----- Original Message ----- From: Mark Jones <[EMAIL PROTECTED]> To: crl <[EMAIL PROTECTED]> Sent: Sunday, January 07, 2001 4:23 PM Subject: [CrashList] If the US bubble is pricked can the fall be controlled? The Fed chief's rate cut was a big surprise. Faisal Islam considers whether it will do more harm than good and what it conceals Sunday January 7, 2001 If the cold chill of a US recession is felt by any group of people in Britain, it will be the blue blazer brigade flogging #1 million yachts in champagne bars at the London Boat Show this weekend. Costly luxury items, such as the Princess 20M motorboat, priced at that magic #1m, are normally the first to suffer when booms turns to bust. But manufacturers at the Earls Court show, which export a third of their boats to the US, were cheerful. 'Our order books are full, we have not seen any slowdown, and following Alan Greenspan's interest rate cut, we are cautiously optimistic,' said Clive Brooks, sales manager at Marine Projects, maker of the Princess range. Howard Pridding of the British Marine Industries Federation agreed: 'With a change in president, this sort of speculation is natural, but confidence remains high.' For this bunch, whose businesses can collapse at the merest whiff of a slowdown, the response seems to be: 'What recession?' And the Fed chief's action only reinforced their confidence. Cross the Atlantic and the mood is more fragile. Some 40 million US consumers receive monthly pension statements showing the value of their funds. Overall, about half of US households hold shares directly, or indirectly through mutual funds and pension plans. So after a year in which the Nasdaq lost more than half of its peak value and other markets ended significantly down, it is not surprising that Americans are buying fewer cars, spent less at Christmas and are worrying about the size of their debts. After four years' growth in real household net worth of between 5 and 12 per cent, last year's share slide will see a fall of around 5 per cent,according to HSBC projections. Business confidence is no better. Poor sales, the impact of last year's interest rate and oil price rises, and less cheap investment finance have taken their toll on profits. Federal Reserve surveys show credit conditions at their tightest since the last recession, a decade ago. Most importantly, people - specifically, important members of George W Bush's new administration - are talking, repeatedly, about recession. And if anyone had any doubts about the US economy, Greenspan's astonishing move seems to have sounded a final warning siren. Economists are split over the wisdom of the cut: was it too late, was it panic, or was it another stunning manoeuvre by the sage of global macroeconomics? 'This is a very precipitous and almost desperate action on the part of the Fed,' said Stanley Nabi of Credit Suisse Asset Management in New York. 'What information do they have that you and I don't? Do they know any financial institutions that are in trouble? The Fed rarely acts between formal meetings. If it did, it would be a sign that it thought things were worse than we did - that they were acting to prevent a disaster.' In this view the talk of recession is overblown, but Greenspan's action may add to the panic-ridden downward spiral. Indeed, market euphoria after the surprise cut on Wednesday had been replaced by Friday with neurosis about liquidity problems in the financial sector. A more optimistic interpretation is that the cut was a skillful, timely vaccination against the virus of poor consumer and business confidence before the entire economy was infected. 'The Fed is always right,' Lawrence Lindsey, President-elect Bush's chief economic adviser, said last week. Other veins of thought say Greenspan has done too little, too late, especially after the oil price volatility that began last September, or that he is doing little more than propping up the Nasdaq, increasing the extent of any slowdown that finally arrives. Certainly the Fed's move seems to have raised more questions than it answered. Why, for instance, didn't Greenspan lower rates at last month's meeting, or earlier? Does the move mark the Fed chairman's tacit support for Bush's $1.3 trillion tax cut plan? Some analysts believe the move marks Greenspan's efforts to lay down the law to the incoming President. He met Bill Clinton in 1992 to instruct the then starry-eyed arrival on which parts of his election manifesto were economically feasible. Conversely, others note that Greenspan, a Republican appointee, owes a political debt to the Bush clan for 'losing' George Bush Senior the 1991 election through interest rate rises. The 180-degree turnaround in the Fed's attitude and policy has coincided exactly with the younger Bush's preparations to assume the presidency, and sits nicely with his tax cuts. But was the dampening of irrational exuberance in stock markets and consumer spending not what he wanted anyway? By rights we are now seeing the effect of the 50-basis-point rise made by Greenspan in May, a move undertaken two months after the initial dotcom stock market bubble had burst. If he's having to take fairly drastic action now, perhaps that move was misplaced. The textbook rule of monetary policy is that it acts with lags that are long and variable. Greenspan's action was intended to have a much more immediate impact. 'It was an exercise in applied psychology,' as John Llewellyn, global chief economist at Lehman Brothers puts it. Never before under Greenspan has the Fed marked a change in monetary policy stance with a 50-point move nor, bar the 1987 stock market crash, has it done so between meetings. But Greenspan's game is a tactical one: surprise markets, media and consumers for maximum effect. In the past, the Fed didn't even announce such shifts; now they are trumpeted loudly, sending a clear message that the Fed is there for the rescue. Otherwise, there is the very real risk that US consumers will start saving at precisely the wrong time in the economic cycle, and rein in spending even more. But such action also injects fragility into market expectations. Ideally, monetary policy should be boring, predictable and directly dis- cernible from the data. One surprise invites the markets to speculate on further surprises, and so on. Of course it could be that this is the bell tolling to show that the decade-long party is officially over, and there is little the Fed can do. The direct effects of monetary policy changes will be felt by companies only in seven or eight months. Meanwhile, the outlook for corporate earnings remains bleak throughout the first half of the year. And with interest-rate cuts and general economic weakness bringing down the dollar, inflation cannot be forgotten.. After all, the causes of the longest postwar US boom are manifold, but low interest rates were not principal among them. Positive market sentiment, cheap finance, and a bias towards entrepreneurial risk-taking were all interrelated factors sustaining it - and now they are absent. Llewellyn, formerly an economist at the Organisation for Economic Cooperation and Development, recalls the lament of Governor Mieno of the Bank of Japan, who tried in the early Nineties to bring a bubble economy based on property prices slowly down to earth. 'Pricking the bubble is the easy part; controlling the fall is the problem.' Is a US recession looming? Factors for 1. Consumer confidence is low 2. Household net worth is falling - a sure predictor of recession 3. Credit conditions for companies of all sizes are tightening 4. Jobless figures are inching up 5. There is a threat from the low savings rate and a huge current account deficit financed by uncertain foreign capital flows Factors against 1. Growth, though down, is nowhere near the two quarters of negative growth required 2. Unemployment is still close to record lows of 4.9 per cent 3. Greenspan's interest rate cut will do the trick 4. Bush's tax cuts will provide the required boost to consumers 5. Talk of recession is a political game designed to win backing for tax cuts Guardian _______________________________________________ Crashlist website: http://website.lineone.net/~resource_base
