An Economic Triple-Threat (Daily Reckoning)

An Economic Triple-Threat
Philadelphia, Pennsylvania
Wednesday, April 9, 2008
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*** The Feds debate the ‘long and short’ of recession…placing bets on the Fed’s next move…
*** Greenspan: “Non, je ne regrette rien”…the stinging reproach of a former Fed Chairman…
*** Dealing with future problems, today…a few worthwhile suggestions from the Philadelphia film festival…and more!
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March’s FOMC minutes were released yesterday…and while they were interesting, what was said in the last meeting wasn’t too terribly surprising.
The minutes show that Fed policymakers were worried that a “deep” recession, rather than a “shallow” one, would permeate the U.S. economy, which spurred them to cut the key interest rate by three-quarters of a percentage point.
The Fed was mostly united in their decision to cut the key lending rate, except for two dissenters, Philadelphia Fed President Charles Plosser and Dallas Fed chief Richard Fisher.
While the majority saw the rate cut as the right decision since “further restriction of credit availability and ongoing weakness in the housing market made a severe downturn a strong possibility,” Plosser and Fisher thought otherwise. The hawks were more comfortable with smaller cuts because of the concern that an inflationary flare-up would occur.
MSNBC reports: “On the one hand, the Fed has been urgently moving to prevent the trio of economic woes – housing, credit and financial – from plunging the country into deep recession. On the other hand, with soaring energy prices and high food costs, policymakers realize they can’t afford to let inflation out of control, either.”
The financial media and experts are placing bets that the Fed will chose to cut rates again next month, as the economy has yet to reach its final bottom.
“There’s no question the U.S. economy is one of the weakest in the world,’’ Stephen Koukoulas, a London-based global strategist at TD Securities, a unit of Toronto-Dominion Bank, Canada’s third-largest bank, said in an interview with Bloomberg Television. “We do need the policy makers, the Fed and even the administration to come in and kick-start the economy. It’s probably going to get worse before it gets better.”
*** Alan Greenspan has been popping up all over the press lately – after 18 years of Greenspeak, it looks like the former Fed chief wants to set the record straight…at least from his point-of-view.
“I have no regrets on any of the Federal Reserve policies that we initiated back then because I think they were very professionally done,” Mr. Greenspan told CNBC yesterday.
And to the Journal , he said: “I don’t remember a case when the process by which the decision making at the Federal Reserve failed.”
The Financial Times recently ran a piece titled, “The fed is blameless on the property bubble.” James Saft, writing for Reuters says that Big Al argued that the epic bubble was not caused by loose monetary policy, but by “the fall in global long-term interest rates, which, as chairman…of the most powerful central bank in the world, apparently had nothing to do with him.”
Albert Edwards, global strategist at Societe Generale Cross Asset Research in London puts it bluntly: “He was the midwife of serial bubbles that are unraveling.”
Former Fed chief Paul Volcker remains unconvinced by Greenspan’s protests, questioning his cheerleading of the “bright new financial system,” that “for all its talented participants, for all its rich rewards, has failed the test of the marketplace.”
And in a speech to the members of the Economic Club of New York, Volcker chided Bernanke for “toeing ‘the very edge’ of the bank’s legal authority in orchestrating last month’s bailout of beleaguered investment bank Bear Stearns,” reports The New York Times .
“Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank,” Volcker said.
*** We had the opportunity to interview Mr. Volcker for I.O.U.S.A. We met the economic bigwig, who is most famous for fighting the inflation of the 1970’s and 1980’s in his office overlooking Rockefeller Center this past winter.
We asked him the obvious question: Does he see a similarity to today’s economic climate to that of when he was at the helm of the Federal Reserve? And do we need the same sort of forceful hand that he lent to the economy during that time period?
“Well, there are all kinds of consequences and uncertainty in the future if we don’t deal with these problems. But when I look at back on my lifetime, it was obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the ’70s led to the kind of crisis in the late ’70s and the early ’80s, and it was very uncomfortable. We don’t want to have to go through big recessions to teach lessons. We’d like to anticipate what needs to be done while maintaining the growth of the economy. And the threat always is an unstable economy, an unstable currency; and that it’s destructive not just to economic life, but it can be destructive of America’s position in the world, which is a concern to me more generally.
“But the great challenge, I think, for democracy, is being able to cope effectively with problems that are pretty clearly out in the future, but require action that require some discipline, some restraint today,” he continued.
“And that’s the test we’re going through, and that’s a question of education and understanding, I think. So I think as people get better understanding of some basic economic issues, the democracy will be better able to cope with those challenges out there in the future.”
This idea of educating America comes up again and again as we promote the documentary. The other night, at a Q&A following a screening at the Philadelphia Film Festival, one audience member suggested that I.O.U.S.A. be shown at every high school in America. We couldn’t agree more. After all, the generation that will have to deal with these debts and deficits should be educated on the subject.
By the way, if any of our readers are in the Philadelphia area, we have a screening of I.O.U.S.A. this evening at 5 PM at the International House.
Until tomorrow,
Short Fuse
The Daily Reckoning

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