What to do? Nearly everyone in the financial community is desperate for quick action by the Federal Reserve Board to end a liquidity crisis. Capital formation would be aided not by poll-driven tax cuts (such as a repeal of the marriage penalty) but by rolling back the 1993 Clinton increase on high incomes and by further reducing the capital gains tax. More obscure but perhaps more important, the Securities & Exchange Commission should end Clinton-era restrictions on capital.
The pressure is on the Fed. Whatever else must be done, everyone agrees that Chairman Alan Greenspan has to walk back the six unnecessary interest rate increases that he presided over. The drop of 50 basis points (one-half of 1 percent) on Jan. 3 was welcome but only a beginning. A drop of 300 basis points is needed over the next few weeks, but the Fed has to do more.
That is the opinion of Columbia Prof. Robert A. Mundell, winner of the 1999 Nobel Prize for economics. "The money has been tight," Mundell told me. "They [the Fed] need to push more money into open-market operations--not just cut interest rates. With that, the price of gold will go up, say to $310 [compared to the current deflationary $264 per ounce]."
Sorry Bob, my old mentor, here we depart company. The propensity to inflate is too great still. It will take another six months of economic slowing to bring back the fear of god. If the FED starts pumping, the game will be back big time and so will the CPI.
Most politicians persist in Greenspan worship, but Senate Republican Leader Trent Lott cautiously suggests the chairman wears no clothes. "I think he overshot the mark a little bit," Lott told me on CNN over the weekend. "I think he should not have been raising the rates as much as he was, and I think he should have cut them earlier."
Of course he overshot. They never have gotten it right and they never will, but the problem all lies in that they try. What's wrong with a free market solution to the pricing of money? That does require a fixed, pre-announced, growth target of money. FED tried doing that and all we got was stable economy. We can't have that here. We need sturm und drang.
Lott also departs from Bush's policy in urging a cut in the capital gains tax to 15 percent from the present 20 percent. Apart from adding a few nickels to the shopper's purse, Lott seeks to boost sources of capital.
It's just a giveaway to the rich, it's just a giveaway to the rich, Polly want a cracker?
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