Monday, March 26, 2001

IT'S THE ECONOMY!

WASHINGTON -- "Where is the president?" asked one of New York's greatest investors at mid-afternoon last Thursday, as the Dow-Jones Industrial Average tumbled another 300 points. George W. Bush does seem removed from economic collapse, but so do Congress and, most ominously, Federal Reserve Chairman Alan Greenspan.

It isn't just that close to $5 trillion in wealth has been lost in cascading American equity markets. Anecdotal evidence indicates decline in all sectors of the economy, beginning six months ago.

"The economy is in deep, deep trouble," Wayne Angell, the chief economist at Bear Stearns and Greenspan's former colleague at the Fed, told me. "Alan Greenspan has to get on it."

But nobody in Washington is "on it." While the Senate's self-absorbed debate about campaign finance reform droned on, President Bush conducted business as usual as if there were no economic crisis and Democrats made the puerile argument that Bush is "talking down" the economy. Greenspan's Federal Reserve sounds an uncertain trumpet and is loath to liquefy the economy -- to pump in money to revive it.

The good news is that high-ranking Bush officials, still in private, finally are frightened by the economy they inherited. The bad news is that they don't know what to do about it. Bush's tax-cut philosophy, now suggesting an immediate $60 billion rebate, is based on the Keynesian notion that putting a few extra dollars in the working man's wallet will revive the economy.

Bush's monetary policy is to let Greenspan do it. But many Fed-watchers are coming to agree with supply-side consultant Jude Wanniski that the world's most famous central banker has been presiding over deflation. Few join Wanniski's contention that setting a higher price of gold is the means, but more now agree with the end: getting Greenspan to pump more money into the system.

The Federal Reserve is not doing that. Last Tuesday's half-point decrease in short-term interest rates disappointed investors hoping for at least three-quarters of a point. The accompanying press release further dampened spirits, talking about making decisions "against the background of" the FederalMarket Committee's "long-run goals of price stability and sustainable economic growth, and of the information currently available." Translated, the Fed lacks sufficient data to make decisions.

The broader problem is the Fed's current mechanism of jawboning the economy by cutting the federal funds rate, which covers short-term inter-bank lending rates. "All of the interest rate hoopla surrounding the Fed'sMarket Committee meeting is nothing but a sideshow," said supply-side pioneer Arthur Laffer. Wanniski put it this way: "The Fed cannot arrest the economic decline by lowering the funds rate."

Instead, it must add liquidity to the economy -- in blunt terms, inflate. David Gitlitz, a former Wanniski colleague who now runs his own consulting firm, reported to clients "a surprisingly aggressive addition of reserves to the financial system" Wednesday by the New York Federal Reserve Bank'smarket desk. Could it be, he wondered, "that the Fed finally 'gets it,' i.e., that it understands that this (half-point) rate-cutting episode will hardly be worthy of the designation 'monetary ease' without an accompanying expansion in the supply of liquidity?"

Alas, the answer seems to be "no." Of the $16.8 billion in reserves pumped into the system Wednesday, about $13 billion was returned Thursday in order to adjust the federal funds. Thus, Gitlitz reported to clients that Wednesday's transfusion was "a larger symbolic gesture rather than a signal of the Fed's intent to significantly alter its stance to move more aggressively to meet or exceed market demands for liquidity."

The investor who asked me, rhetorically, about the president's whereabouts added that he is sorry he voted for Bush. How could the president reclaim this former enthusiast -- and, more important, rejuvenate the economy?

Advocates of deeper tax cuts retroactive to Jan. 1, while acknowledging it will not provide quick relief for the economy, laud its psychological impact. But long-range substantive help and a short-term morale boost require Alan Greenspan to put his foot on the accelerator. George W. Bush might be most valuable if he abandons non-interference with the Federal Reserve and starts nudging the chairman.

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