It's Too Late Now
By James K. Galbraith
Special to TheStreet.com
3/21/01 12:41 PM ET
Let me confess to minor sympathy for Brother Greenspan. There was nothing he could have done Tuesday to stop the onrushing slump. The pathetic action he took was merely a shrug, a sigh of resignation and impotence.
If you doubt this, ask yourself: Suppose the cut had been 75 basis points? Do you think that would have sparked a rally? Do you really believe that the distance separating a slump from a rally was 25 lousy basis points? Or rather, to be precise, that it was the difference between 25 basis points now and the same 25 basis points in two or three weeks? Of course not.
Next, suppose the cuts had been, say, 100 basis points or more. Would the markets have shouted hallelujah then? Would such a cut have jump-started consumer confidence? Would it have revived the tech sector? Or would we have inferred that the news reaching the Fed is worse than we knew?
The point is, it's too late.
This slump has three deep causes. The first is the build-up of private debts, mainly households, to new highs. The second was the tech bubble, fueled in part by capital inflow, funneled into one narrow sector of the markets. Third, let's be candid, was the last administration's single-minded pursuit of public debt reduction -- a goal achievable in a growing economy only if private debts are going up very fast.
The Fed failed to take any steps to control these developments. It failed to discourage excessive household borrowing, particularly unsecured credits. It failed miserably to squelch the Nasdaq bubble, which it could have done on its own authority by raising the margin requirement. It went along with the debt reduction charade -- until just as cravenly switching over to the tax reduction charade last month. And it attacked the debt pile-up at the most vulnerable point in 1999-2000, by jacking up interest rates in what it said -- incredibly -- was a defense against inflation!
When households reach historic limits of debt carriage -- and interest rates rise -- they tend to stop borrowing. When a stock bubble pops, the firms feeding on it run out of money after a while. These things have happened. Now, they must run their course.
We will need to wait until cars and appliances age, until people have weddings, children, divorces, or deaths in the family, and decide to move to new houses. Only then -- a year or more from now -- will the urge to borrow return. Then, a cut in interest rates might do something.
In the meantime, hold on to your hats. |
