Beware of Dr. Green And Mr. Span -->
By Pierre Belec
Saturday July 7 3:04 PM ET
NEW YORK (Reuters) - Some pretty smart people are warning about the danger of playing with interest rates, comparing the nation's central bankers to Dr. Jekyll and Mr. Hyde. Call these critics the Alan Greenspan (news - web sites) bashers.
He says the central banker's tinkering with interest rates -- six increases totaling 175 basis points between 1999 and 2000 followed by six reductions amounting to 275 basis points this year -- are destabilizing the $10 trillion American economy and messing up the business cycle.
``It's an unnatural process at best,'' he says. ``The economy has a natural balance of its own and big changes in money policies cause the economy to lose its balance. It's much like sitting on a bicycle and someone slams the wheel to one side and you struggle to regain your balance.''
Ranson believes the fast-paced economic changes, boom to bust and back again, will complicate the life of the average Wall Street investor who is trying to squeeze a dollar from an already unpredictable stock market.
Need some convincing? In the wake of the 1999-2000 rate-raising spree, the market took a head-spinning fall and investors are still unsure where stocks are going.
WAITING FOR THE RATE BOOMERANG TO COME BACK
``There is a delay process of up to 1-1/2 years for the economy to respond to money policy shifts,'' Ranson says. ``So what Greenspan is now doing is adding stimulus at a time when the economy doesn't need it after adding restraint two years ago when it again was uncalled for. The net result is that these changes have disrupted the important business cycles.''
Business cycles are defined as changes in the economy ranging from expansion, recovery, contraction to recession. As a result, the swings in cycles have a big impact on corporate earnings, inflation and stock market profits.
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The cruelty of the Fed's rate-boosting two years ago, which has slammed corporate earnings, is forcing Corporate America to fire thousands of workers. Only a couple of years ago, the same companies had a tough time attracting skilled workers as the future looked bright.
``The Fed is enormously exaggerating its power and ability to see exactly when and how its actions will affect the economy,'' Ranson says.
He says that the monetary tightening has curbed the economy too much.
``The side effects of the Fed's action have been so great that the central bank can't live with the results, which explains why the Fed is reversing itself with large rate cuts,'' Ranson says.
MAJOR CHANGES IN GREENSPAN'S THINKING
``During the early years of Greenspan's chairmanship, the central bank had been very gradualist but as Greenspan's confidence in himself increased, the Fed became more and more pro-active, more interventionist and, to use their words, 'preemptive,''' Ranson says.
But by cutting rates now, the Fed is de facto admitting it was wrong in raising in the first place. ``But I don't think they are keen to come out and say so,'' Ranson says. |
