BusinessWeek Notes Greenspan's Failure to Revive Economy
Phil Brennan, NewsMax.com
Friday, Aug. 31, 2001
BusinessWeek points out how Federal Reserve Chairman Alan Greenspan is failing at his job. His seven cuts in interest rates have not ignited an economy teetering on the edge between recovery and recession.
And, some analysts warn, further rate cuts could do more harm than good.
Greenspan's almost frantic campaign to rev up a faltering economy by slashing interest rates began in January, when the stock market was reeling and consumer confidence shaky. One after another, rate cuts - some of up to a half of 1 percent - came in rapid succession, yet the expected recovery failed to materialize even though consumer spending continued at a healthy pace.
Eight months later, after interest rate cuts amounting to a full three points, Greenspan faces tough choices. The rate cuts - a traditional central bank method of boosting economies - have failed thus far. The stock market has not bounced back, corporate profits are sinking, mounting numbers of layoffs are frightening consumers, and that much-heralded federal "budget surplus" is vanishing, thanks to the economic slowdown and the resultant reduction in tax revenues.
W. James Farrell, CEO of Illinois Tool Works, a diversified manufacturer in Glenview, told BusinessWeek: "There are a lot of negative things around. I don't think the odds are good that the economy's going to go back up."
Part of Greenspan's predicament lies in the fact that further rate cuts could drive down the value of the dollar to dangerous levels, making the traditional strategy for stirring up a stagnant economy self-defeating.
"If the dollar continues to weaken, the Fed's hands could be tied when it comes to further easing," said Michael Wallace, a senior economist at Standard & Poor's.
The strategy also carries the risk that rate cuts could jack up housing prices because cheaper mortgage rates spur home sales, which are rising by about 8 percent annually, BusinessWeek reports in its Sept. 3 issue.
That hyperactivity is encouraging potential sellers to ask higher prices for their property and buyers to get into the market, analysts say.
Housing Bubble to Burst?
"Home buyers are taking note, preferring to invest in housing rather than in the declining stock market," California builder Bruce Smith told BusinessWeek.
"It's sentiment such as this that has some analysts worried," the magazine reports. "They fret that ebullience in the housing market may reflect too-loose credit standards by mortgage lenders. The result, these analysts say: House prices have reached bubble status in some parts of the U.S. - a worrying trend that would only be exacerbated by bigger Fed rate cuts."
That Greenspan recognizes the hazards of frequent and large interest rate reductions is obvious in the size of the most recent cut - a mere one quarter of 1 percent - the second such tiny reduction in three months. Moreover, there are indications that future cuts will be fewer.
In a statement issued with the rate cut announcement the Fed indicated it had no immediate plans for another cut. BusinessWeek noted that Wall Street shrugged off the last reduction and stock prices plunged before recovering slightly the next day.
This apparent strategy worries investors who fear that a slowdown in the size and frequency of interest rate reductions could stifle the expected recovery yet to materialize.
In the meantime, the bad news continues, with developments alarming enough to squelch consumer confidence and sharply reduce consumer spending, the only bright spot in the present economy:
Corporate executives are trying to cut costs, using layoffs as one means of slashing the cost of doing business.
Japanese semiconductor manufacturer Kyocera said Thursday it would slash between 8,000 and 10,000 jobs overseas, mostly in the United States, United Press International reported. No. 4 computer maker Gateway Inc. announced Tuesday it would cut almost 5,000 jobs worldwide, a fourth of its workforce, the Associated Press reported. On Aug. 17, Ford Motor Co. said it would eliminate as many as 5,000 salaried employees by the end of the year and warned of more cost-cutting to come. On Aug. 21, Steelcase Inc., a Grand Rapids, Mich., office-furniture maker, announced it would cut 1,100 jobs, and New York media giant AOL Time Warner Inc. announced it was laying off 1,700 workers.
Wary investors are dumping stocks, keeping the market in the doldrums.
Drastic price cuts spurred by competition and fewer orders have created price wars in hard-hit high tech. The technology-heavy Nasdaq index has dropped by almost 15 percent in the past 1 1/2 months, and the more broadly based S&P 500 has dropped 5 percent.
According to BusinessWeek, a University of Michigan poll of consumers in early August found that just 18 percent of those expecting a tax rebate planned to spend it. The rest said they would either save the money or pay debts. "The tax-rebate impact will be very minimal," said Kurt Barnard, president of Barnard's Retail Trend Report. "People are going to buy what they need."
A Sea of Debt
Worst of all prospects Greenspan faces is the specter of a debt bomb explosion in an economy being fueled by consumer spending financed largely by consumer debt.
"American households are up to their eyeballs in debt (home loans, second mortgages, car loans, car leases, credit cards)," Anthony B. Sanders, John W. Galbreath Chair of Real Estate Professor of Finance at Ohio State University, told NewsMax.com.
"Job loss or the reduction in salary and bonuses will lead to a horrible outcome. While a household can walk away from credit cards and second mortgages, car loans (and leases) and home loans are problematic in that the assets are usually sold at auction after default/foreclosure.
"This 'house of credit cards' will tumble and it will hurt. The government and the business community are faced with an interesting problem: for corporate earnings to grow (and people to have jobs), they want continued borrowing to encourage continued buying. A slowdown in borrowing means a slowdown in buying which will cause slower corporate earnings, a decline in stock prices and a lowering of household wealth.
"So, who wants to slow the credit crisis down? The predatory lending investigations by Congress are about as effective as the Clinton investigations - they will find that some banks prey upon the uneducated. It's not just the uneducated, it's virtually everybody!" Sanders wrote.
Concluded BusinessWeek: "With the U.S. perched precariously between recession and recovery, Greenspan faces more difficult decisions in the days ahead. Let's hope he gets things right. The fate of the New Economy depends on it."
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