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| Greenspan to the Rescue
by John M. Curtis Copyright January 4, 2001
With the NASDAQ sykrocketing to 5,000 and the DOW melting down, some economists marveled at the bizarre reversal of fortunes. Momentum in the NASDAQ drained capital from prestigious Blue Chips whose profits headed south. Compared to 'old economy,' 'new economy' stocks looked irresistible. On its way up, the NASDAQ seemed indestructible, immune to the Fed’s 6 rate increases. Like radioactivity, its cumulative effects eventually torpedoed the fledgling 'new economy,' bursting the bubble and fueling the exodus out of tech stocks. With money flowing back to the 'old economy,' the forgotten Blue Chips looked safe again, as the NASDAQ melted down. Trying to cure inflation, Greenspan’s excessive rate increases poisoned the 'new economy' whose businesses—and, yes, growth—were heavily dependent on market capitalization. No longer flush with cash and able to pay their bills, the dot.com industry crashed and burned dragging down the entire tech sector. Otherwise sound businesses were upended by the Fed’s tight-fisted policies. Now reversing gears, Greenspan must accept the debris lining the streets—picking up the pieces is no easy matter. Blaming investors for jumping on the bandwagon is like blaming tourists for taking the elevator to the top of the Empire State Building. What’s the point? Pouncing on a good thing is the American way. Going with the flow, investors watched their wallets swell, buying future-looking tech and dot.com companies. With investors chasing the high-flying techs, prices soared together with inflated price-to-earnings multiples. Despite the risks, investors were richly rewarded with unprecedented profits. While inflation was tamed in the overall economy, it was rapidly escalating in tech stocks. You simply had to pay more to get more. Despite all the rapid growth, inflation was not seeping into the general economy, except as measured by one irrational index: The GDP Deflator, the Fed’s measure of consumer spending. Rather than celebrate strong consumer spending, Greenspan blamed it for fueling a stealth inflation. But was there really inflation, or did Greenspan and the 'old economy' rebel against the high-flying 'new economy?' With profits in hand and confidence running high, consumers opened their wallets and supported the economy by purchasing more goods and services. When the good times roll, that’s what’s supposed to happen. When the CPI remained low and other inflationary indices stayed stable, most economists heralded the bull market as having the best of both worlds: robust growth with low inflation. Believing that things were too good to be true, Greenspan began strangling the economy with 6 rate increases. Now that he torpedoed the economy, he’s prepared to rescue it. Referring to Greenspan’s latest rate reduction, "By this move, the Fed revealed it is deeply alarmed by the deterioration of the economy," said Mickey D. Levy, chief economist of Bank of America Securities in New York, underscoring the urgency of the Fed’s rate cuts. Like a misguided doctor, Greenspan gave the economy bad medicine, choking off its money supply. Most businesses die because of under capitalization. Destroying equity markets wasn’t what the doctor ordered. Seizing the moment, the incoming administration is now selling its $1.3 trillion tax cut in view of the sputtering economy. "I think we’re going to need to move more quickly," said president-elect Bush, pushing his plan for across-the-board tax cuts. With markets in the tank, growing surpluses in the bank and economic worries making headlines, Bush convened an economic summit to advance his tax cut proposal. Bristling at tax cuts, the Fed wants to wait and see whether its current round of rate cuts does the trick. Ironically, Greenspan now wants to put cash in peoples’ pockets, increasing the GDP Deflator, the very index he used to justify 6 punitive rate hikes. Viewing a slew of bad economic news, the Central Bank now believes that rate cuts are needed to resuscitate the economy. "Tax cuts are an integral part of economic recovery," said Bush reacting to Greenspan’s surprise rate cut, believing that his tax plan would stimulate economic growth. Opposed to targeted tax relief—including abolishing the death tax and marriage penalty—Bush wants to cut marginal tax rates, something the Fed views with suspicion. Pushing interest rates to the breaking point, Greenspan went overboard, sabotaging the NASDAQ and pushing the economy to the brink of recession. Fighting inflation with high interest rates, bankruptcies, unemployment, market meltdowns and possible recession turns back the clock on economic progress. Wild speculation, inflated share prices and bloated multiples aren’t enough to justify taking down the markets by hiking interest rates. Whatever the dangers of inflation, they’re far less than bankrupting growing businesses and decimating the retirement plans of small investors trusting the market to secure their futures. With president-elect Bush encouraging privatization of social security into individual investment accounts, the Fed must show far more skill in orchestrating a 'soft landing' for the new generation of investors whose life savings and retirements are now tied to the stock market. Failing to profit from experience the next time around could spell disaster for future investors. About the Author John M. Curtis is editor of OnlineColumnist.com and columnist for the Los Angeles Daily Journal. He’s director of a Los Angeles think tank specializing in political consulting and strategic public relations. He’s a seminar trainer, columnist and author of Dodging The Bullet and Operation Charisma. |
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