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More interest rate cuts not what our floundering economy needs | |||
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By DAVID MOON, Moon Capital
Management Has Alan Greenspan gone from being Superman to the Irrelevant Man? Only weeks after being named Chairman of the Federal Reserve Board in 1987, Dr. Greenspan faced his first crisis: the October stock market crash. He handled it in exemplary fashion. The Fed pumped money into the financial system, making credit easy, preventing mass bankruptcies and failures by overleveraged financial institutions. Greenspan surprised more than a few skeptics in his inaugural season. After all, he was following a legend, the man who killed inflation: the (almost reverend) Paul Volcker. Greenspan proved (at least) up to the task. Greenspan had served in Gerald Ford's White House and has since been appointed Fed Chairman by presidents Reagan, Bush (the father) and Clinton. He is given credit for saving much of the banking system in 1990 and for managing the economy to its longest peacetime expansion ever. But, like a triple scoop of Marble Slab ice cream, the decade long economic treat is melting. And like a diabetic, struggling to maintain some consistency in our blood sugar level, we are about to pay the price for our decade of financial decadence. Recessions happen. Always have; always will. The government (and private business and consumers) can do much to lesson the impact of our swings between expansion and contraction, but we cannot change that fact. So what is Dr. Superman up to? When the Federal Reserve Board cut the Fed funds rate another half point this week, Wall Street applauded. The Dow increased 1.6 percent on Tuesday, continuing a five-day bull run that precipitated and anticipated the rate cut. Investors around the country have been pleading for the Fed to do something to help a struggling stock market. Since the beginning of 2000, the S&P 500 is down almost 30 percent. Even since the first of ten rate cuts this year, the stock market is off almost 20 percent. Investors are excited the Fed is doing something to help. But there is a problem, however. It is not the Fed's job to 'help' the stock market. The Fed conducts monetary policy, regulates certain financial institutions and tries to maintain a stable financial system. No where in its mandate is there anything about a profitable financial system or investment climate ' just a stable one. In 1987, a single day decline in stock prices almost equal to our 22 month stock price decline threatened the stability of the financial markets. The Fed needed to act. But Wal-Mart at $55 a share does not threaten anyone except Wal-Mart shareholders. With interest rates now around the two percent level, what does the Fed expect? More people will go out and borrow money to buy big screen TV sets this Christmas? Adjusted for inflation, short-term interest rates are actually negative. The secret is out: the consumer is all borrowed up. Even if they could borrow at two percent, paying the two percent interest is not the consumer's problem. The problem is paying back any new principal they borrow. At some point, lower interest rates do nothing but increase the profitability of the institutions that depend on borrowed funds for their operations. Trust me, I am all for increased profits, especially if it is a company we own. But that simply is not the job of the Fed. Interest rates in Japan are practically zero. No one borrows any more money; the economy is languishing in the tenth year of a long economic slide. Lower rates have done nothing to help them. Why should lower rates from this level do anything to help our overall economy? One definition of stupidity is doing the same thing over and over again, hoping to get a different result. The Fed is fighting the wrong battle with the wrong weapons. David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).
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