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This is disappointing. If the Fed was unable to prevent the market bubble it is unlikely that the Fed would get us out of the symmetrical situation — a protracted stock-market decline like the one Japan is experiencing. Those who are not concerned about the Japanese decline should pay attention to the falling bond yields. A related argument is that if the Fed is unable to affect asset values, how do we know that it will be able to affect the real economy. And if by its own admission the Fed cannot affect market bubbles, and by inference the real economy, then what is the Fed's role in life?
Greenspan's admissions are quite damaging to his illustrious career at the Fed. If he knew that the Fed could not affect the bubble and the real economy, why did he try? And more importantly, if Greenspan knew of the ineffectiveness of monetary policy with regards to the real economy, why did he allow people to give him the credit for the good times? Symmetry dictates that he takes some of the blame for the bad times. It seems to us that by pursuing an active monetary policy, given the admitted ineffectiveness, the Maestro has or will shortly lose much of his credibility. Who then will soothe the market? The time is now for George W. Bush to step up and take the economic leadership mantle. To be sure, the Bush economic program has a lot of holes. His tax-rate cuts were not aggressive enough and lack permanency. And amid the uncertainty and the moving targets, this makes financial planning difficult. But Bush now has an opportunity to eliminate the uncertainty. We all know what we would like to see: an increase in asset values and the resumption of economic growth. We would also like to see more transparency and integrity in public companies. Bush's recent Texas summit hinted at a number of possible solutions. These included allowing taxpayers to deduct as much as $20,000 worth of capital loses. Another proposal included a tax deduction for corporate dividends. Some people also mention the old standby of capital-gains tax-rate cuts. Any of these measures, if permanent, would lower the effective tax rates, lower the double taxation in the U.S. economy, and would lead to a rise in asset values. The higher asset values would in turn reduce many of the wealth-induced credit constraints. Higher asset prices will increase the net worth of individuals as well as the capital of the lending institutions. These are all good and desirable outcomes. However, the political forces have unleashed a counter attack. These measures are being criticized because the static income analysis suggests that the rich will benefit disproportionately if they are put in place. Some people argue this as if it were a great revelation. Obviously, the static impact of a capital-gains tax cut will benefit those with lots of capital gains. There is nothing magical about it. The magical part is when the behavior of those people change as a result of the tax cut and the rest of the economy benefits. If there is no change in behavior, there is no sense for taking the action. Where is the Gipper when you need him? My former partner used to tell a story about the time he asked President Reagan how he decided to go into Grenada. The president's answer was that he just asked himself what John Wayne would have done. At first that seems like a simple answer — but in a way it was very profound. In the movies John Wayne always did the right thing. And once real leaders conclude what the right thing is, they lead. President Bush needs to get in front of his overall program. Good economics is in many ways good politics and that includes the security of the U.S. There is a vacuum of economic leadership in this country. In his speech at Jackson Hole, Alan Greenspan effectively resigned from his post as the economic leader of the free world. George W. Bush has a wonderful opportunity to fill that void. But we must pray that he takes this chance. Once there, his instincts will not fail him. On the other hand, if he tries to be cute and crafts an economic program amenable to the bean counters we are looking at a one termer.
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he newspaper accounts of Alan Greenspan's speech this week at the Jackson
Hole conference are quite disappointing. The Fed chairman made what the
Wall Street Journal called: "A spirited argument that the
Fed was impotent to prevent the stock-market bubble of the 1990s."
