Greenspan's speeches on monetary policy are important events, but not because of the value of the information that he gives out or its accuracy. In fact he has a dismal record. He uses these events to tailor his public image and make it appear that he is on top of things. But if you read him carefully and look through the past few years of speeches you will find that he will say one thing at one time and then completely contradict it later. He is a complete political animal and unlike Paul Vokler and other past Federal Reserve Chairmen NEVER talks honestly. For instance back in 1999 when he started to raise interest rates he claimed that a rising stock market creates inflation. During this past summer he claimed that there is no way to know whether or not stock markets create inflation and that he never thought it wise to base interest rate policy on that theory. This time he made no mention of the fact that this recession has been caused by the aftermaths of a stock market bubble which he created and claimed that the current slowdown is has been caused by the terrorist attack on the World Trade Center. Towards the end of the speech he also subtly completely back peddled on his claim that the "new economy" would return.
I'm going to give you some quotes from what he said and parse them with my own comments:
"But before the recovery process gets under way, stability will need to be restored to the American economy and to others around the world. Arguably, that stability was only barely becoming evident in the United States in the period immediately preceding the act of terrorism."I'm not sure what he is talking about here. Before the attack unemployment was rising, retail sales were slipping, and industrial production was continuing to drop. This is just an apology to make it sound like he was succeeding in stopping the economic downturn, but the terrorists ruined his game.
"In the days following the attack, the level of activity declined significantly. The shock was most evident in consumer markets, as many potential purchasers stayed riveted to their televisions and away from shopping malls. Both motor vehicle sales and sales at major chain stores fell off noticeably. The airline and travel industries also suffered severe cutbacks."
The attack did have a short term negative effect on consumer spending.
"As the initial shock began to wear off, economic activity recovered somewhat from the depressed levels that immediately followed the attacks, though the recovery has been uneven. Markedly increased incentives induced a sharp rebound in motor vehicle sales by the end of the month that has carried apparently undiminished into the first half of October. However, many retailers of other consumer goods report that sales have only partially retraced the steep drops that occurred in mid-September. Fortunately, air freight is largely back to normal. Overall airline passenger traffic, while above its mid-September lows, was still off considerably in early October from pre-attack levels. Similarly, the hospitality and entertainment industries have overcome some of their earlier difficulties but continue to struggle."
But the effect on consumer spending will be short term. The terrorist attacks have not ruined the country. Some people are getting overly frightful and hysterical because the media keeps talking about real and imagined terrorist attacks, but in the long run this is just a small blip. There is no reason to be a worry wart.
"The shock of the tragedies at the World Trade Center and the Pentagon has reshaped those assessments of risk and required an abrupt realignment of prices in many markets to reflect the expected costs of operating in what we now recognize as a more hostile world. These circumstances pose a difficult challenge for business decisionmaking, not so much because the costs are inordinately large, but because the events, which have potentially substantial consequences, are so uncertain. Insurance deals with this problem by spreading the risk and converting potential large unknown costs into a steady stream of known insurance premiums that facilitates the forward planning so essential to an effective business operation."
"Although it is difficult to determine with any precision, it seems quite likely that a significant repricing of risk has already found its way into our markets, as many economic decisions are responding to shifting market signals. But these adjustments in prices and in the associated allocation of resources, when complete, represent one-time level adjustments, without necessary implications for our longer-term growth prospects."
According to Greenspan the markets dropped to factor in the new risks created by terrorism. He hints that this was just a temporary drop and now things can go back up, but at the moment he was saying this the averages were all above their pre-attack levels. This is more nonsense.
"The level of productivity will presumably undergo a one-time downward adjustment as our economy responds to higher levels of perceived risk. But once the adjustment is completed, productivity growth should resume at rates in excess of those that prevailed in the quarter-century preceding 1995."
This paragraph is the most important statement in the whole speech. All throughout this year he has been claiming that productivity created by the computer and the internet would prevent a recession. Back in January he claimed that technology would enable businesses to monitor and eliminate excess inventory fast enough to prevent a recession. Then as the year went on and the stock market continued to drop he tried to bail it out by cutting interest rates. Each time he responded to critics who thought he was hyperinflating the money supply by saying that inflation would remain weak because of high productivity.
Well the high productivity he was referring to was the high productivity rates that we saw in the late 1990's that caused Greenspan and bull market gurus like George Gilder to claim that we had a "new economy." Over the past few years I had been saying that the new economy was a hoax and this past summer the government revised the late 90's productivity numbers down - so far down that they were no longer high enough to be noteworthy. After that action it became impossible for anyone - except the most ridiculous such as CNBC's Lawrence Kudlow - to claim that there ever was a "new economy" productivity miracle.
Up until today Greenspan has said that we would return to the productivity rates of the late 1990's and that fact would make the economy recover quickly and grow fast once again. This is the first speech he has given since those numbers have been revised down that he shunned this theory. By stating that we would return to the productivity rates "preceding 1995" he made it clear today that he no longer believes in the "new economy" theory. He has to or else he'd look like a fool. But he'll never admit that he was the most prominent proponent of this hoax. He just made the biggest flip flop of his public life. And for Greenspan that is saying a lot. |
