Predictions of record budget surpluses have since been replaced by huge deficits. Mr. Greenspan has lately been advising that the way to deal with this colossal forecasting failure is not to reverse any tax cuts, but to reduce spending.

Defenders of Mr. Greenspan can attribute such lapses to his conservative ideological bent (as well as limited economic forecasting abilities). But here's something much harder to explain without reference to the election cycle: Mr. Greenspan has been remarkably unconcerned about the risk of an increase in inflation in our economy.

Over the last three months, the Consumer Price Index has risen at a 3.7 percent annual rate, as compared to 1.7 percent over the last year. If we exclude food and energy, the acceleration is much smaller but still significant.

And there is reason to believe that some of the energy price increases will be lasting, since they result from the dollar's decline against other currencies over the past 2 years.

But in its official statement last week the Fed said that the risk of "an unwelcome fall in inflation" now "appears almost equal to that of a rise in inflation." In the face of rising inflation not only in consumer prices, but also producer and non-oil import prices, why would the Fed say this?

One reason would be to convince the financial markets that a pick-up in the inflation rate is unlikely, so as to keep long-term interest rates low. The interest rate on ten-year Treasury notes closed at 3.77 percent last week, which would make the real return about zero at the current (3 month) rate of inflation.

Mr. Greenspan probably knows that inflation is rising, but doesn't want to see that increase reflected in long-term interest rates until after the election. He also doesn't want pressure to raise short-term rates -- which the Fed controls directly and is holding at a 46- year low of 1 percent -- before the election.

To fully appreciate how unusual it is for the Fed to be soft-pedaling inflationary risks when they are staring us in the face, keep in mind that for central bankers inflation is synonymous with "The Great Satan." In the past the Fed has choked off growth and even triggered recessions in order to fight real or imagined threats of even small increases in the rate of inflation.

The November election looms large indeed. And the plot thickens: Mr. Greenspan probably also knows that there is a bubble in the housing market that can burst at any time. Housing prices have accelerated at an unprecedented rate since 1995 -- more than 35 percentage points nationwide above the overall rate of inflation. Nothing like this has ever happened before in the housing market. In many areas -- for example New England and California -- the surge in prices has been more than twice the national average.

The most obvious explanation is that the stock market bubble of the late 1990s spilled over into the housing market. The pin most likely to prick the housing bubble would be a spike in long-term interest rates.

The Fed's minutes of June 24-25 last year showed that its policy-making board was already discussing the inflationary risks of a falling dollar in private, at the same time that the Fed was publicly stoking fears of deflation. Concern about deflation helped drive the long-term Treasury rate to a 45-year low of 3.07 per cent that month, fueling a mortgage refinancing boom that drove the economic recovery through the end of last year.

That spate of low long-term rates also pumped new air into the housing bubble, keeping home prices rising at 8 percent last year. But all bubbles must eventually burst, and when this one breaks it will affect spending as did the stock market's crash in 2000 -- which caused a recession. The $3 trillion question (that's an estimate of housing wealth that could disappear): will it happen before the election? Not if Alan Greenspan can postpone it.

Mark Weisbrot is Co-Director of the Center for Economic and Policy Research, a nonpartisan think-tank in the nation's capital (www.cepr.net). Readers may write him at CEPR, 1621 Connecticut Ave NW, Suite 500, Washington, DC 20009-1052 and e-mail him at Weisbrot@cepr.net

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