy" at a conference at Boston College.

"I think the past interest rate increases are going to be digested before Greenspan makes any moves,'' said Arnie Owen, managing director of capital markets at Roth Capital Partners, ahead of Tuesday's collapse. "I think this week we are going to see follow-through in the rally. The Dow was oversold by a lot. I think the confidence level of the investment community is building.''

Meanwhile, the Nasdaq keeps on cruising. Granted, it fell 57 points Tuesday after spending much of the day hovering around 5,000. But this index has doubled in the past four months.

"This P&G warning reinforces the argument that higher interest rates will affect the 'old economy' stocks, but the 'new economy' is going to sail on," said Chuck Hill, director of research at First Call/Thomson Financial in Boston.

Economic data suggests the economy is regulating itself

All this doom and gloom for the Dow comes after some rosy unemployment statistics came out last week. That's if you consider higher unemployment a good thing.

The unemployment rate in February actually increased to 4.1 percent from a 30-year low of 4 percent in January. The cornerstone for Greenspan's insistence on raising interest rates has always hinged on the theory that lower unemployment means higher wage pressure and, thus, escalating inflation.

But to date, there's no sign of inflation anywhere.

That brings us back to the new economy.

On the same day the Dow fell to its lowest level in almost a year, an economic report confirmed that U.S. productivity remains unbelievably strong and inflation remains in check. The fourth-quarter productivity number was revised upward to a 6.4 percent gain, compared with the 5 percent increase reported a month ago.

With productivity high, unit labor costs were restrained, declining 2.5 percent in the fourth quarter.

Economists polled by Reuters had expected a productivity increase of 6.3 percent and a drop in labor costs of 2.2 percent.

"If you ask yourself why the technology stocks continue to do so well, the answers are in these numbers,'' said Hugh Johnson, chief investment officer at First Albany Corp. "The returns on investment (in technology) are so substantial that rising interest rates or worries about the economy don't matter."

I may get inundated with hate emails from the AARP and New York University, but perhaps it's time to start scrutinizing Mr. Greenspan's actions and logic a bit more closely.

Undoubtedly, he's a brilliant man. But he's also a man who received his undergraduate and master's degrees in economics in 1948 and 1950, respectively.

With only eight months remaining before a general election, the omnipotent Fed finds himself facing his most daunting challenge to date.

It's clear Greenspan's master plan to cool off the white-hot stock market has had little or no impact. Technology stocks are immune to the interest-rate shuffle while the old economy stocks are facing a myriad of problems unrelated to interest rates.

After raising rates four times since last summer, it's time for Greenspan and Co. to chill out.

Give the stock market and the rest of the economy a chance to digest the last four rate hikes, Al. Don't go making any rash decisions now.