MONUMENT SECURITIES: Happy Birthday Mr Greenspan
06 Mar 08:26
By Stephen Lewis
Of Monument Securities
LONDON (Dow Jones)--This is a day of celebrations for some. It is Mr Alan
Greenspan's birthday. He has reached the age of 77, with his admirers in
Congress pressing for a resolution that would allow him to remain in office for
as long as he wishes. Admittedly, this proposal arose from suspicions the Bush
team would like to find a replacement for the Fed Chairman when his current
term ends in June 2004, if not sooner. His principal Congressional champions,
Mr Schumer and Mr Corzine, are both Democrats on watch for improper pressure on
the central bank from a Republican Administration. However, the Fed
Chairmanship is more than an honorific title. Mr Greenspan has already reached
an age when, for the majority of men, the most energetic activity they could
contemplate would be writing their memoirs. To suppose that the management of
the dollar financial system can be safely entrusted, for an indefinite period
and without review, to someone so far advanced in life, venerable though he may
be, is unrealistic. Furthermore, Mr Greenspan's record hardly justifies
granting him an undated lease on his position at the Fed.
In recent months, he has been very much on the defensive when discussing the
Fed's role in the 1990s economic boom and the subsequent bust. Initially,
towards the end of 2000, when it became clear that US business activity was
turning down, the Fed Chairman argued this was merely a short-run adjustment
after a period when capital investment had run ahead of immediate demand. There
was no need for concern because there was every reason to believe the
glittering productivity performance of the US economy would be sustained. In
the meantime, the Fed would take the edge off the recession by stoking
household spending through interest rate cuts. By the autumn of 2002, the
analysis was looking tired and the prescription misguided. There were still no
signs of a sustainable upswing in business spending, while household
indebtedness, through the active prompting of the Federal Reserve, had reached
a level where it represented a fresh threat to economic stability. Mr Greenspan
shifted his ground, acknowledging that conditions were less than optimal but
arguing there was nothing the Fed could effectively have done to prevent the
market bubble and its bursting. Yet, this line of argument lacked credibility.
He had correctly identified in 1996 the threat that 'irrational exuberance'
presented but chose, recklessly, to continue with an expansive monetary stance.
This was in furtherance of his experiment to see how fast he could make the US
economy grow without precipitating serious inflation. With a narrow focus on
the 'core' rate of increase in the personal consumption expenditure deflator,
the Fed Chairman was reluctant to label the stretching of capital valuations as
a symptom of monetary excess. Latterly, he has recognised that even the
unbalanced growth dependent on household borrowing, which has so far kept the
economy as a whole inching higher, cannot be expected to go on for much longer.
All that is left of the Greenspan experiment is the mess at the bottom of the
test-tube. The depressing aspect of the Administration's reported estrangement
from Mr Greenspan is that it has not occurred as a response to the Fed's record
of monetary management but after some comments the Fed Chairman had made that
were deemed critical of the Bush team's tax-cutting plan.
If an indictment of the Fed's handling of policy were needed, the latest
Beige Book provides it. According to this comprehensive survey of business
conditions in the USA, 'growth in economic activity remained subdued in January
and February.' 'Consumer spending remained weak,' and 'business spending was
very soft'. Most districts still described manufacturing activity as weak or
lacklustre. 'Refinancing activity continued to drive growth in household
loans', but as Mr Greenspan himself had noted separately in a speech to
mortgage lenders earlier this week, this factor could not be expected to go on
supporting growth in the housing and consumer spending sectors. Admittedly,
this tale of woe partly reflects the impact of geopolitical uncertainties on
businesses' spending and hiring decisions. However, the 'soft patch' in the
economy started long before the troop build-up in the Gulf. Such phenomena are
not caprices of Nature; they are signs that policymakers have made mistakes.
The message from the Beige Book, indeed, is so downbeat that the FOMC, when
it next meets on 18 March, will find no grounds in it not to take rate action.
Although the report notes that energy and insurance costs are rising, it also
points out that businesses are having difficulty passing along cost increases
to their customers. It seems the weakening in the dollar's exchange rate has
not yet resulted in any appreciable lessening of competitive pressures in US
domestic markets for goods and services. By the time the FOMC meets, it may be
clearer how the Iraq crisis will be resolved. This will probably be more
important in determining the FOMC's interest rate action than the contents of
the Beige Book. Nevertheless, the economic malaise is clearly more than the
'soft patch' Mr Greenspan diagnosed last autumn.
-By Stephen Lewis: 44 20 7338 0179: analysis@monumentsecurities.com
(Stephen Lewis is chief economist at Monument Securities Ltd., London,
independent brokers specializing in institutional business.)
Opinions expressed are those of the author, and not of Dow Jones Newswires.
This column is published for information only, and it neither constitutes,
nor is to be construed as, an offer to buy or sell investments. The information
and opinions expressed herein are based on sources the author believes to be
reliable, but he cannot represent that they are accurate or complete. Any
information herein is given in goodfaith, but is subject to change without
notice. No liability is accepted whatsoever by Monument Securities Ltd.,
employees and associated companies for any direct or consequential loss arising
from this article. Monument Securities Ltd. is regulated by the SFA and is a
member of the London Stock Exchange, LIFFE and ISMA.
(END) Dow Jones Newswires
03-06-03 0826ET |
