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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: fedhead who wrote (13948)	9/20/2002 5:03:55 PM
From: stockman_scott	Respond to of 57684

Is Washington Listening? By Donald Luskin SmartMoney.com Friday September 20, 3:33 pm ET biz.yahoo.com THE DAY AFTER the terrorist attacks of Sept. 11, 2001, I posted a column called "Rising From the Ashes." It was an optimistic look at the potential for the stock market to spring back from what seemed like a deathblow. I wrote, "...if America's leadership and the American people respond constructively — as they always have in the past — then from this crisis could emerge significant opportunities that could propel the economy and the markets into an important new growth phase." Now, a year later, the markets are lower than they were in the panic following the New York Stock Exchange's reopening after Sept. 11. And it's not because the American people didn't respond constructively — they did. It's because, on the economic front, America's leadership did not respond constructively. At first the market adopted my highest hopes for rising from the ashes of Sept. 11 — and by the end of 2001 it had gotten out of hand. The mania among Wall Street economists from November 2001 to April 2002 for a "V-shaped economic recovery" may have been, in fact, something between wishful thinking and patriotic fervor in the wake of a national tragedy. Investors played along last December and January when equity valuations were driven back up to levels not seen since the top of the bull market in March 2000. It's almost as though they were responding to the public-relations campaign carried out in New York City with the slogan "Bring Back the Bull," urging investors to conquer terrorism by bidding up stocks. Of course it had to end in tears. To be fair, in the first few months following Sept. 11 there were hopeful signs that the tragedy would inspire pro-growth economic policies. Most important, within hours of the attacks the Federal Reserve announced that it would supply all the monetary liquidity the banking system demanded during the crisis — and it followed through, big time. Initially, the Fed even abandoned its inefficient operating mechanism based on interest-rate targeting, letting the fed funds rate float as a byproduct of liquidity supply and demand. The Fed reverted to it traditional rate-targeting operations in a couple of weeks, but rates have stayed at constructively accommodative levels. The Fed has yet to take back any of the 1.75% in rapid-fire rate cuts made after Sept. 11, even though the economy shows signs of recovery, and even though those cuts were deemed at the time to be only a temporary response to an emergency. Would the Fed have gotten the funds rate down to 1.75% eventually with or without Sept. 11? Perhaps the economy was already in recession before then (although almost all Wall Street economists were denying it at the time), so a gradual series of rate cuts may have been in the cards all along. But surely Sept. 11 motivated the Fed to ratchet rates down far more aggressively than it would have otherwise. Sadly, other than the Fed's decisive and persistent action, our economic leadership has done everything wrong. Proposals for pro-growth tax cuts that dominated the post-Sept. 11 debate on economic stimulus were quickly forgotten, to be replaced with an orgy of pork-barrel government spending. There were some initial signs that regulatory shackles on American business growth would be loosened, but the Bush administration has ended up doing nothing to alter Clinton-era antitrust and telecommunications policy. Protectionist trade barriers against foreign steel were arbitrarily imposed, reversing two decades of bipartisan pro-growth global trade policies. And then came the WorldCom (Other:WCOEQ - News) accounting scandal. It was inevitable that the Democrats would eventually find an issue with which to compete against President Bush's sky-high approval ratings in the wake of Sept. 11, and this turned out to be it. They turned it into a legislative assault against CEOs, auditors, and other putative corporate crooks that culminated in the Sarbanes Oxley Act, the most sweeping economic regulatory initiative in two generations. And President Bush — ostensibly a free-markets Republican — stood by and let it happen. And from a pure game-theory perspective, why should he have done anything else? His popularity is based on a signature foreign-policy issue — to venture into a controversial domestic economy issue is a no-win proposition, in which he has lots to lose and nothing to gain. So the Republicans in Congress who've to stand for reelection in November — when George Bush does not — had no choice but to go along with the Democrats' frenzy of reform, even trying to one-up their rivals in how tough they could appear to be on corporate corruption. Thanks to this dynamic, free-market capitalism has been a victim of Sept. 11. Now, as the economy struggles to pull out of recession with the shadow of Sept. 11 still cast across all our lives, the Bush administration has no intention of spearheading the kinds of pro-growth policy initiatives that we might normally have expected. Yes, there was a big show put on at the Waco economic forum, with a few suggestions for tax cuts aimed at relief for beleaguered stock-market investors. But those suggestions had now simply been forgotten, leaving the impression that Waco was staged primarily as a sop for the pro-growth wing of the Republican party, and to throw a bone to critics of the administration in the financial community — people just like me. The sad fact is that President Bush's political priorities are focused exclusively on the war on terrorism, and possible military action against Iraq dominates the headlines. We trust that Bush's decisions will be taken in light of the facts and the national interest. But there's an intense risk that he'll be tempted to "wag the dog" in order to boost his popularity and help his fellow Republicans in the November elections. So in two senses the consequences of Sept. 11 are swords of Damocles hanging over the economy. If we go to war with Iraq, the economic impacts will be unpredictable and chaotic. And whether or not we do, the economy will be left to sink or swim on its own. The eyes of the administration are elsewhere. We remain in the ashes. ________________________________________________ Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.