Crane....agree with your thoughts. This emphasis on "manipulation" as an explanation for all the mess we're seeing is overblown.
Have lived long enough to have held the hands of people (clients) losing tons of money in economic downturns. We're in one of those downturns and must live thru it without blaming anything other than just plain "circumstances." (or economic "cycles", if you prefer).
When the economy heats up too much, it needs time to cool down. We are currently experiencing the cool-down and some of us are feeling downright victimized, but the fact is we have no one person to blame....not even Greenie.
The story below explains it better than I can....particularly the last half or so of the story. Read and understand......IF you seek true understanding.
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Analysis
Fed-Induced Euphoria Begins to Fade
By Steven Pearlstein
Washington Post Staff Writer
Friday, January 5, 2001; Page E01
The dramatic interest-rate cut by the Federal Reserve this week, and promises from political leaders of some sort of quick tax cut, were meant to assure Americans that everything that can be done to prevent a recession will be.
"The Cavalry Has Arrived," declared Wall Street's Salomon Smith Barney in its daily message to investors. "Up, Up & Away," blared the front-page headline of the New York Daily News, with a cartoon likeness of Fed Chairman Alan Greenspan dressed as Superman.
But by noon yesterday, as the daily ration of downbeat business and economic news began to dribble in -- Office Depot closing 70 stores, another increase in initial unemployment claims last week, yet another drop in stock prices and the value of the dollar -- Tuesday's euphoria gave way to a more sobering realization: a $10 trillion U.S. economy is simply too powerful and complex to be micromanaged from Washington.
"The idea that you can do monetary or fiscal policy with enough foresight to prevent a recession is nonsense," said Lester Thurow, an economist at the Massachusetts Institute of Technology.
"Nowhere is it written that monetary and fiscal policy can avoid all recessions," warned economist John Makin. "Many people have come to believe it is true, but it isn't."
Indeed, one byproduct of the record-long economic expansion of the 1990s was to turn the Fed's Greenspan and former Treasury secretary Robert E. Rubin into cult figures not just on Wall Street but on Main Street. The pinstriped duo maneuvered the federal government into balancing its budget and teamed up to prevent financial crises in Asia and Latin America from turning into global economic meltdowns.
But the current deterioration in the economy presents a more complex challenge than a financial crisis, in which Washington's offer to be the effective lender of last resort proved sufficient to quell a panic by investors and restore orderly markets. For what's going on now is really two downturns -- one in the old economy and one in the new.
The evidence now is pretty strong that the manufacturing sector is already contracting, following a pattern familiar to the Fed and other policymakers. As the expansion progressed, overconfident consumers began to spend beyond their means while overconfident companies expanded their production. The Fed, hoping to prevent an outbreak of inflation, raised interest rates enough to dampen consumer spending on high-priced items. As inventories of unsold dishwashers, houses and cars build up, companies cut back on production, employment and investment, and the slowdown occurs.
It will be several months before it is clear whether Greenspan and his colleagues raised rates too high or waited too long to reverse course, transforming a needed slowdown into an unwanted recession. But there is general consensus that, no matter how aggressively the Fed moves now, it will have little impact on the economy until summer at the earliest.
"There's enough in process now that it's too late to prevent whatever is going to happen during the first half of the year," explained Allen Sinai of Primark Decision Economics in Lexington, Mass.
Or put another way, if the economy is headed for a recession -- and there is still considerable disagreement about whether it is -- the best that a series of interest-rate cuts can do is make that recession shorter and shallower than it otherwise might have been.
There is some thought now that the usual lags between when rates are cut and the economy responds could be shortened because of the increased impact the stock market has had on consumer spending and business investment. And because the stock market has traditionally been sensitive to interest-rate changes, the theory goes that a series of bold moves by the Fed might provide a psychological jolt sufficient to stop, or even reverse, the downward momentum of stock prices.
But while psychology may drive the market up or down for short periods, in the long run stock prices eventually come back into some alignment with corporate profits. And most analysts predict profits will be down sharply in the coming year.
"Can a series of Fed rate cuts compensate for another round or two of earnings disappointments?" asked Makin. "Probably not." And even if it could, he added, there would be a real danger that Wall Street would become addicted to the Fed's medicine, expecting fresh doses every time stock prices decline.
President-elect Bush and Republican congressional leaders could also get into the act, as they have said they are eager to do, passing a quick tax cut that could boost the economy by putting more money in workers' paychecks. But even the most optimistic scenarios envision the cut taking effect no earlier than June, by which time the economy will probably have already found its bottom.
And economists debate whether tax cuts always work to boost short-term consumer spending. As Japan discovered, tax cuts that take effect while unemployment is rising may provide little help if nervous consumers decide to save the money rather than spend it.
If cutting interest rates and taxes are likely to have limited short-term impact on the old economy, economists warn that they are likely to have even less effect on the new economy.
Lower interest rates, for example, won't do much for the makers of computers, chips and software if there aren't some big new advances coming along to entice businesses and consumers to turn in their old models for new ones.
Nor will tax cuts do much to revive a telecommunications sector that, as a result of an investment bubble that led to rampant overbuilding, has left the landscape littered with money-losing companies and excess capacity.
"The tech sector has to go through a catharsis -- six to nine months of bankruptcies, mergers, consolidations -- before anyone can begin to talk of growth again," said David Hale, chief economist of Zurich Financial Services. "And there is nothing fiscal or monetary policy can do to fundamentally change that. The overhang in the tech sector has a life of its own."
AEI's Makin likened the recent investment bubble in the dot-com and telecommunications sectors to similar speculation that developed in the 19th century around the emerging new industries of those days -- the railroads and auto manufacturing. Then, as now, he said, vast fortunes were made and lost before the industries finally settled into a profitable arrangement. And then, as now, he predicted, the bursting of the bubbles will lead to recession.
"These investment booms are unusual in the 20th century," said Makin. "Policymakers are not used to dealing with them. And once things begin to unwind, it's not clear there is much they can do anyway."
Yesterday, Morgan Stanley's Roach was taking a philosophic stance toward the possibility that the decade-long expansion was about to come to an end.
"Recessions are the natural way the economy purges itself of imbalances and excesses," he said. "There is no policy from Washington that can make the household savings rate go from negative to positive or bring the deficit back into balance. It usually takes a recession for the economy to rid itself of such bad habits."
© 2001 The Washington Post Company |
