Hi Cush,
Perusing the Post yesterday, & I came across this...
nationalpost.com
Fed stalls growth- again
Thought u might be interested.
Fed stalls growth -- again
Alan Greenspan is no 'saviour' or 'maestro.' Markets hate uncertainty, but that's exactly what the Fed delivered yesterday
Richard M. Salsman
Financial Post
Investors in the U.S. stock market spoke loudly and clearly after the Fed's decision yesterday afternoon to cut the Fed funds rate by just a half percentage point, to 5%. In short, they hated it. After trading upward most of the morning, the broad S&P 500 equity index fell by 2% after the Fed announcement; the tech-heavy Nasdaq index plunged by 3%. The S&P 500 is now 22% lower than a year ago, when the Fed was still raising rates; the Nasdaq is 65% lower. In the past year, the total market value of publicly-traded U.S. stocks has declined by US$4.3-trillion.
This massive destruction of wealth is due primarily to Federal Reserve policy. Recall that in late 1996 Fed Chairman Greenspan ridiculed the rise in the U.S. stock market, dismissing it as a by-product of "irrational exuberance." In subsequent years he was proved wrong. The market rise was vindicated. Lower inflation and faster growth led to stupendous advances in technology, productivity and profits -- advances that the Fed did not forecast. But instead of being pleased by this salutary combination and staying out of the way, Mr. Greenspan and his colleagues set out, purposely, to undermine the market and the economy, raising rates by 1.75 percentage points from June 1999 to May 2000.
Fed officials justified their punitive policy by reference to flawed Keynesian textbooks, which taught them that "excessive" economy growth causes inflation, and that stocks can form a "bubble" by mispricing future earnings.
Fed officials seem oblivious to facts that contradict their pet theories. Consider the nearby graph, which shows an inverse relationship between economic growth and inflation. An accelerating inflation rate from 1988 to 1990 brought substantially lower growth in the United States. The economy revived from 1991 to 1995 amidst a decelerating inflation rate. Then, from 1995 to mid-1999, as inflation decelerated still further, the U.S. economy proceeded to accelerate at an ever-faster rate. The U.S. stock market welcomed this beneficial business climate and priced it accordingly.
But the Fed wouldn't leave well enough alone. It responded to prosperity by punishing it, raising rates and causing not only a prolonged stock market slide, but the virtual closing of IPO markets, a severe slowing of the economy, a rise in the inflation rate and a growing number of layoffs. The Fed has destroyed wealth while spreading stagflation. Growth will slow down further in 2001, as a delayed result of the Fed's rate hikes.
This carnage is not due to some inexplicable and sudden collapse of consumer confidence or to some "glut" of tech equipment, as the Fed has claimed. The Fed's the one to blame. It isn't solely responsible for the wealth destruction that's been seen. U.S. trustbusters are also to blame for assaulting Microsoft and forbidding or obstructing profitable mergers. But had Fed officials sat still, we'd still be enjoying solid growth with low inflation and rising stock prices.
In contrast to the evidence provided in our graph, Fed officials (and most economists) believe there's a direct, not an inverse, relationship between growth and inflation. They insist that fast growth breeds higher inflation while lower growth necessarily depresses price increases. That's fallacious; it's not growth that's bad for inflation but inflation that's bad for growth. The Fed bases policy on a false, anti-market theory; no wonder it causes widespread harm.
Mr. Greenspan has been idolized in recent years as a "miracle worker," a "new economy seer," a "wizard," a "maestro." But he wasn't responsible for the boom of the late 1990s. Central bankers don't create wealth; they either stay out of the way so it can be created or else they sabotage it by generating inflation and raising interest rates. Mr. Greenspan receives a bit less praise today than he did a year ago. But even now, analysts are debating whether he'll "come to the rescue" of the markets and economy. But how can Mr. Greenspan be the "saviour," when his policies are responsible for the carnage in the first place? Mr. Greenspan is no saviour. Indeed, by delaying rate cuts today he's inducing a delay in economic activity until there's a lower cost of capital.
The Fed should cut rates quickly and aggressively -- back to the 3% level of 1992-93 -- and then stand aside indefinitely. Instead, Mr. Greenspan and his colleagues seem bent on dragging things out, on torturing the markets and sowing uncertainty. In testimony before the U.S. Congress on March 2, Mr. Greenspan said "I hope I was sufficiently ambiguous not to have indicated the timing of when or if we would move. I was particularly adept at -- I hope I was adept at-- what we term 'Fedspeak' on that issue." Markets disdain uncertainty. Surely Mr. Greenspan must know that. If so, then by purposely sowing uncertainty, he only shows his disdain for markets. No wonder they shudder.
As they have for decades, most Fed officials refer to the latest market plunge as a "correction," as if the prior economic-financial condition we enjoyed was error-ridden and abnormal. They're parroting conventional economics, which says markets left to their own devices are prone to "excess," "imbalances" and breakdowns. In fact, markets left free tend to deliver stability and prosperity. That should be seen as the norm, as the healthy state of affairs and what's truly "correct." In contrast, punitive policy, wealth destruction and stagflation should be considered errors, problems and abnormalities. More often than not, central bankers impede wealth creation
Regards,
Peter |
