Posted on 05/01/2003 1:39:57 PM PDT by sarcasm
Greenspan's gloomMay 1st 2003
From The Economist Global Agenda
America’s economic prospects remain in doubt, Alan Greenspan tells Congress. The Federal Reserve chairman drew attention to lingering business caution and hinted that he is worried about the dangers of deflation
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WITH the war in Iraq over, Alan Greenspan, chairman of the Federal Reserve—America’s central bank—made an unusual appearance before Congress on April 30th. Though the ostensible reason for his visit to Capitol Hill was simply to be quizzed by congressmen on the fine details of his latest monetary-policy report, the Fed chairman used his appearance to deliver a public assessment of the post-war economic outlook, ahead of the Federal Reserve's next meeting, on May 6th, to decide what, if anything, to do about interest rates.
Unfortunately, Mr Greenspan seemed unable to offer the sort of upbeat message many (no doubt including the occupants of the White House) had been looking for. For months before the military action started, Mr Greenspan had put much of the blame for the economy’s sluggish performance on geopolitical uncertainty. So some observers will have been disappointed, therefore, by Mr Greenspan’s continuing caution. Indeed, the tone of his testimony was remarkably downbeat.
The Fed chairman noted that there is, as yet, only limited evidence about the state of the economy now that the war is over—and that what there is remains mixed. Households, he said, are “less apprehensive” about the economic outlook: but that hardly suggests a rush back to the shopping malls, and Mr Greenspan acknowledged that the increase in consumer demand has so far been “tepid”. He certainly did not make much of the rebound in consumer confidence reported by The Conference Board, a private research body, on April 29th.
It seems clear that what really troubles the Fed chairman are the persistent weakness in business confidence and what that implies for business investment. Right from the onset of recession in 2001, Mr Greenspan has consistently argued that a solid and accelerating economic recovery would ultimately depend on a pick-up in business investment. In this respect, there was a small gleam of hope in his latest assessment, the thrust of which was that at least most of the preconditions for such an upturn are now in place. The oil price has fallen back, share prices are up from their mid-March lows, improved profitability is in prospect for many companies and order books are growing. Mr Greenspan's continuing confidence in American productivity growth was supported by new figures published on May 1st, which showed continued growth, though at a slowing pace in the past two quarters.
Many economists criticised the Fed for the decision it made at its March meeting not to offer a judgment on the likely balance of future economic risks. This “bias” judgment is usually followed almost as closely as interest-rate changes themselves: knowing whether the Fed thinks the main risk is from inflation or from further economic weakness, or if the risks are equally balanced, provides Fed-watchers with clues as to the likely future movement in interest rates. But at the March meeting, the Fed, in effect, threw up its hands and admitted it had no idea what the balance of risks was. Mr Greenspan sought to defend this unusual decision in his latest testimony, and said that the Fed had, as a result, stepped up its detailed surveillance of economic developments.
Yet it seems that the Fed chairman remains troubled by the extent of the uncertainty surrounding the economic outlook. And he gave his most candid assessment yet of the dangers of deflation. With inflation so low, Mr Greenspan said, “substantial further disinflation would be an unwelcome development”. The language was coded, but the import of his words seems clear. Mr Greenspan is concerned that any further fall in the inflation rate could bring the risk of deflation that much nearer. Even for inflation to approach zero would, in the chairman’s view, risk undermining profit margins and delay an upturn in business investment—on which the prospects for a broader, sustained economic recovery depend.
Central bankers normally get very nervous when people start to talk about deflation. They do not like to suggest it is a serious risk, lest that influences behaviour and depresses confidence and spending (because people start to hold off purchases in the expectation of a fall in prices). Instead, they prefer to reassure people that they are alert to the dangers and are prepared to respond to the threat in good time. One of Mr Greenspan’s Fed colleagues, Ben Bernanke, gave a lengthy and detailed speech saying just that, last November. For Mr Greenspan to address the subject so directly suggests the extent of his current concern.
Timing is all, of course, and it is not just Mr Greenspan who is hoping that a clearer international picture in the coming weeks will be accompanied by a clearer and more favourable economic outlook. President George Bush recently indicated that he was minded to nominate the 77-year-old Mr Greenspan for a fifth term as Fed chairman when his present stint expires next year; Mr Greenspan promptly made it clear he would accept. By then, the American economy could once again be displaying its more customary buoyancy. For now, though, it looks as if Mr Greenspan is in for a bumpy ride.
What is Bush thinking? Greenspan caused this recession with an unprecedented series of interest rate hikes designed to kill the stock market. Well, he killed the bull market, all right. And now he can't say a good word about tax cuts. Please, Bush, let this guy go.
