Monday, September 17, 2007

The Fed Plans To Kick The Recession Can Down The Road

The phrase “moving the goalposts” has been applied most heavily in public discourse of late to the Bush regime’s “strategery” regarding the Iraq war. Through the “surge” and constant reiteration that things are getting better in Iraq, Bush hopes to delay a full-scale drawdown just long enough for him to leave office, thus saddling his successor (likely a Democrat) with two choices–maintain troop levels in Iraq and be crucified by the anti-war movement, or bring troops home and be accused of “cutting and running” by the conservative base.

This kind of crass political calculus isn’t limited to the Iraq quagmire, though–you can see it in the news today that the Federal Reserve is telegraphing a cut in interest rates at its next meeting:

For the first time in more than four years, the Federal Reserve appears ready to lower interest rates to prevent a housing meltdown and a painful credit crunch from driving the economy into a recession.

A rate cut would affect millions of borrowers, with the intention of getting them to spend and invest more, which would revitalize the economy…Fed action would mean that borrowers who can obtain credit would see rates drop on a variety of loans. It would become less expensive for people to finance certain credit card debt and for homeowners to take out popular home equity lines of credit, which often are used to pay for education, home improvements or medical bills. Also, it should help some homeowners whose adjustable-rate mortgages reset in the fall.

The uncritical cheerleading by AP economics “reporter” Jeannine Aversa is genuine. It’s deliberately designed to plant the idea in the reader’s mind that this is good, that this is what the Fed should do, and in fact, will do. But the reality is that even a cut in interest rates will only delay an economic slowdown and eventual recession, not stop it. The underlying economic conditions which led to the housing boom and subsequent slump–too-low interest rates, unscrupulous lenders looking to make a buck, and ignorant borrowers trying to buy things they can’t afford–will still be in place, and a cut in rates will only spur more of the irresponsible behavior which triggered the housing boom/crash in the first place.

But this, I suspect, is part of the plan as well. Current Fed chair Ben Bernanke was a longtime Bush economic adviser before taking the job, and doesn’t want to be remembered as the man who captained the ship as it sank any more than Bush does. By supporting a rate cut, Bernanke and the current Fed board may want to spur a last-minute flurry of conspicuous consumption, buying, and borrowing that should propel the economy through the last few quarters of Bush’s reign, and then saddle his successor (again, likely a Democrat) with an even more unpopular set of choices–raise taxes to pump new revenue into the government, end the Bush corporate taxes and lose support from industry and big business, and find a way to weather the anger of voters who will only see that the economy sucks and there’s a Democrat in office.

This sort of thinking certainly has precedent, though–consider former Fed chair Alan Greenspan’s blaming Bush and the Republicans for the failing economy in his new memoir:

Mr. Greenspan, who calls himself a “lifelong libertarian Republican,” writes that he advised the White House to veto some bills to curb “out-of-control” spending while the Republicans controlled Congress. He says President Bush’s failure to do so “was a major mistake.” Republicans in Congress, he writes, “swapped principle for power. They ended up with neither. They deserved to lose.”

Many economists say the Fed, by cutting short-term interest rates to 1% in mid-2003 and keeping them there for a year, helped foster a housing bubble that is now bursting. In his book, which was largely written before much of the recent turmoil in credit markets, Mr. Greenspan defends the policy. “We wanted to shut down the possibility of corrosive deflation,” he writes. “We were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address….It was a decision done right.”

You catch that? Greenspan admits that he is responsible for fostering the corrosive housing bubble that has led to millions of Americans facing foreclosure and the collapse of banks and lenders across the globe…but it wasn’t his fault. No, it was the fault of Bush and the Republicans for acting like Democrats and increasing spending.

People like this truly have no shame, and yet they are aware at some level of how much of the burden they must bear for the catastrophic mistakes they’ve made, so they do everything they can to distort history and repaint the world into what they would have wanted. If Greenspan–and Bush–had truly been concerned about their legacies, they could have done a great many things differently, not least being never going to war with Iraq or turning our economy into a hollow shell fueled by credit consumption, overleveraged borrowing, and dubious “specuvesting” to begin with.

UPDATE: Hale “Bonddad” Stewart substantiates my theory with some sobering analysis of the economic crisis facing the next President. What better way to ensure that the losing party can retake the government in 2010-2012 than by leaving them such a massive poison pill in 2008?

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The Nazis, Fascists and Communists were political parties before they became enemies of liberty and mass murderers.

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