Poor Alan Greenspan — ex Ruler of Rates. Once he stood before masses of moneymen who dare not cough lest they miss a word, an inflection even. Did he begin his presentation with “Ahem”, “Ummm”, “Uhhh”? Depending, men rushed to open windows high above Gotham to either throw themselves out or holler instructions to waiting minions who executed complex financial transactions.
The words of the emperor were sacrosanct. “Irrational” was as deadly to stock values as the hexes of medieval sorcerers. “Exuberance” was also a downer. The trouble was the great proxy audience of non attendees we who only read the words — couldn’t see the broad winks, the grimaces, the phffffft raspberries, the eye rollings. But — no matter — the emperor has now left his throne and sits at his dining room table where family members ignore his call to “pass the ketchup, please”.
We have a new Fed Chairman, Ben Bernanke, whose well intentioned mission true to tradition is a stable, healthy economy. His primary weapon is short term rate elevation. Dummy me, who thought the very whisper of price controls was anathema to economists — a concept consigned to the garbage bin of economic history. But, evidently, it works on money — the mother of all commodities — and that’s why the Fed Chairman, the Ruler of Rates uses it to slay the dragon, inflation. {C}But, if he can cold shoulder supply and demand: and impose mandated rates on currency itself, why not douse the flaming real estate market with rent control? Or why not a czar to manipulate the price of housing? Or automobiles, or chicken gizzards — a technique booed by economists from London to Vladivostok even. Didn’t we watch the Soviets make a pig sty out of Mother Russia’s fertile farmlands with Central Price Planning? Don’t proper economists wile away their precious free time thinking up lewd names for such economic heresy? Haven’t we watched such authoritarian systems smother under the logical weight of the marketplace? Why do we think it’s workable with money, but not with Oreo Cookies?
Remember how Nixon, the staunch Conservative, suddenly was seized by the body snatchers and metamorphosized into Karl Marx, central planner par excellence. Dead for over a century and suddenly like Elvis he reappears — and in the White House of the United States of America. Elvis/Nixon/Marx writes up a set of rules governing the price and distribution of gas. Chaos reigns. Prohibition worked better.
Still, there are rational — almost respectable — economists who believe the Fed can control the dragon they call inflation by raising short term rates. What’s puzzling to rainmakers, illusionists, sorcerers, and even economists is that for roughly fifteen quarters of short term rate increases — long term rates have languished. Normal textbook expectations would have them ascend and thereby make money expensive to borrow and consequently hard to get. VOILA — inflation falls in a heap at our feet. We observers of a wacky world who are infatuated with money but not economic textbooks have trouble with this paradigm. I can visualize the Greenspan/Benanke transition conference:
Alan: “You just keep punching that ‘Short Term Rates Up’ button.”
Ben: “But long rates haven’t moved in many quarters, I may as well mash the diet Pepsi button on the drink machine
Alan: “Yeah, you can do that too and defeat inflation. Besides look, I’m snapping my fingers and not one elephant has appeared in this room. Keeps “em away. It’s what we call an empirical solution.”
Ben: “Yeah, I guess it must work ‘cause that CPI thing is about as flat as the long term rate curve.”
Before Alan Greenspan, the finger snapping Fed Chairman, started jacking up rates, my money market fund paid me one half of a percent. Not many dollars for life’s amenities. As of March 2005, 2% came my way. Now it’s approximately 4%. I guess that proves that when federal interventionists raise short term rates — well, short term rates rise. Amazing.
I don’t know how this tames the inflationary dragon, but I can deduce with ease that it provides more fried chicken dinners, a new pair of shoes, maybe even a bracelet of semi-precious stones for the wife. Such gluttony on my part and the green means to satisfy my materialistic lust would seem to exert pressure on prices.
Even parsimonious banks these days understand that interest rates on their checking and savings accounts can’t compete with brokerages. Up go their rates. As of the third week of March 2006, over 2 trillion dollars sat in money market funds. Waves of dollars wash over millions of Americans who stack money in banks and brokerage accounts. Suddenly, liquidity is not only safe, but profitable. That fights inflation?
Meanwhile, the rates on long money cost the borrower no more than they did three to four years ago. The marquee topic on our financial pages is the inverse yield curve. That was NOT the plan. The plan was for those long rates to grow like a sweet ripening watermelon, thereby making it more expensive for the entrepreneur to open his new scooter factory and hire a couple hundred free-spending employees who would rush out to buy necklaces for THEIR wives’ lovely necks and thereby drive up the price of necklaces. (Just like I did with my increased money market interest check.) But as usual, central planners propose, and the people dispose — in totally unpredictable ways.
Those luxuriously low long rates allow adventurous corporations to throw money and caution to the winds. Borrow like there’s no tomorrow is the CFO’s anthem. That was NOT the plan, either.
Another thing, since money is as cheap as turnip greens, many an outfit that borrowed at 8% can “call” their long bonds — refinance their debt — at 3 to 4 points less than the original coupon. Now they’re plush with bucks. Uh oh, they could even open one of those scooter factories, which is so irritating to Saint Ben and his inflationary dragon fighters!
The supreme conundrum in this economic thriller is that even though long term rates did not ascend — which was supposed to be the bullet in the heart of inflation — the scaly monster seems almost tame.
Planners plan. The consumer grins and conducts a thousand invisible transactions a week that confound prediction.
