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| Greenspan Eases the Pain
by John M. Curtis Copyright December 9, 2000
With word that the economy’s "appreciably" slowed, Greenspan sent the Nasdaq rocketing 274 points to an unprecedented one-day rally. Whether it can be sustained is anyone’s guess. What goes up must come down, suggesting to watchful investors that the Fed’s finally ready to resuscitate the markets by lowering interest rates. Stimulating the economy is welcomed relief to battered investors—and new economy businesses—punished by the Fed’s tight-fisted monetary policy. Giving investors hope was upbeat music to the technology sector now inextricably tied to the entire economy. "New technology," said Greenspan, "has enabled new businesses to galvanize productivity and spur the unprecedented growth." With the Nasdaq now in the tank, Greenspan’s admitting that his miserly policy may have gone too far. Recent Fed rate-hikes caused the meltdown in the dot.com world, hurting investors and punishing entrepreneurs. You can’t have it both ways: Supporting new businesses and whipping them with intolerable interest rates. Technology represents the future. How can you encourage research and development and simultaneously blame new businesses for not turning immediate profits? Entrepreneurs and venture capitalists depend heavily on stock market momentum to launch new industries. When investors head for the hills, market capitalization dries up, and otherwise good businesses go under. Sure, they’re not immediately profitable like the old economy, but their innovation opens new doors to established—but tired—industries looking to remain competitive. Unlike the old days, there’s now a healthy interdependence between the old and new economies. Like good parents, the Fed must accept the responsibility of helping fledgling businesses grow from helpless dependence to flourishing independence. Turning the new economy on its head, the Fed’s overly punitive policy showed great insensitivity to the needs of companies trying to get on their feet. Ordinary Americans investing in the new economy by borrowing and buying stocks, shouldn’t be sabotaged by the Fed’s action. Greenspan’s recent words are music to the ears of anxiety-ridden investors looking for some light at the end of the tunnel. With the economy pushed to the brink of recession, the Fed’s finally ready to switch gears and begin cutting rates. Investors can regain hope that their battered portfolios may eventually recover. It’s already too late for many publicly traded companies, dependent on market capitalization, that haven’t made it. Referring to Greenspan’s veiled remarks, "He is running a bit scared; the economy is slowing faster than he anticipated," said Sung Won Sohn, executive vice president and chief economist of Wells Fargo & Co. Though most people were promised a soft landing, the tech-wreck upended investors and led to the current negative investment mood. Hoping to begin undoing the damage, Greenspan reassured investors that help is on the way. Cutting interest rates is a step in the right direction, but just how much the Fed can do to reverse the stubborn bear market is anyone’s guess. Reporting that factory orders tumbled 3.3% and that unemployment edged up to 4%, the Commerce Department helped twist Greenspan’s arm into changing the Fed’s 'tightening' to a 'neutral' bias, opening the door for rate reductions in mid-January. Driving the market with 'rational expectations' should improve the economic outlook and pave the way for a modest year-end rally. Unlike the past, Greenspan must do a better job of responding to ominous economic signs. Allowing the American stock market to go into a year-long tailspin causes collateral damage in Asia and Europe, whose markets and economies are closely linked to the U.S. In today’s global economy, the Fed must consider its impact on U.S. and international markets. Clumsy miscalculations and inept fine-tuning now have global implications. Responding before the handwriting’s on the wall, Greenspan can accomplish his objectives without dragging down the world economy. Fed watching is no longer the favorite pastime of market gurus—it’s the key barometer of survival to ordinary investors and businesses. More powerful than any world leader, the Fed chairman must accept the responsibility of managing the global economy. Whether it’s cars or computers, the international community invests and grows with the same profits. When interdependent stock markets head south, multinational corporations no longer have the capital to improve technology, test new products, and refurbish old plant and equipment. With less discretionary income, corporations and individual bite the bullet and pinch pennies. Without money to invest, businesses die. In today’s global economy, keeping the ball rolling requires market momentum not meltdowns. Zealotry about inflation must be balanced with the disastrous effect of tight credit on fledgling businesses and investors. Learning from past mistakes, hiking interest rates too far only trades inflation for recession, upending businesses and investors. Greenspan must show better diagnostic skills and surgical precision. Without greater care, new businesses and investors may not see the light of day. About the Author John M. Curtis is editor of OnlineColumnist.com. He’s also the director of a West Los Angeles think tank specializing in human behavior, health care and political research and media consultation. He’s a seminar trainer, columnist and author of Dodging The Bullet and Operation Charisma. |
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verreacting to exaggerated fears of inflation, Fed Chairman Alan Greenspan went overboard, throwing ice water on the most successful stock market in U.S history. Spearing the bulls with six painful rate hikes since June 1999, Greenspan corralled the market into hibernation, sinking the tech-rich Nasdaq more than 40% since March. Pulling the rug out from America’s new breed of investors, Greenspan drove panic-stricken neophytes to the exits, sending the new technology sector into a virtual free fall. Fixated on the GDP deflator—the Fed’s measure of the wealth effect—Greenspan ranted about "exuberant" spending—the very thing fueling the economy. Now, with lowered confidence, swollen inventories and unwanted belt-tightening, the Fed’s finally awakened from its latest bout of amnesia. "In an economy that has already lost some momentum," said Greenspan to a conference of Bankers in New York, "one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending." Translation: The economy’s heading south.|
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