Jim, the Fed action is the wrong medicine for the wrong ailment. What worries the Fed is NOT inflation as measured by consumer prices but as measured by some curious notion that stocks are too high. And not all stocks, either. Just the technology group, which the Fed lumps together, irrespective of whether the company is making money, has low debt, strong cash flow, increasing demand; or whether the company is losing money, issuing more shares, increasing its debt, etc., etc. To the Fed types, it makes no difference, particularly because they don't have any direct experience investing, and they aren't familiar enough with the tools that would cure this problem, if it is in fact a problem.
Instead of raising interest rates, which is like trying to cut paper with an ax instead of a scissors, the Fed should have announced a gradual increase in margin requirements from the current 50% level to somewhere near 80% in order to reduce speculation. Second, the Fed should have urged restrictions on what stocks are marginable. My own preference is that no IPO issued in the last three years should be marginable at all, without first showing at least three consecutive quarters of operating earnings. I might even want to increase that time to 5 years, but you get the point: Encourage investors to avoid buying financially risky stocks on margin.
Finally, one reason I think the Fed is in error here is that the consumer price index is barely above a 3 percent annual rate, up from about a 2.4 percent annual rate a year ago. That's not very inflationary, but more important, it reflects almost wholly an increase in the energy component. If that's true, then the higher costs of gasoline and fuel oil act exactly the same way as higher taxes or higher interest rates, and therefore RAISING interest rates in the face of higher energy costs is overkill.
Of course the Fed board members don't look at it this way, since they've been schooled (by Milton Friedman type monetarists) to recognize only the value of adjusting interest rates, and nothing else. It is a crude, ill conceived tool when other tools that are available will do a better job of controlling stock prices without damaging the rest of the economy. Here I am on the liberal side of the discussion, agreeing completely with Larry Kudlow, who is about as conservative and business oriented as you can get these days.
Art Bechhoefer |
