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N.Y. Times Magazine notes gold but pointedly avoids manipulation issue
By Alan Murray
The Wall Street Journal
Wednesday, June1,2005
Economists are reading the wrong fairy tale. This isn't
a "Goldilocks" economy -- not too hot, not too cold -- as many have
called it. Instead it's more like "The Emperor's New Clothes."
The emperor, in this case, is Federal Reserve Board Chairman Alan
Greenspan. For the past year he has been telling us he is tightening
credit. And because he's Alan Greenspan, we all tend to believe him.
But the truth is, if you go out and borrow money, you will find
credit has never been easier and many rates have never been lower.
The emperor has no clothes -- or at least, he's scantily dressed.
Sure, the federal-funds rate, paid by big banks on overnight loans,
has been raised by the Fed eight times in the past year. The banks'
prime rate has followed, along with some short-term lending rates.
And the big auto companies are paying more for their credit.
But the interest rates that matter most to the economy -- home-
mortgage rates for individuals; bond rates for companies -- have
been going mostly down, not up. The interest rate on 10-year
Treasury bonds yesterday dropped to nearly 4%.
Now don't get me wrong: I'm a big fan of Mr. Greenspan's. I got to
know him as an economics reporter for this paper 23 years ago when I
was handed a long list of economists and their phone numbers. Most,
I learned, were happy to oblige with a quick quote confirming
whatever trend I was discovering that day. But Mr. Greenspan was the
one person who really seemed to understand how the pieces of the
economy fit together.
Today, however, he is stumped. In February, he called the behavior
of market interest rates a "conundrum" -- a rare Greenspanian
acknowledgment that he couldn't explain what is happening. Since
then, the Fed has "raised rates" two more times, and the conundrum
has deepened. It has become the central mystery of today's economy.
Much ink has been spilled recently over whether the U.S. faces a
housing "bubble." But traditional bubbles -- tulips in the 1630s;
tech stocks in the 1990s -- are characterized by prices that move
inexplicably and irrationally higher. Housing prices are less
puzzling -- they keep going higher because mortgage rates remain so
confoundingly low.
One explanation of the conundrum comes from Fed governor Ben
Bernanke, who has been nominated by the president to head his
Council of Economic Advisers. He is mentioned as a possible
successor to Mr. Greenspan, whose term expires early next year. Mr.
Bernanke has given several speeches this year highlighting what he
calls a "global saving glut."
In the past decade, he argues, capital flows have become truly
global. And a series of financial crises -- Mexico, East Asia,
Russia, Brazil, Argentina -- has led developing and newly developed
economies, as a group, to switch from being net borrowers on
international capital markets to being net lenders. Some have
boosted their domestic savings; others have found they have little
access to credit. The result is a flood of money into the developed
world, keeping interest rates low and current-account deficits high.
That suggests that the current problem may not be, as many assume,
made in the U.S.A. The world can stop berating Americans for
profligacy -- since, in the face of a savings glut, that sort of
profligacy may be the only thing keeping the global economy afloat.
And members of Congress might think twice about efforts to increase
American savings -- since, in the short term at least, more savings
is the last thing the global economy needs. Even the housing bubble
looks more benign; after all, housing prices are rising even more
rapidly in other developed countries than they are in the U.S.
The challenge for Mr. Greenspan is to figure out how to respond to
these global phenomena. Should he keep raising short-term interest
rates until the rates that really matter start to respond? If so,
the Fed may have a long way to go. Or should he conclude that low
interest rates on bonds and the global savings glut are signs that
inflation really isn't a threat?
My guess is Mr. Greenspan will err on the side of tighter money.
Why? Because he has just eight months left in office and he isn't
going to want to leave his successor with a significant risk of
inflation. He knows from his own experience 18 years ago that it's
much harder for a new emperor to persuade the world he's wearing
beautiful clothes.
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