Alan Greenspan is fighting a losing battle to avoid a deep economic downturn. It is becoming apparent that monetary policy just won’t do the job. And if the Federal Reserve chairman keeps opening the money spigot wider and wider, he is likely to compound the problem by adding inflation to the economic slump.

The bottom line is that we’re in a period of history that offers no pleasant solutions. A stock market bubble is in the process of bursting, and if history is any guide, it will take years of pain before happiness reappears.

By the Fed’s own analysis, the five rate cuts so far this year have done little to stimulate the economy.

The key federal funds rate is down 2.5%, yet the economy appears to be deteriorating. According to the Fed, retail sales and tourism were slow to flat in April and May, and manufacturing was weak or declining. In addition, commercial real estate softened and new construction "appears to have leveled off."

As for banks, which tend to benefit from a lower rate structure, the falling rates generally have had a negative impact. That’s because rates on loans have been declining more quickly than rates on deposits, which is causing a squeeze on margins.

The stock market, too, is becoming inured to falling interest rates: stock prices have not been responding with the same degree of vigor that they had when the central bank first began easing its policy.

Monetary policy can work wonders in bringing down inflation, but it’s not clear that it can stimulate an economy that is being pulled down by the equivalent of gravitational force.

The danger is that by revving up the money supply, the Fed may be setting the stage for the worst of all possible worlds: a declining economy together with rising prices.

Although there have been signs of price pressures, the latest reports have been reassuring. Last month’s figures on wholesale prices were good, with the producer-price index up only one-tenth of a percent in May. And the "core" index, which excludes the volatile prices of food and energy, was up a modest two-tenths of a percent. But those indicators can change rapidly.

Theoretically, the big tax cuts that Congress has approved could help by spurring spending and bolstering confidence, but it is not clear that they will. With large layoffs still being announced every week, with bankruptcies up, and with a sharp loss of investor enthusiasm for stocks, it is likely that both consumers and businesses will opt to reduce their record levels of debt than to go out and buy goods and services.

Since the tulip bubble of the 17th Century, economies have paid dearly for speculative booms. And, if this nation’s historic price-earnings ratio offers any omen, the stock market still has a long way to go before it returns to the average price-earnings ratio of the last 170 years.

In this tricky period, it is especially prudent to proceed with care.

Robert A. Bennett, Editor-in-Chief

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