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Mix-Ansicht- Offener Brief an Alan - XERXES, 02.03.2004, 08:50
Offener Brief an Alan
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Rare is the economy that transitions from recession to recovery and, ultimately, to expansion without an attendant rise in interest rates. And yet 27 months into the current recovery, that’s very much the state of affairs in the United States. The Federal Reserve is the key actor in this drama. Borrowing a page from the script of the New Paradigm of the late 1990s, the Fed continues to hold the view that monetary tightening need not interfere with the rapid growth of a productivity-led economy. But the prescription of low nominal interest rates introduces a new dimension of financial market risk into the equation -- the possibility of multiple asset bubbles. In an effort to spark debate over the wisdom of this policy strategy, the following “open letter” to Alan Greenspan appeared in the March 1, 2004, issue of Newsweek International.
Dear Mr. Chairman:
Who would have thought that the U.S. economy would have come through the stock-market bubble of the late 1990s in such remarkable shape? I sure didn't, but obviously, you did. My congratulations on a job well done.
Of course, you know better than anyone that a central banker's work is never done. There are always unexpected problems that require forceful policy responses, and that's what worries me. I am concerned that your successes may have come at the cost of creating more serious problems in the future. I am equally worried that your strategy closes off the options we will need to cope with these threats.
The issue goes to the heart and soul of economic policymaking. Mr. Chairman, I don't have to tell you that policy strategy requires a touch of art as well as science. But it also needs common sense. Like war, one of the basic principles of stabilization policy is never to run out of ammunition. Policy stimulus is to be used in bad times, but when circumstances improve, it is critical to"reload the cannon" to prepare for the next battle.
With the federal funds rate at only 1 percent, what can you at the Fed do for an encore, should you need to respond to an unexpected problem? For that reason, I would urge you to raise the federal funds rate immediately to 3 percent in order to restore some semblance of normalcy to financial conditions.
Unfortunately, for reasons that are not altogether clear, you seem to be adamant about keeping interest rates at rock-bottom levels. If you want my opinion, that's asking for real trouble. It raises the risk of another bubble. As soon as you take interest-rate risk out of the equation, you re-create the"moral hazard play" that became central to the Great Bubble of the late 1990s. Investors and speculators alike will be quick to take advantage of a Fed that is not about to stand in the way of vigorous growth in the economy and rapid appreciation in asset markets.
There are already signs of such excesses. Property markets are frothy and so are government bonds, credit instruments, high-yield debt, and tech stocks (again). Here we are, only four years after the bursting of the first bubble, and the risks of new bubbles abound.
Ironically, that doesn't seem to trouble you. In a recent speech you noted,"Our strategy of addressing the bubble's consequences rather than the bubble itself has been successful" (see “Risk and Uncertainty in Monetary Policy,” remarks presented by Alan Greenspan at the meetings of the American Economic Association, San Diego, California, January 3, 2004). That worked once but can it work again? In particular, how do you deal with the consequences of another bubble if you are still holding short-term interest rates at 1 percent? Last spring, in the midst of a deflation scare, you and your colleagues argued that you had plenty of options left — namely, a stockpile of"unconventional" weapons that could be deployed in the event you couldn't cut the federal funds rate any further. But who knows if such untested tools would have actually worked?
There's something else I don't get. You are very upbeat about economic prospects, recently presenting a forecast to the U.S. Congress that real GDP would rise 4.5 percent to 5 percent over the four quarters of 2004. This is solid growth for any economy. But you still insist on keeping interest rates amazingly low. A normal economy needs normal interest rates. With your forecast, you should have nothing to be afraid of. Am I missing something?
As bold as you were in combating the post-bubble perils, I believe you need to be equally bold in preserving this nascent recovery. To do otherwise and leave short-term interest rates at unusually low levels risks a return to the perilous bubblelike mentality that posed such grave risks to the economy and financial markets in the late 1990s. These are lessons to be learned — not ignored.
Sure, politicians will be up in arms if you hike interest rates, particularly during an election season. But the last time I checked, America has an independent central bank. You must do the right thing — not what is politically correct. Others could also be aghast at the idea of a full two-point rate hike, but recall what happened in 1994, when the Fed raised rates by a full three points, but did so gradually over the course of the year. That only served to create mounting anxiety and turmoil in the markets. Better to move in one fast step and get it over with.
Mr. Chairman, recoveries are all about renewal and opportunity. For the economy, recovery spells rejuvenation. For financial markets, it's a time for healing. But for policy, recovery offers the critical opportunity to reload the cannon in order to cope with the inevitable next problem. No one knows when and where that problem lurks. But as day follows night, it'll come. The Federal Reserve must be prepared for that possibility. The time for more normal interest rates is at hand.
Respectfully yours,
Stephen S. Roach
Chief Economist
Morgan Stanley
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