Tuesday, August 09, 2005

FOMC - More of the Same

The Federal Reserve hiked interest rates another 25 basis points today, bringing the federal funds rate to 3.5 %. Apparently, FOMC has yet to learn from history. Since 1990, this is the third wave of interest rate hikes conducted by Greenspan and Co. Like the other two periods, this set of hikes occurs at a time when the price of energy is climbing. This was true in the early 1990s, and also true in 2000. The last two periods of concurrent rate and energy hikes resulted in recession. The first cost Bush 41 an election, and the second put Bush 43 behind the economic curve right from the start. Is there any reason to believe this set of rate hikes coupled with skyrocketing energy costs won't also result in a recession?

I've yet to see the highly touted genius of Alan Greenspan. He has overseen two recessions and stood helplessly by while the stock market soared out of control in the late 1990s. His practice of direct economic manipulation via interest rate control appears to be on a crash course for the third recession in his tenure. If nothing else, it would appear that Greenspan and FOMC are immune to the lessons of history. If the current trend continues, they will soon see a third example of why FOMC should not increase the price of borrowing at the same time the price of energy is going up. I only wish we didn't have to pay the high cost of their lessons.

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2 comments :

Alan Fraser said...

Let's see now. Financial collapse and preceding events. Vietnam War followed by OPEC increases and there goes the Carter administration. Wildly irresponsible spending by Reagan followed by financial collapse. And, we should note, a portion of that spending was through the CIA to support Noriega of Panama. This, no doubt, was to ensure his awareness of the seriousness of military threats. Now the hallmark of Republican administrations, we have the wildly irresponsible spending of the Bush administration only this time he's wasting lives and money. All in all, it appears that Republican administrations have no more sense with a budget than a cheerleader with her first Visa card. (Sorry, couldn't resist a bit of pinko hyperbole.)

Kannafoot said...

Deficit spending in the Vietnam era goes back to Johnson trying to fight a war on poverty and a war in Vietnam simultaneously. He failed at both, unfortunately. Carter was doomed by more than OPEC and Vietnam fallout. Watergate followed by economic stagnancy followed by the oil shortage did Carter in. Lack of a viable foreign policy didn't help, but Carter was mostly a victim of the times. It's a shame, really. He was perhaps the only honest president of our lifetime.

Yes, Reagan spent like a madman, however the economic momentum of the Reagan years swept right through a stock market correction and the brief Bush 41 recession. Reaganomics worked amazingly well. Coming off the double digit inflation and double digit unemployment at the end of Carter's term, what Reagan pulled off was astonishing.

For the record, Noriega's CIA lovestory goes back to the 1950's. Only Nixon (who tried to have him assassinated) and Carter had him off the payroll. Attributing this to Reagan tells only a fraction of the story.

Bush 43 is trying to follow the Kennedy & Reagan model of tax cuts for economic stimulation. The difference is that neither had an active war with which to contend. (Technically, Kennedy had Vietnam, but it was not a significant economic drain until the Johnson years.) Bush 43 has also had a series of corporate scandles to contend with. We're seeing a stock market pattern not unlike the one in the 1970s - something for which Bush will certainly bear the blame if it doesn't straighten out. My position has always been that deficit spending is not a cause of economic downturn, though. Rather, what's holding us down right now is primarily an energy cost that's spiraling out of control.

I've got to work on my hyperbole. That cheerleader image certainly surpasses my insurgent cockroaches reference.