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It’s Up to Greenspan
The Fed must open the money spigots.


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Larry Kudlow

There’s not much business-as-usual on the global scene these days.

Japan is still sinking — investors won’t even buy their government bonds anymore. Germany has become the Japan of Europe. Latin America is a complete mess with Brazil about to swing left politically, making an already bad situation even worse. World stock markets are tanking. Wealth is being destroyed everywhere.

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And as usual the U.S. is the world’s last best hope. But lately hope has been looking pretty thin on the homefront.

A strong recovery at the start of the year has measurably softened. In recent months key indicators such as production, employment, and housing-starts have all declined. The index of leading indicators has fallen in four of the past five months. The stock market is still desperately looking for a bottom.

Eighty-five million shareholders grew hopeful this summer when President Bush commented favorably on an investor-tax-cut package that might have relieved the double taxation of corporate dividends, increased super-saver allowances, and improved the tax treatment of capital gains and losses. For a few weeks 401(k) owners — who have watched their retirement savings deflate to 201(k) status — were optimistic that fiscal policy might boost after-tax asset values.

But key administration officials put the kibosh on it. Office of Management and Budget Director Mitch Daniels, normally a supply-side advocate, has lapsed into deficit bean-counting austerity. Treasury Secretary Paul O’Neill is missing in action. Political advisors such as Commerce Secretary Don Evans and top White House assistant Karl Rove got cold feet over demagoging Democratic threats of “tax cuts for the rich.”

Look again, fellas. Eighty-five million shareholders cannot all be rich people. More, roughly two-thirds of them vote, and they’ll vote for the party most likely to make them rich.

A pre-election contract with investors could have positioned Bush Republicans with an exciting pro-growth message. But House and Senate leaders, like the administration, seem to have lost their nerve. Club for Growth president Steve Moore believes the GOP keeps the House if the Dow Jones is above 8500 by November. Well, don’t hold your breath. Today’s Dow is around 7850. That could spell Charlie Rangel as the next Ways and Means chair. There’s no flat tax coming from there.

Republican spokespeople think they have a strong growth message that includes terrorism insurance, the energy bill, and homeland security. Forget about it. Those add up to no sex appeal, no panache, and no leadership.

That leaves Greenspan & Co. to right the economic ship. And that’s always a high risk.

Recently, economic nobelist Milton Friedman said money-supply growth should err on the side of ease today. He is totally right, but key liquidity measures that stalled last winter must be significantly strengthened. The Fed must recognize that the creation of new money will halt the spread of deflation, support growing dollar needs in Latin America and other parts of the globe, and relieve the lingering corporate credit crunch.

Right now, our businesses are forced to put their spare change into interest payments on outsized debt rather than create new jobs or invest in new capital goods. Meanwhile, with businesses impaired by government, prosecutors, and the threat of class-action lawsuits, lenders are not likely to do much new lending. This is a vicious cycle that can be solved with fresh cash from the Fed.

Fortunately, a true double-dip recession is not yet on the horizon. But a tepid 3% recovery rate is dangerously close to an economic-growth pause. Crashing share prices among telecom, media, and information-technology companies should be a signal to the Fed that the recovery rate should be twice as fast.

A legacy-worried Alan Greenspan has been saying that he didn’t create the bubble many blame for the soft economy and the near-record-setting stock-market decline. Perhaps he’s right. But the present matters more than the past: The blue-chip Dow and the broader S&P 500 sit at five-year lows, and the technology-based Nasdaq has fallen to a level not seen in six years. Euro stocks have sunk to five-year lows and Japan to nineteen-year levels as gloom deepens around the globe.

As economists and investors ponder uncertainties over the impending war on Iraq, the importance of adequate money-adding should not be debated. Adequate money adding should simply be performed — for the sake of a stock-market rebound and the security that comes with a strong economy.

The Federal Reserve will announce a monetary policy decision Tuesday afternoon amidst great turmoil in the world economy. Let’s hope they make the right move and open the money spigots.



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