Snowshoe, James K. Galbraith's writing in the The Street.com is a strange brew. For example, he takes the Fed to task for not raising margin requirements to prick the NASDAQ bubble. While I personally think that margin requirements ought to have been raised, such an action is not in the Fed's purview. The Board of Governors of the NYSE/NASDAQ are charged with maintaining the adequacy of margin accounts. Right church, wrong pew. Mr. Galbraith then takes a giant leap by issuing a manifesto that the Clinton administration's successful efforts to reduce the national debt were inextricably at odds with economic growth UNLESS households went into hock to compensate. First, such a linkage is simplistic. Second, nowhere have I seen evidence to suggest that the fiscal surplus acted as a drag on a ten year economic expansion.
Mr. Galbraith comes nearer to the mark when he rightly, IMO, assigns responsibility for the deep doo we're in to "capital inflow to . . .one narrow segment of the markets". I think it is beyond obvious that we've got a surplus of routers, telecom infrastructure equipment, chips, and PCs AND a surplus amount of capacity to manufacture even more of the damned things. Overinvestment indeed. But since when did that become the Fed's problem? It is every American's God given right to go broke, and if you thought CSCO was a steal at 70 you probably are. We are only somewhat into a good old fashioned inventory recession; we are up to our eye balls in a surplus capital equipment recession. "We" (venture capitalists, investment bankers, day traders, etc.) simply misallocated capital, meaning we put too much of the stuff in one sector, and starved other sectors. When you've got too many Chevy's on the lot, dropping interest rates to induce Mr/Mrs America to drive one away with 'no money down and no payments till Armageddon' can be an effective remedy to jump start the show. But it does precious little to tempt Intel to order more equipment from Applied Materials in order to ramp chip capacity so they can add to a present (and growing) surplus. Thus at last we return to the opening paragraph of the Galbraith writing: lowering the Federal Funds rate by 50 or 75 or 125 basis points is really a non-event. Eventually it will help over indebted entities (whether business or household) sustain their debt service requirements, and eventually it will put more liquidity back in the system which will eventually help somewhat. Yawn.
The good news is that we didn't follow the Japanese example and build bridges with $50 tolls intended to take people where they didn't want to go in the first place--now that's not capital misallocation,it's more like capital evaporation. I'd rather have warehouses brimming with Cisco gear that will eventually provide economic value rather than condos in Texas that were stillborn as regards utility.
In all events however, it would be well to recall that the Fed is charged with maintaining the money supply to promote economic growth and stability and is given two tools to carry out its responsibility--fiscal and monetary. They are NOT chartered to cruise down Sand Hill Road and lecture those nasty VC's for convincing folks to throw all that dough at the .com and telecom industries. Mr. Galbraith gets to the right conclusion regarding yesterday's Fed actions being of little consequence (and certainly none in the near term), but his path is more than marginally convoluted. regards, mike doyle |
