That old Greenspan magic seems to be fading

[DaveSZ]

http://www.guardian.co.uk/usa/story/0,12271,1213158,00.html


That old Greenspan magic seems to be fading

Fed chairman will have to tighten America's belt sooner rather than later

Larry Elliott
Monday May 10, 2004
The Guardian

For the best part of 20 years, Alan Greenspan has been a symbol of the stupidity of ageism. He became chairman of the US Federal Reserve at 61, when plenty of workers have already been tossed on the scrapheap and many others are preparing to wind down for retirement. His golden years in charge of the US economy were when he was pushing 70 and he's still there aged 78. Greenspan is the doyen of central bankers, still talked about in almost reverential terms by his peers. The fact that the Fed chairman rarely gives interviews and makes public pronouncements that are to economics what Finnegan's Wake is to literature only adds to the mystique.

It is, then, with some trepidation that the question has to be asked: has Big Al finally lost the plot? At the start of last week, Greenspan presided over a meeting of the Fed which kept interest rates on hold at 1%, the level they have been pegged at for nearly a year. A statement accompanying the decision said the risks to inflation were balanced, which means the Fed thinks there is as much chance of the cost of living going up as going down. On Thursday, new joblessness claims in the US fell to their lowest level in getting on for four years, and the picture of a recovering labour market was underlined by Friday's non-farm payrolls which showed an increase of 288,000, above what had been expected. The economy is expanding at an annual rate of 4.5%, surveys of both manufacturing and the service sector are strong, the housing market is booming, inflation has started to pick up.

Hardly surprisingly, Greenspan's call on inflation is now coming under the microscope, even by those on the Keynesian left who tend to favour expansionary macroeconomic policies. "Show me something, other than computers, where the price is falling," says Dean Baker of the Centre for Economic Policy Research in Washington. Baker is right. Clearly, risks to inflation are on the upside, and massively so. The economy has been injected with a cocktail of three growth-inducing drugs - negative real interest rates, a rising budget deficit and a falling currency. Oil prices have touched $40 a barrel and the labour market is tightening. It is hard to believe that Greenspan, a junkie for economic data no matter how seemingly trivial, has not spotted all this. Rates in the US are far below a neutral level, which would probably be around 5%, yet Greenspan is in no hurry to act.

Waiting game


Last Tuesday's Fed statement did suggest that, yes, perhaps there would come a time for a bit of gradual monetary tightening but not just yet. The Bank of England has raised interest rates three times since November in an attempt to ensure that it stays on top of events, but even after Friday's strong employment data there were those predicting that Greenspan would wait until August before tweaking interest rates rather than moving at the next meeting, in June. Greenspan's argument appears to be that he wants to be sure that the recovery from the relatively mild recession of 2001 is firmly entrenched, but the evidence could hardly be any more conclusive. The risk is that the Fed is now a long way behind the curve, with all the factors in place for another period of deep instability in prospect for the world's biggest economy.

-more-

[Eric J in MN]

1. Greenspan doesn't want to slow the economy between now and November

Greenspan doesn't want to slow the economy between now and November.

He won't care about inflation until after the election.

[SoCalDem]

2. Nope , he's manipulating it jussssst right..

Lots of the lucky ones have borrowed "cheap money" to buy up all those "undervalued stocks", and have re-fied their McMansions down to practically negative rates...they have gotten their Hummers..

Now with the election almost upon us, it was time to raise the gasoline prices so high that inflation would rise.. Time to raise those interest rates, so that the ones with the bonds can start getting higher returns, and then when summer is over, the gasoline prices will magically start to drop....all the way "down" to say...$2.15 a GALLON...

For the Bushies, it's a win-win. Oil companies made a killing...upper-crusties got cheap interest for their Hummers and McMansions..and the rich ones got cheap stocks...and rising interest on their "investments"..

Most of us lost, but who cares about us?? No One !!

[SharonAnn]

3. He wants to keep the tax cuts and cut Social Security. No way!

I've paid into that for 42 years and am of the first generation that paid not only for their elders, but also FOR OURSELVES! We've been paying a surplus amount into Social Security for more than 20 years.

It is not OK with me to give that money to wealthy and high-income people.

Raise their F---ing taxes! Make them pay their own way for a change instead of stealing from those of us who are wage slaves.