Paul Samuelson Views on the Federal Reserve
INTERVIEW--Nobelist Samuelson--Fed should tighten
By Isabelle Clary
NEW YORK, May 21 (Reuters) - Nobel Prize-winning economist Paul Samuelson told Federal Reserve Chairman Alan Greenspan last week he should tighten credit now or risk rising inflation down the road.
Greenspan clearly did not heed the advice of the first American to win the Nobel Prize for economics, as the Fed kept the federal funds rate unchanged on Tuesday.
In a Reuters interview, Samuelson also said U.S. stock prices are too high and Greenspan is afraid to take steps that might cause a massive stock market pullback.
GREENSPAN AND MONETARY POLICY
''Since the summer of 1996, my judgment has been that the Fed should tighten up a little. I told Greenspan what should be done,'' Samuelson told Reuters while commenting on his encounter with Greenspan at the Boston Fed on Wednesday last week.
Samuelson, emeritus professor at Massachusetts Institute of Technology (MIT), also serves as a consultant for the Fed and the Treasury Department.
''The prosperity of the labor force is wonderful, but it is a fragile thing and it could go away if we have too much demand pressure,'' said Samuelson who advised Greenspan to tighten to ''stretch out that prosperity.''
''He (Greenspan) is a little scared to tighten because who wants to go down in history books as the Fed chairman who caused a big market slide?'' Samuelson said, referring to the U.S. stock market as well as Asian markets. ''But it's not good to paint yourself in a corner.''
Samuelson noted that in a decade under Greenspan the U.S. central bank ''has done well in walking a tightrope between too much demand and too little.''
The Nobel-Prize winner also praised Greenspan's predecessor, Paul Volcker, who ''deserves credit for breaking the back of the stagflation of the 1970s.''
THE BRAVE NEW WORLD
Samuelson's argued that the economy has been operating at too high a rate for its long-term good, necessitating higher interest rates.
The MIT professor, whose work encompasses business cycle behavior and market efficiency, does not believe in new hypotheses suggesting the economy's noninflationary speed limit has somehow risen dramatically.
''I do not believe that the evidence of economic history and contemporary statistics or the different competing notions about sound mainstream economics justify any such belief,'' Samuelson said of the notion of an economy that would never run into production constraints or meet a downturn.
''When you have a strong bull (stock) market, it is customary for people to believe we live in a new era. It happened in the 1920s when the business cycle was said to be dead or in (former President John) Kennedy's Camelot period.''
STOCKS
Samuelson expressed concern about the level of the U.S. stock market and investors' hopes it will rally forever.
''I believe you can have over-exuberance at a stable price level,'' noted Samuelson who said low current inflation alone does not justify strong stock gains.
''It's not really a healthy thing for a large number of stock owners to believe they'll average 30-percent returns on their securities for the next three years ... as they did in the past three years,'' Samuelson said. He added that raising margin requirements for stock ownership may be a good idea.
''Greenspan did not want to do this because he believes that things have unintended consequences,'' Samuelson said. ''He's afraid that if he raised margin requirements, this could kick back in the opposite direction (bolstering investor confidence).''
PRODUCTIVITY AND SUPPLY-SIDE EXPERIMENTS
The Fed's restraint -- only one 25-basis-point rate hike since February 1995 -- at a time of high growth and declining unemployment has some economists wondering if the Fed is running an experiment to see how fast the U.S. economy can grow before displaying inflation symptoms.
''There is a belief, still a minority belief, that the U.S. productivity potential in the (Microsoft Corp. Chairman) Bill Gates era is somehow bigger than anybody is able to measure,'' Samuelson said.
''Our ways of measuring services productivity are very crude. This was the central axiom of the radical right supply-siders in 1981,'' Samuelson noted. ''Give growth a chance, make your mistake on the easy side because there is a great hidden potential, and you'll unleash great ventures and everybody will benefit. There is very great danger on acting upon that. I don't want to get short-term benefits and pay for it with a long-run reversal.''
CENTRAL BANKING
Samuelson supported the Fed's dual mandate to seek maximum growth and employment as well as fight inflation.
''Inflation is an extremely important signal a central bank should be observing, particularly at a time of high prosperity. It's a completely wrong philosophy, like the one that is going to guide the new European central bank, to think of only one thing, the price level. God gave us two eyes, one to keep on the price level and the other on production.''
JAPAN
Samuelson also criticized Japan for its inability to fix the financial and economic problems plaguing the world's second-largest economy.
''I regard Japan as the worst self-governed country in the world. The bureaucrats there never knew much and never learned anything. There is no good sense in the corrupt and faction-riddled Diet. There is no leadership at the Prime Minister level,'' Samuelson said.
''The saddest thing is the (Japanese) electorate does not have a clue about where to go. They even objected to rescuing the banking system. |
