The Credit, Where Credit Is Due
By James K. Galbraith
Special to TheStreet.com
1/27/00 7:12 PM ET
Phil Gramm said it precisely, "If you were forced to narrow down the credit for the golden age that we find ourselves living in, I think there are many people who would be due credit, and many more who would claim credit."
Gramm went on to praise Alan Greenspan, as one might expect at the man's fourth confirmation hearing. But credit -- the willingness and ability of the American household to incur debt -- is the thing. It is credit that accounts for the record-high home ownership we now enjoy, for our new cars and appliances and, in part, for our bloated stock prices. In comparison with credit, Mr. Greenspan is a bit player.
And the fact that American capitalism runs on credit is also its vulnerable point. So long as house prices and stock prices are rising, household balance sheets look great. But when they stop rising while debt continues to build, then credit becomes a burden. And if those prices fall, the great American debt machine could be in trouble.
Which raises a question. Why are Mr. Greenspan and his colleagues hell-bent on higher interest rates? Higher interest rates will squeeze middle-income families out of the housing market. They make every sort of durable-goods purchase more expensive. And they don't just depress the stock market, they skew the distribution of stock prices. Just look at the opposed movement of the Nasdaq (up) and the blue-chips (down) in the past six months. A higher interest rate means a higher required rate of return, and that causes speculators to concentrate their activities. Rising interest rates don't pop a bubble, they feed it. At least for a time.
Greenspan was asked by Sen. Charles Schumer whether he was concerned about margin lending, which jumped sharply in the final months of last year (in conformity with the theory just stated, this occurred as interest rates were being pushed up). Yes, it turns out, the Chairman is concerned. But since raising margin requirements is not a "perfect" solution, the issue remains under study. But in the meantime higher interest rates -- a far less perfect solution -- will soon be decided once again.
The 1978 Humphrey-Hawkins Full Employment and Balanced Growth Act stipulates three main goals for economic policy: "full employment," "balanced growth" and "reasonable price stability." Remarkably, we have two out of three: full employment and reasonable price stability, a magic combination that so many economists deemed impossible for so long. But balanced growth eludes us. And unbalanced growth, relying so heavily on household debt, cannot endure.
Mr. Greenspan testified, and the press faithfully reported, that the purpose of his present policies is to prolong the expansion. But the effect of raising interest rates is to curtail, not prolong, our expansion. It is, as other press reports plainly state, to slow economic growth and bring the expansion to an end. And when rising interest rates finally achieve this, what then?
Like all Golden Ages, the one Sen. Gramm described so aptly will end. We are not on a sustainable track. And when the Fed majority that favors slower growth and higher unemployment finally gets its way, they'll produce not a slowdown but a slump, not a plateau in stock prices but a crash. That could be a year or more away. But when it comes, Mr. Greenspan will surely regret that he didn't ride off into the sunset this year, his reputation as the greatest Fed chief ever serenely intact.
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