With the stock market signaling the end of the recession, a newly skeptical Federal Reserve chairman began talking gloomily about the economy.

Alan Greenspan, in his recent congressional testimony, expressed his disquiet that despite one move after another, the Fed has been unable to counteract the persistent scarcity of credit.The Fed chairman has discovered that "you can lead a horse to water, but you can't make him drink."

Greenspan has provided banks with reserves to permit an expansion of credit, but he can't make them lend. And so far they haven't. The credit expansion that is supposed to lift the economy out of a recession is slow getting under way. The banks are apparently keeping their excess reserves in the overnight federal funds market or are purchasing short-term Treasury securities.

The reasons banks don't want to lend are obvious. Loans are risky and not very liquid, and right now the banks want liquidity and no risk. They fear heavy deposit withdrawals, and they fear the new risk-sensitive, capital-based supervision.

In the event depositors want their money, bank assets in Treasury bills or federal funds can be instantly turned into cash. Moreover, these short-term investments cannot fall in value like real estate or business loans, and they pose no risk to the banks' capital positions.

Banks are worried about their capital positions because they're being subjected to newer and stricter supervision during a period when their capital is shrinking due to bad loans and falling real estate values. The easiest way for banks to beef up their capital ratios is by curtailing their lending.

Unless it was well-capitalized, a bank that aggressively expanded its lending at this time could easily find itself taken over by regulators worried about the risk to the Federal Deposit Insurance Corp. Paranoid from the $500 billion bailout of savings and loan deposit insurance, policymakers are paralyzing the commercial banking system and pushing it and the economy towards collapse.

A great deal has been written about the role of deposit insurance in bringing on the fiasco, but other causes are being ignored. During the 1980s, President Reagan's critics tried to discredit his economic policies by claiming that the only effect of tax cuts would be inflationary budget deficits. This tale was repeated so often that people were encouraged to seek out traditional inflation hedges, such as real estate, for investments.

After a half decade of real estate boom, the government pulled the tax rug out from under the investments with the 1986 tax reform, which reduced their profitability and raised their costs. Investors were forced to write off their properties over longer periods, the capital gains tax rate was raised and "passive" investors were denied the normal tax deductions.

All of this was done in the most destructive and unfair way. No provision was made for developments undertaken on the basis of the previous tax law. At the stroke of a pen, the U.S. government, in all of its grand incompetence, turned billions of dollars of real estate investments into bad deals. As the investments failed, the properties passed to the creditors - S&Ls, banks and insurance companies.

Having initiated a downward spiral in real estate, the government worsened the problem with the 1989 S&L legislation, which destroyed the value of S&L charters and forced more institutions into failure.

The government wreaked havoc on the credit system amidst a scapegoating frenzy blaming crooks, speculators and "the rich" - the same tactic that was used 60 years ago when government mistakes wrecked the financial system and caused the Great Depression.