WHY DID THE ECONOMY SLOW DOWN
an excerpt from James Padinha's commentary
<<From The Economist. The recent issue with the Chinese punks on the cover.
"This is an unusual type of slowdown. In contrast to the post-war norm,
the expansion was not "murdered" by the Federal Reserve. The contraction
started with an investment bust, as firms that had radically over-invested
during the boom years of the late 1990s suddenly cut back."
I respectfully disagree; The Economist does not have its facts straight.
The attached table shows that on a quarterly basis investment spending did
not begin to slow until the third quarter of last year (on a year-on-year
basis, it began to slow one quarter later). It also shows that the
slowdown came in the wake of a tightening cycle that drove the funds rate
to 6.50% in May 2000 (its highest since early 1991) from 4.75% in November
1998 (its lowest since the middle of 1994).
Firms, therefore, did not "suddenly" cut back on thinking that they had
recently overdone it. FIRST came the interest-rate hikes, THEN came the
investment slowdown. Firms "suddenly" cut back because the Feds finally
put an end to the extra-dirt-cheap-capital policy they'd been engineering
for two full years prior to the 1999-2000 hikes. To say that the
investment slowdown didn't come as a direct result of the hikes we saw
during the year-plus prior seems to me to sit well north of ridiculous; and
the natural extension of The Economist's thinking -- that investment
spending would "suddenly" have slowed when it did even had the Fed not
hiked at all during the fiteen months prior -- seems sillier still.
The Feds did indeed murder the expansion. For two full years between the
second half of 1997 and the first half of 1999, they chose to not act on
all kinds of signs -- from capital-market signals to common-sense thinking
concerning productivity-driven, tech-led investment booms -- that begged
for relatively higher real interest rates. They waited, and waited, and
waited, and by the time they got around to doing something the boom was
that much more out of hand. Had they begun to nudge up policy rates
sooner, even on a small scale and on a relatively infrequent basis, things
would not have gotten so out of hand -- and the Feds would have avoided
having to crush the economy so much later. Yet no. And if the Feds own
dogs, we're right to fear for their animals: Our central bankers prefer one
delayed and bloody belt-beating to a series of smaller healthy corrections
along the way.
That the Fed murdered the expansion is one of the strongest factual
statements that we've been able to make about the central bank in some
time, and so it amazes me that so many smart people think the economy began
slowing all on its own. Would that such folks were more like Newton, who
knew well that a moving object stays in motion at constant speed unless
acted upon by an unbalanced force. Unfortunately for us, and to the
economy's detriment, the Feds opted for one big final force over
spaced-out, smaller ones -- and that's what landed us in the muck in which
we're stuck.>>
Padinha was formerly a columnist at thestreet.com |
