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Alan Greenspan's most successful ruse has to been to make his speeches so dull that they mask the monumental gamble he is taking with the U.S. economy. But the Fed chairman's testimony before Congress on Wednesday clearly indicates that he believes he has won that gamble.

A growing number of Fed critics have complained that, when faced with the prospect of economic slowdown, Greenspan slashes interest rates, leading to a massive extension of easy credit. The extra debt may keep the economy afloat for a while, as it has since the crash of the Nasdaq economy and the Sept. 11, 2001, attacks.

But it does much more harm in the long run by preventing necessary restructuring of the economy, driving down saving, inhibiting future spending and endangering the long-term health of the banking system. This column has made this charge against Greenspan on numerous occasions. Raising doubts about the effects of easy money is hardly a wing-nut obsession. Two central banks -- the Bank of England and the Reserve Bank of Australia -- recently have mentioned credit growth when explaining why they have hiked interest rates.

But one line in Greenspan's testimony Wednesday shows that he is unfazed by the soaring debt levels of the U.S. He said: "All told, our accommodative monetary policy stance to date does not seem to have generated excessive volumes of liquidity or credit."

Greenspan was pushed to provide actual numbers to support his case. In fact, he couldn't talk about debt in the economy without mentioning some pretty hairy numbers. "Home mortgage debt increased about 13% last year," he noted. "The growth of nonfederal debt, at 7.75%, was relatively brisk in 2003," Greenspan added.

So where was the good news on the debt front? Well, Greenspan is encouraged that "the low level of interest rates and large volumes of mortgage refinancing activity helped reduce households' debt service and financial-obligation ratios a bit." He must be referring to the Fed yardstick that measures households' payments on financial obligations as a percentage of disposable income. Yes, it came down "a bit" in 2003 -- to 18.09% in the third quarter of last year, from 2002's high point of 18.29%. But above 18%, it is still at historically high levels.

Greenspan also defended the massive increase in household debt last year by arguing that "the rise in home and equity prices enabled the ratio of household net worth to disposable income to recover to a little above its long-term average."

You realize what the head of the nation's monetary system and the most powerful actor in the global economy is doing here? After five years of volatile stock markets, he's asking us to rely on equity prices. As for house prices, they could fall steeply as the credit binge slows down. In fact, Greenspan concedes that the buoyant housing market and boom in mortgage refinancing "are not expected to continue at their recent pace." But, of course, the central banker does not predict what will happen to house prices when that pace slows right down.

Easy money causes much long-term damage to the economy. Under Greenspan, credit growth was rampant through the late '90s, which led to excessive investment by businesses, particularly in high-technology items. This investment led to the Nasdaq boom, but it took only a small uptick in interest rates to cause the whole technology sector to collapse in 1999 and 2000.

Greenspan has never accepted the blame for creating the boom that led inevitably to the bust. The Fed's Monetary Policy Report to Congress, which also came out Wednesday and accompanies Greenspan's testimony, refers to "a glut in long-haul fiber-optic" that had built up earlier. But how did the glut ever get there in the first place? Easy money, of course.

Greenspan's policies haven't done anything to increase the nation's pitiful saving rate. In fact, his low interest rates have played a big role in keeping the nation's personal saving rate at around 2%. In the Monetary Policy Report, the Fed appears almost surprised by this. The central bank notes that households did not save more as their wealth fell during the stock market slump. Why might this be? Well, the Fed thinks the answer may be that households wanted to "take advantage of the attractive pricing and financing environment for consumer goods."

And who created this advantageous financing environment? The Fed, of course.

That's what central banks do. They are set up precisely to influence how much credit is in the economy. When America gets crushed by its debt mountain, it will be the Fed's fault. "The Federal Reserve's duties include conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices," according to its mission statement.

Greenspan has done all he can to influence money and credit conditions. Unemployment is coming down and prices are stable, so it looks like he hasn't done so badly on that front, either. But it all comes back to the debt totals. As Wednesday's testimony shows, Greenspan thinks they're not too high. But if they are, his monetary policy gamble will unwind in the most horrible fashion.
In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to peter.eavis@thestreet.com.

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