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Finally! Someone talking sense...
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JW
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http://www.thestreet.com/p/comment/galbraith/1354492.html
It's Too Late Now
By James K. Galbraith
Special to TheStreet.com
3/21/01 12:41 PM ET
Let me confess to minor sympathy for Brother Greenspan. There was
nothing he could have done Tuesday to stop the onrushing slump. The
pathetic action he took was merely a shrug, a sigh of resignation and
impotence.
If you doubt this, ask yourself: Suppose the cut had been 75 basis
points? Do you think that would have sparked a rally? Do you really
believe that the distance separating a slump from a rally was 25
lousy basis points? Or rather, to be precise, that it was the
difference between 25 basis points now and the same 25 basis points
in two or three weeks? Of course not.
Next, suppose the cuts had been, say, 100 basis points or more. Would
the markets have shouted hallelujah then? Would such a cut have jump-
started consumer confidence? Would it have revived the tech sector?
Or would we have inferred that the news reaching the Fed is worse
than we knew?
The point is, it's too late.
This slump has three deep causes. The first is the build-up of
private debts, mainly households, to new highs. The second was the
tech bubble, fueled in part by capital inflow, funneled into one
narrow sector of the markets. Third, let's be candid, was the last
administration's single-minded pursuit of public debt reduction -- a
goal achievable in a growing economy only if private debts are going
up very fast.
The Fed failed to take any steps to control these developments. It
failed to discourage excessive household borrowing, particularly
unsecured credits. It failed miserably to squelch the Nasdaq bubble,
which it could have done on its own authority by raising the margin
requirement. It went along with the debt reduction charade -- until
just as cravenly switching over to the tax reduction charade last
month. And it attacked the debt pile-up at the most vulnerable point
in 1999-2000, by jacking up interest rates in what it said --
incredibly -- was a defense against inflation!
When households reach historic limits of debt carriage -- and
interest rates rise -- they tend to stop borrowing. When a stock
bubble pops, the firms feeding on it run out of money after a while.
These things have happened. Now, they must run their course.
We will need to wait until cars and appliances age, until people have
weddings, children, divorces, or deaths in the family, and decide to
move to new houses. Only then -- a year or more from now -- will the
urge to borrow return. Then, a cut in interest rates might do
something.
In the meantime, hold on to your hats.
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James K. Galbraith is author of Created Unequal: The Crisis in
American Pay (Free Press, 1998) and director of the University of
Texas Inequality Project. A professor at the University of Texas at
Austin and senior scholar at the Levy Economics Institute, he worked
for many years on the staff of the House Banking Committee, where he
conducted oversight of the Federal Reserve. He welcomes your feedback
and invites you to send it to James K. Galbraith .
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