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The odd characteristic of this recession is that the major contributor to economic growth — the consumer, especially the little guy — has been an enormous beneficiary of a monetary policy enacted to return the U.S. economy to a normal growth path. First of all, the primary reason for the technology meltdown, declining product prices, was actually positive for the consumer. Plummeting prices for computers, peripherals, and cell phone usage, coupled with access to universal price competition offered via numerous Internet portals, provided the little guy with an unusual opportunity to improve his standard of living. The decline in interest rates is an even bigger story — at least for the consumer. The two largest items that require financing at the consumer level are automobiles and home ownership. The decline in interest rates orchestrated by the Fed triggered a series of reductions in auto-loan rates. Whether it was zero financing on selected new car models or the extension of the payment period, the consumer found himself in a position to purchase a more expensive car at a lower price. Then there is mortgage lending. The continued increase in new home sales is attributable to a dramatic decline in interest rates on home mortgages. The three-percentage-point reduction in mortgage rates over the past couple of years implies a 30% or more reduction in the monthly payments on homes. So the reduction in cash flow necessary to support a home was of such magnitude that a whole new little-guy segment of the population became eligible for home ownership. And it wasn't the interest rate alone that mattered. With bank loans to businesses curtailed because of the credit problems of corporations, lenders rushed to the little guy to offer him money to purchase a new home with low down payments — as low as only 3% — or to refinance an existing residence. For the consumer who already owned a home, the ability to refinance high-interest-rate mortgages at substantially lower rates provided another source of increased cash flow to the little guy. And don't forget that the tax law let's homeowners tax-shelter capital gains of up to $500,000 on homes sold after two years. With real-estate prices rising up to a 20% clip in 2001, most homeowners found themselves in the enviable position of owning an investment that had a nice, built-in, tax-free capital gain. Wouldn't it be a great deal if stock investors could tax shelter some of their capital gains if held for more than two years? Even though the demand for housing is booming and new car sales are running at record levels, the little guy is also benefiting from record-low levels of inflation. At last count, inflation was running around 1%, scarcely noticeable given these other factors that were helping the little guy improve his lot in life. And that's not all. Yes, investors have temporarily lost a bundle in the stock-market decline. But, if that money is not needed immediately, the chances are high that most of the losses incurred by well-diversified investors will be recouped. One reason for expecting a stock-market rebound is that the government is not about to abandon its desire to see the economy recover. Plans are already underway in Washington to implement a third fiscal-stimulus package — this one to benefit (you guessed it) the little guy (investor). Elimination of the double taxation of dividends, increased write-offs of capital losses, and higher deductibles for contributions to retirement plans are all in the cards for next year. If unemployment stabilizes and the balance of the workforce continues to experience an average 3.5% pay increase, the consumer should be able to keep going and going. So, the next time Alan Greenspan testifies before some government committee, his comments should include the real role the Fed played in minimizing the impact of the first recession of the new millennium: helping the little guy. — Tom Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. |
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since the economy began sinking into recession in late 2000, the Federal
Reserve System, under the guidance of Alan Greenspan, has undertaken a
strategy of continually lowering interest rates to encourage borrowing
to finance increased business activity. The Fed's policy of reducing the
target on the Fed funds rate, the rate by which banks lend reserves to
one another, dramatically lowered the interest rates on short-term securities.
The fed funds rate target in late 2000, just prior to the first easing,
was 6.50%. By early 2002 that target had been reduced to 1.75%. The record
reduction in the fed funds rate paved the way for a major increase in
borrowing for consumers to spend and businesses to invest. 
