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ROACH: THE FED FORGETS 'THIS' PRINCIPLE AT GREAT PERIL

Posted By: economica
Date: Friday, 6-Feb-2004 11:03:34

In Response To: FROM NOW TO DOOMSDAY-JAPAN TAXPAYERS 2 BAIL OUT BANKS (economica)

EXTREMELY DRAMATIC EVENTS ARE TAKING SHAPE - IN AMERICA AND ABROAD... Global: Time to Reload Stephen Roach (New York) ........... The basic principle of the “policy reload” is particularly relevant to the dilemma now faced by America’s Federal Reserve. Alan Greenspan’s recent “victory lap” in celebration of the Fed’s so-called successes of the past few years makes me especially worried that the US central bank is ignoring this principle at great peril. In a now infamous speech given about a month ago, the chairman argued that the Fed should be vindicated for its controversial approach in dealing with the great stock market bubble of the late 1990s (see “Risk and Uncertainty in Monetary Policy,” remarks presented at the meetings of the American Economic Association, San Diego, California, January 3, 2004). Notwithstanding the usual caveats of Fedspeak, one phrase from that speech says it all: “Our strategy of addressing the bubble's consequences rather than the bubble itself has been successful.......... Think about the implications of this strategy. Chastened by the criticism he faced after declaring the stock market “irrationally exuberant” in December 1996, Greenspan now argues that central banks should remain agnostic on the existence of a bubble. Their job, instead, should be to contain the post-bubble damage — if and when it occurs. Fortunately for the Fed, it had some 600 basis points of ammunition in the federal funds rate at the time the equity bubble popped. But now 500 of those basis points have been used up. That underscores the critical issue: With only 100 bp left on the federal funds rate, what can the Fed do for an encore?....... Lacking in the traditional fuel of income support, consumers have had little choice but to extract purchasing power from yet another asset — this time, property. But such asset-driven growth spawns the lethal combination of debt and reduced saving. And America has willingly complied. Household debt outstanding has soared to a record 82% of GDP, while the net national saving rate plunged to a record low of less than 1% in 2003.......... It has become a breeding ground for a string of additional asset bubbles that have come on the scene in the aftermath of the burst equity bubble. That’s not just true of property but also of bonds, credit instruments, emerging market debt, and tech stocks (again). This multiple-bubble syndrome is strikingly reminiscent of the moral hazard play that became central to the Great Bubble of the late 1990s ........ What would the Fed do if the US economy unexpectedly stumbled, another asset bubble popped, or an exogenous shock occurred? What worries me the most is that the Fed’s new strategy as articulated in San Diego by Alan Greenspan could boil down to a one-bubble fix. Unless the Fed can replenish its policy arsenal, it may well be helpless to deal with the inevitable next problem........ Alan Greenspan’s recent ‘victory lap’ in celebration of the Fed’s so-called successes of the past few years makes me especially worried that the US central bank is ignoring this principle at great peril..... But the far bigger risk, in my view, is a central bank that is not only fostering a series of asset bubbles but is also lacking in ammunition for future problems......... http://www.morganstanley.com/GEFdata/digests/20040206-fri.html Get Me Rewrite! By PAUL KRUGMAN Published: February 6, 2004 Right now America is going through an Orwellian moment. On both the foreign policy and the fiscal fronts, the Bush administration is trying to rewrite history, to explain away its current embarrassments....... And don't forget the Pentagon's Office of Special Plans, created specifically to offer a more alarming picture of the Iraq threat than the intelligence professionals were willing to provide........ And if top political figures have their way, there will be further rewriting to come. You may remember that Saddam gave in to U.N. demands that he allow inspectors to roam Iraq, looking for banned weapons. But your memories may soon be invalid. Recently Mr. Bush said that war had been justified because Saddam "did not let us in." And this claim was repeated by Senator Pat Roberts, chairman of the Senate Intelligence Committee: "Why on earth didn't [Saddam] let the inspectors in and avoid the war?" ....... "Today's budget deficits are the unavoidable result of the revenue erosion from the stock market collapse that began in early 2000, an economy recovering from recession and a nation confronting serious security threats." Sure, the administration was wrong — but so was everyone....... http://www.nytimes.com/2004/02/06/opinion/06KRUG.html

Articles In This Thread

FROM NOW TO DOOMSDAY-JAPAN TAXPAYERS 2 BAIL OUT BANKS
economica -- Friday, 6-Feb-2004 10:14:53

ROACH: THE FED FORGETS 'THIS' PRINCIPLE AT GREAT PERIL
economica -- Friday, 6-Feb-2004 11:03:34