"Now back to the fool-on-the-Hill testimony"
Good stuff from Fleck
By Bill Fleckenstein
07/15/2003 06:26 PM EDT
URL: thestreet.com
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"Now back to the fool-on-the-Hill testimony. Because I am tired of reprising the utter drivel of this man, I had not planned to discuss today's speech. I changed my mind after reading what he had to say, which just blew me away. Early on, he was predictable enough: "The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as it's needed to promote satisfactory economic performance." Of course, satisfactory economic performance is to be determined by him -- somebody who can't distinguish a bubble from a bust.
From there, he hinted at what was to come: "Policy accommodation aimed at raising the growth of output, boosting the utilization of resources, and warding off unwelcome disinflation [my emphasis] can be maintained for a considerable period without ultimately stoking inflationary pressures." Translation: The Fed is so good, it can not only tell the difference between these two but make sure that we get only welcome disinflation, not unwelcome disinflation."
"Or, said differently, if disinflation, i.e., the lowering of the inflation rate, is unwelcome, the Fed will somehow magically pick the right level of inflation (though Greenspan chose to keep us in the dark as to whether that's 2%, 3%, 4% or 5%, or clue us in on how he came by his powers of omniscience). So, he has basically dropped the pretense of the Fed's deflation-preventing crusade to expose its true colors -- the desire for more inflation. (Of course, what the Fed really wants is asset inflation and more speculation.)
Toward the very end of his speech, when praising the Fed for bringing down the rate of inflation, Greenspan let the cat out of the bag completely: "We face new challenges in maintaining price stability, specifically to prevent inflation from falling too low [the emphasis is mine] ." Read that again. It's a seminal event in the history of that great inflation machine, the Fed. Let the record show the Fed believes its goal is not maintaining price stability but rather making sure inflation runs at a high enough rate. To repeat, the Fed now deems itself capable of picking the right rate and engineering things perfectly to that level."
"Oh, but there's more. Greenspan goes on to crow about welcome speculation (vs. the unwelcome kind) in the financial markets, giving a tip of the hat to what's been happening in bonds and junk bonds: "Moreover, strong inflows to corporate bond funds, particularly those specializing in speculative-grade securities, have provided further evidence of a renewed appetite for risk-taking among retail investors." So Gordon Gekko had it wrong. It's not "greed is good" but "speculation is good." Or, in the parlance I've invented for today, "welcome" speculation is good.
That, of course, brings Greenspan to thoughts on the housing market: "Households have been able to extract home equity by drawing on home equity loan lines, by realizing capital gains through the sale of existing homes, and by extracting cash as part of the refinancing of existing mortgages." Once again, he recognizes that we've got all this leveraging up in housing, and that, too, is welcome in his book."
"Shifting to the slump in capital spending (a fly in the ointment of his little scenario), he turns to a rather novel concept to explain the problem away: "But as yet there is little evidence that the more accommodative financial environment has materially improved the willingness of top executives to increase capital investment. Corporate executives and boards of directors are seemingly unclear, in the wake of the recent intense focus on corporate behavior, about how an increase in risk-taking on their part would be viewed by shareholders and regulators [the emphasis is mine] ." "
"Well, there you go, folks. Capital expenditures are being held back by regulatory concerns, and/or by chieftains' concern about alienating their shareholders. These are the same guys who grant themselves stock-option packages across the board and don't give a damn about what the shareholders say -- and now Greenspan is using that as an excuse? Anyone with a basic understanding of economic history knows that capital expenditures are not picking up because we had the biggest bubble in the history of the world. In the aftermath of a bubble, as history has shown, capital expenditures usually remain pretty soft for a decade, because it takes that much time for the prior misallocation of capital to be purged."
"In any case, Greenspan ends by reaffirming his commitment early in the speech: "The FOMC stands ready to maintain a highly accommodative stance of policy for as long as it takes to achieve a return to satisfactory economic performance." He has demonstrated for years that he cannot judge what "satisfactory" is. He lurches from crisis to crisis borne of his own incompetence, making them bigger each time.
Despite my outrage at his wrecking of the economy and the financial system, I am glad of one thing: Greenspan has finally made it crystal-clear that the Fed's goal is to be an engine of inflation. Since it was a successful engine of inflation even when it claimed that it wasn't, we can only guess at what the inflation rate's going to look like in the future." |
