Memo To: Steven Brill, Brill's Content
From: Jude Wanniski
Re: "Banking" on a Sacred Cow
What happens when the news media decide that the most powerful man in the world is a sacred cow? The most powerful man, of course, is Federal Reserve Chairman Alan Greenspan. In his syndicated column yesterday, Bob Novak impolitely calls him "Master of the Universe," but Novak is the only journalist apparently not afraid to give Greenspan a boot in the rear, a boot he sorely needs. I present it here as one of two exhibits your press watchdog magazine should consider. The other is a statement issued last Saturday by former Vice President Dan Quayle from his campaign headquarters in Phoenix. It is by far the sharpest criticism I have seen anywhere of the Master of the Universe, with Quayle as much as arguing that Greenspan has wandered so far from his authority in now managing the stock market that he should consider early retirement. The Quayle camp assures me it was sent to every journalist of the hundreds on their e-mail and fax list. As far as I can tell, it was not picked up anywhere. The press corps has decided George W. Bush will be the GOP presidential nominee, and Bush has already announced he would absolutely ask the Holy Bovine to stay on as Fed Chairman, no questions asked. There canít be a news story here. Why bother?
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August 30, 1999
BY ROBERT NOVAK, SUN-TIMES COLUMNIST
Just as Wall Street's Fed-watchers anticipated, Chairman Alan Greenspan's Federal Reserve last Tuesday raised the federal funds rate (on interbank lending). But why unexpectedly also raise the discount rate (on Fed lending to banks)? The answer validates both Greenspan's mastery and the danger posed by it.
Since banks rarely seek loans at the discount window, raising that rate exerts little or no economic impact. But savvy analysts have a theory. Greenspan was concerned that investors would exhibit "irrational exuberance" in the stock market when he signaled that another federal funds hike in October is improbable. So he tamped down expectations and put a confused market on a roller coaster.
Thus did Greenspan burnish his reputation among the financial cognoscenti as "Master of the Universe." But it underlined that his Federal Reserve has been tracking equity markets--activity unprecedented for a central bank. If Greenspan seems more interested in bond yields than the real economy, his overpowering prestige limits critics to peevish editorial writers and a few Republican presidential hopefuls.
The avowed purpose of Tuesday's tightening was to guard against revived inflation. But Greenspan's own colleagues at the Fed privately admit there is no inflation. Current reports show an anemic growth rate of 1.8 percent.
What's more, raising the federal funds rate just 0.25 percent has consequences. The previous hike hoisted mortgage interest to 8 percent, undermining housing sales. Depressed farm commodity prices stay depressed when the central bank tightens. The Fed has shut down the economy in the past and can do it again.
But the people who watch the Federal Reserve most closely are much more interested in Wall Street than Main Street. One remarkable explanation by Fed-watchers for why Tuesday's rate hike was necessary is that Greenspan's recent congressional testimony had raised expectations in the bond market that could not be disappointed. That confers a special status for bond traders.
The upshot is that the bond market is given special treatment, while the merchant, the farmer and the home buyer are ignored. What clearly worries Greenspan is stock prices, as he made clear Friday at the annual gathering of the world's central bankers.
The traditional antidote to the Fed from elected politicians has become tepid. Although members of Congress who actually approve of Greenspan's last two rate increases are rare, scarcely a dissenting voice was heard from lawmakers.
For five decades, I have witnessed Fed chairmen elevated in prestige beyond all reason: William McChesney Martin, Arthur Burns, Paul Volcker. But none has approached Greenspan's invulnerability. Although the Fed has made mistakes of judgment in the last seven years, this central bank is improbably credited with U.S. prosperity. Its last two rate increases are viewed as mindless by many administration economic officials, but a gag order has been placed on any criticism.
GOP presidential campaigners, noting farm price deflation, were impolite enough in their Iowa campaigning to say the "Master of the Universe" wears no clothes. But front-runner George W. Bush's support for Greenspan is unconditional.
Lack of vigorous Republican opposition to Fed austerity derives from the same mindset that passed a tax bill dedicated to the equally no-growth concept of debt reduction. In a letter to Senate Majority Leader Trent Lott on Aug. 18, Jack Kemp declared: "I believe it is time for the Republican Party to alter its course and denounce a debt retirement economic strategy as ill-conceived, ill-advised and counterproductive under current circumstances." Like criticism of Greenspan, it was a voice in the wilderness.
© Creators Syndicate
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August 28, 1999
QUAYLE ON GREENSPAN'S JACKSON HOLE REMARKS
PHOENIX, AZ - GOP presidential candidate Dan Quayle issued the following statement today on remarks delivered in Jackson Hole, Wyoming by Federal Reserve Chairman Alan Greenspan:
"The chairman's speech at the Fed's annual gathering in Jackson Hole is the straw that breaks the camel's back, as far as I am concerned. I can no longer understand how the entire Political Establishment can sit back in a state of paralysis while Alan Greenspan lectures the nation on the need to not only subdue economic growth, but also to rein in the stock market. As far as I know, there is nothing in the Federal Reserve Act of 1913 that empowers the Fed to both manage our national economy and regulate the values of equities on our stock exchanges. There is no sign of inflation with the highest-powered telescopes available, yet Mr. Greenspan continues to threaten even higher interest rates later this year, where instead he should be ending the commodity deflation he has induced.
"As much as I appreciate the job he has done in keeping inflation under control since his appointment by President Reagan in 1987 and his reappointments by Presidents Bush and Clinton, I believe he has in the last few years strayed further and further from his authority. The speech in Jackson Hole, in which he advises the American people that he will now assume even greater powers, demonstrates the need for term limits for Fed chairmen. I not only disagree with those Republicans who say Mr. Greenspan should be deified with a fourth term. I believe he should consider taking early retirement.
"Where is George Bush on this issue? He has taken the lead in announcing unequivocal support for Greenspan, even as the President of the Dallas Fed, Robert McTeer, has courageously voted in opposition to the Fed's wrong-headed policy. This is not just a question of a quarter point on the federal funds rate. We are talking about the power of the Fed and its chairman in assuming powers placed by the Constitution in the hands of the people and their elected representatives."