He created the bull market by distorting interest rates too low. He's tried to pop the bubble easy, but it ain't over yet.
And now he can't say a good word about tax cuts. Please, Bush, let this guy go.
Greenspan is in favor of tax cuts, but he wants to see corresponding reductions in spending to prevent Cognress from borrowing and displacing the capital markets. No one in Congress, or the White House, is interested in reducing federal spending.
| Greenspan caused this recession with an unprecedented series of interest rate hikes designed to kill the stock market. Well, he killed the bull market, all right. And now he can't say a good word about tax cuts.
The recession is not so clear. If we are in fact at or near the bottom — and there are some indications that we are, although who knows for sure — then Greenspan pulled off a truly magical feat and he deserves a standing ovation. You say he set out to "kill the stock market," but that isn't true. He did set out to pop a bubble — what he called "irrational exuberance." No one really knows how to do that. The last time we had a bubble that bad, it ended in a decade of double-digit unemployment that went into the 20-per-cents before it was over. To hear the all-Democrat press talk, this is "the worst economy in fifty years," but that's just more "quagmire" from a press corps that wants to see Bush defeated at something — anything. In the twenty years between 1975 and 1995, the unemployment rate was higher than it is now in every year but two. The unemployment rate was higher than it is now in Clinton's first two years in office, and was about the same in his third year. Did you hear all this doom and gloom back then? Hell no, it was "Happy days are here again." If unemployment peaks at 6%, then Alan Greenspan popped a stock market bubble without throwing the whole economy into the tank. That's an amazing thing, because anybody who says he knew for sure how to to that is lying. Did the bubble have to be popped? Absolutely. There was really crazy stuff going on, like the aquisition of Time-Warner — a company with serious assets like cable in the ground, household-name magazine properties, huge film libaries — by a thing that was really just a column of fast-moving air... as everybody found out afterwards. That kind of stuff needed killing, and no one should fault the Fed for taking on that task. We could criticize how well they did the task, but if conditions now are as bad as it gets, we absolutely should not criticize them. 6% unemployment definitely qualifies as a "soft landing" compared to what could have happened. |
Yeah, the government does. Government is a growth industry in case you hadn't noticed. You can't even freeze them in place.
Richard W.
Tell that to Bush I, who was undermined by Greenspan.
That was no help. Now corporations are again pressed to reduce costs to bring forward earnings in line with P/E expectations.
improved profitability is in prospect for many companies and order books are growing.
Is he reading GAAP or 'Pro Forma' numbers? Actual larger profit or just smaller losses?
Mr Greenspan's continuing confidence in American productivity growth was supported by new figures published on May 1st, which showed continued growth, though at a slowing pace in the past two quarters.
Alan, when a number gets smaller and smaller that's called "decreasing", and decreasing productivity is not good.
Richard W.
Greenspan made that statement in December of 1996. Most of the bubble occurred after that statement, which is when he started targeting stock prices and the mythical wealth effect, instead of targeting stable prices. His policies led to the global currency problems of 1997 and 1998. The currency collapses and Y2K fears turned America into a super safe haven. And Greenspan was causing way too much interest to be paid on money seeking safe haven, making the problem even worse. Most of that bubble money went into large cap, well known names. That's where foreigners typically put their money. The irony is that most stocks didn't participate in the bubble. The Nasdaq advance-decline line was straight down from 1996 onward.
While our recent bubble has some similarity to the bubble of the late 1920's, a far more informative place to look is Japan's bubble of the late 1980's. Currency overvaluation and global "hot money" was also a factor there.
Had Greenspan wanted to correctly prevent the bubble in 1996, he should have attacked our strong currency rather than the stock market.
What is Bush thinking? Greenspan caused this recession with an unprecedented series of interest rate hikes designed to kill the stock market. Well, he killed the bull market, all right. And now he can't say a good word about tax cuts. Please, Bush, let this guy go.
I wonder if Bush (41) wish he'd canned Greenspan in July of 1991 when he had the chance. And you're right about Greenspan causing the current recession, although I'd call it a historic growth recession instead. Greenspan has killed more investment and growth opportunities than any other human in history, and now he's going to be renominated by the one person who should know better.
What everyone should know is that the economy was already slowing on its own during Greenspan's long and tortuous rate hikes of 1999 and 2000. His highness was warned numerous times by many people in the private sector, but he was oblivious as he wanted to be certain of the death of the stock market bull that had mocked him for four years. Once foreign investments started returning home after Y2K, it was all over. There's no way that anyone should say that Greenspan should be applauded for anything he did after 1996.
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I agree with you on the tax cuts.