Re: Japan and global demand

[David Gleicher <104201.2301@xxxxxxxxxxxxxx>]

Message text written by INTERNET:pkt@xxxxxxxxxxxxxxxx

>William Hummel writes:

>>I agree the Fed could have done much better in curbing the
>speculative excesses.  In particular it should have raised margin
>requirements and set stricter rules on bank lending for purely
>speculative financial games. <

>It is not the proper role of the Fed to intervene to prop up stock prices,
>nor are the latter directly related either to employment or inflation
which
>are the Fed's proper concerns.

>I did not say or imply that the Fed should prop up stock prices.
In fact I said nearly the opposite.  It could have done a much
more effective job of preventing the stock price bubble that did
occur
.>

DG replies:
You are playing verbal games.  When you speak about the Fed doing  'better
at curbing speculative excesses' you mean the Fed should act to prevent a
crash in the stock market.  The point I'm making is that  it is not a
responsibility of the Fed to manipulate stock prices (by curbing
'speculative excesses' or whatever).  Greenspan has allowed himself to do
just that (or be perceived to do so) and it is an absolute perversion of
the role of the Fed.

>Regarding Greenspan, has it occurred to anyone that interest rate policy
by
>the Fed has had very little noticeable effect on the economy one way or
>another over the past decade (at least).  Empirical studies suggest a weak
>connection, if any, between interest rates and private planned investment,
>and theoretically the connection is equally tenuous so this should not be
>surprising.  Thoughout much of the nineties Greenspan raised interest
rates
>(to curb a non-existent problem of inflation) and yet the economy grew at
>historically high rates and the unemployment rate plunged.  Now he is
>trying to lower rates, but the economy seems to be slowing down.
>Monetarism is dead, and the foolish notiion that monetary policy should
>lead short-term growth policies should be allowed to die along with it.

>
Your view of interest rates in the nineties does not square with
the facts.  There was a general downtrend in the Fed funds rate
during that decade.  It started at 8.25% and ended at 5.5%, but
not on a straight line of course.  The funds rate was
incrementally lowered to 3.0% where it remained throughout 1993,
increased to 6.0% in mid 1995, and lowered again to 4.75% in the
first half of 1999.

DG replies:
First of all you don't really dispute my basic point, which is there is no
relation between Fed interventions and short-term growth.  Second, you
didn't read what I wrote very carefully.  I said when there was a slump in
the early nineties, under Bush the elder, Greenspan lowered interest rates.
 As you say The funds rate was
incrementally lowered to 3.0% where it remained throughout 1993.  Then as
the economy expanded, I said Greenspan raised interest rates, and you
concur, from 1993 to the first half of 1999 the funds rate rose to 4.75%.
What you fail to note in your supposed dip in the rate from 1995 to 1999,
by the way,  was the decline in the inflation rate during this period, so
that the real funds rate, I would guess, did not fall at all during the
Clinton administration.

>
Monetarism played no role during the nineties, as evidenced by
the fact that the openly Fed ignored the monetary aggregates.  It
effected its policy through control of the Fed funds rate.
There is no way one can conclusively prove that the Fed's
monetary policy played an important role in the steady drop in
unemployment during the nineties.  But it is presumptuous to
declare that it had no effect.>

DG replies:
Monetarism continued to play two important roles in the nineties:  the
underlying rationale of Fed policy was that changes in the money supply
(whether measurable or not) ultimately influence the rate of inflation--a
view which Greenspan at the recent hearings explicitly attested to once
again;  and second, fiscal policy was deemed ineffective in changing the
growth rate in the short run, leaving monetary policy as the only
instrument of demand management and balancing the budget as the only fiscal
policy.  You write:  "There is no way one can conclusively prove that the
Fed's monetary policy played an important role in the steady drop in
unemployment during the nineties.  But it is presumptuous to declare that
it had no effect."   Is that the best you can do?  is it so presumtuous to
say, in this forum especially, that the emperor has no clothes.  I will
repeat there is little empirical or theoretical basis for your belief  that
interest rate reductions by the Fed stimulate the economy and increases in
rates slow it down.

DG


>As to politics, a cynic might say that the Fed is much like the Supreme
>Court in the US.  It has been granted a kind of privileged status, but
>indeed both institutions are filled with Republican hacks, like Greenspan,

>When the economy was expanding under the Democrats, Greenspan tried to
slow
>it down.  Since the Republicans took office, as he did in the last years
of
>the previous Bush administration, Greenspan has
>tried to prevent a slow down.  The explanation of his actions is not that
>difficult to find, is it?

Greenspan made the mistake of keeping the interest rate too high
during the Bush Sr administration.  Many think the recession in
1991-1992 caused Bush the election.  Greenspan lowered interest
rates steadily in 1991-1992 for two reasons: to break the
recession and to restore the health of the banking system that
had over-extended itself in the eighties, mainly with LDC loans
that had gone sour.

I am no fan of Greenspan, but I think your analysis of his
motives are wrong and does him a real injustice.  I saw no
evidence that he was playing a partisan political role.  While
his increase of the Fed funds rate in 2000 might seem to have
been designed to favor Bush in the presidential election, it came
at a time when stock prices and P/E ratios had gone to ridiculous
levels.  Greenspan was using the wrong tool, but I believe his
motives were honest.

William F Hummel<

DG replies:
It is wonderful how people like Renquist and Greenspan escape their pesonal
histories when elevated to positions that are deemed above the fray.  Rreal
power disguises itself exactly that way.  Greenspan has been a Republican
partisan his entire political career.  The fact that he was not challenged
by Clinton is more a reflection on Clinton than on Greenspan.  To see the
contortions that Greenspan is going through to support Bush's obscene tax
cut is enough to clinch the argument here I think.