“DO NOT PAY ATTENTION to the man behind the curtain,” the Wizard bellows to Dorothy and her friends in a scene near the end of The Wizard of Oz. While the movie is fiction, the meltdown in U.S. tech spending is not. Unlike Dorothy, all of us have to pay attention to and suffer the consequences of the Wizard of Wall Street, Alan Greenspan, and the members of the Federal Open Market Committee.
This group’s actions?and lack of action?during the past two years bewilders me. From June 1999 through the middle of May 2000, the Committee saw inflation as the fiscal enemy and consequently raised interest rates six times, peaking with a 50-basis-point rise on May 16.
On June 28, 2000, the Committee met again. After this meeting, it issued?and reissued?the following statements explaining the decision to hold the interest rate at six and a half even as energy prices continued to climb, stock market equity quickly evaporated and respected economic think tanks predicted tough economic times ahead.
“Recent data suggest the expansion of aggregate demand may be moderating toward a pace closer to the rate of growth of the economy’s potential to produce.” (June 28, 2000)
“Recent data have indicated the expansion of aggregate demand is moderating toward a pace closer to the rate of growth of the economy’s potential to produce.” (Aug. 22, 2000)
“Recent data have indicated the expansion of aggregate demand has moderated to a pace closer to the enhanced growth of the economy’s potential to produce.” (Oct. 3, 2000)
Back to the movie. In that same scene, Dorothy admonishes the Wizard, calling him a very bad man. To which he counters, “No, I am a very good man, but a very bad wizard.”
Mr. Greenspan may be a good man, but he is a very bad financial wizard. Though he professes to be apolitical, the reason he kept the Committee on the sidelines in the second half of 2000 was totally political: the 2000 presidential election. Greenspan feared that any rate adjustment?up or down?would be used by Al Gore or George W. Bush for campaign ammunition.
So he sat on his ill-guided six-and-a-half rate until he woke up on Dec. 19, 2000, brushed off his June 28 policy Word template and finally acknowledged the “drag on demand and profits from rising energy costs, as well as eroding consumer confidence.” Then, on Jan. 3, Greenspan commenced a rate reduction policy that has yet to improve corporate profits.
So that’s my theory. This economic funk is not about supply, demand, rising energy costs or available labor. It’s about playing presidential politics with the American economy. Mr. Greenspan’s regrettable decision to not act last fall caused the one thing that he and the Committee so desperately wanted to avoid: a hard landing.