No Hidden Agenda Behind Rate Cut.

IT was a bold and aggressive stroke for the gradualist Greenspan, slashing interest rates by 50 basis points between meetings. Yet the Federal Reserve chairman is already being accused -- unfairly, in this observer's view -- of bailing out the stock market again.

In 1998, the Federal Reserve responded to financial system distress by lowering the overnight interbank rate by 75 basis points in a span of seven weeks. Wall Street was soothed. Main Street got an unneeded shot of adrenalin.

Similarly, in 1987 the Fed lowered interest rates in response to the one-day, 508-point, 23 percent plunge in the Dow Jones Industrial Average. Once again Wall Street got a palliative while Main Street got a fuel injection.

The Greenspan Fed's tendency of responding to financial system stress has been dubbed "the Greenspan put" by Wall Street. In essence, the Fed is guaranteeing protection against a decline in stock prices -- the essence of a put option -- by lowering rates when things get dicey. The very existence of the put option creates what's known as a "moral hazard," the act of encouraging risky behavior by providing a safety net.

Today's Lex column in the Financial Times, "The Greenspan Put," argues that the fundamental need for the 50 basis point rate cut "is far from clear."

"By showing investors he will rescue them come what may, he is encouraging excessive risk-taking and the formation of future bubbles," the FT writes. "Investors should ask themselves whether in fostering such a classic moral hazard the Fed is really being their friend."

Maybe things look different from across the pond, but from where I sit, the rate cut was fully justified, even needed, on fundamental economic grounds.

"Greenspan didn't cut rates when the Nasdaq was down 50 percent," says Bob Barbera, chief economist at Hoenig & Co. in New York. "He waited until the NAPM was below 45."

Manufacturing is already in recession. Steel production at a seven-year low. The National Association of Purchasing Management's December business barometer hit its lowest level since April 1991, the month following the end of the last recession. Consumer confidence plummeted in December. Christmas sales were lousy, the worst in five years. Weekly jobless claims are up 36 percent from a year ago; a rise of that magnitude has coincided with slowdowns in the past, Barbera says.

"I think the Fed was embarrassed that (in 1998) it responded to signals of financial system duress and the economy boomed," he says. "This time Greenspan needed real-side variables to support him. That's why he waited."

Financial market participants were quick to ascribe some deep, dark secret to the Fed's actions -- a they-know-something-we-don't-know motivation. Instead, there was no valid reason not to lower rates, with inflation tame, the economy decelerating at break-neck speed and market interest rates well below the funds rate.

"It's really just a recognition of what the data show," says Melanie Hardy, economist at Bear Stearns & Co. "The Fed was doing the smart thing in responding. Greenspan clearly recognizes the speed of deterioration in the economy."

Everything about the Jan. 3 action -- the size and timing of the cut, the statement imploring the District banks to request an additional 25 basis point cut in the discount rate, the retention of the risk assessment weighted toward slower economic growth -- "was designed to maximize publicity," says Neal Soss, chief economist at Credit Suisse First Boston. "It was not about the markets. It was about the economy."

Specifically, it was a message to the consumer to go shopping.

"Greenspan was saying to consumers, whatever is bothering you, rest assured that there is no hobgoblin under the bed," Soss says. "Papa is here."

Caroline Baum is a columnist for Bloomberg News.