From the February 3, 2008, Sunday Times (London)
February 4, 2008
by Irwin Stelzer
I returned to Washington from Phoenix yesterday, my sense of proportion restored. As you read this, the build-up to the Super Bowl, to be played late afternoon (Phoenix time) is reaching fever pitch, and all thoughts of interest rates, sub-prime mortgages and an economic downturn have been filed in the back of American minds — or at least of the approximately 100m (1 billion worldwide) who will watch the game from the comfort of their living rooms. How many will really watch the game, and how many are merely waiting for the new Victoria's Secret commercial to air will never be known. But it is a reasonable guess that the conversations at the many Super Bowl parties will not include phrases such as "basis points" and "optimal growth rates".
That is for tomorrow, when the Senate will be debating, in its usual languid fashion, the stimulus package approved by the president and the Democrat-dominated House of Representatives. After some fiddling round the edges, it will send the bill to George Bush, who will sign it and begin the process of pumping some $150 billion into the American economy.
Bureaucracies being what they are, it will take the Treasury more time than it should to get the cheques in the post. But by early or mid summer Americans will have some more money, either to spend (as the sponsors of the programme hope), or with which to pay down some of their credit-card balances. And businesses will have a greater incentive to invest in equipment.
Meanwhile, back at the Federal Reserve Board, officials are hoping their recent interest-rate cuts of 1.25 percentage points, bringing the Fed funds rate down to 3%, will put the economy back on a growth path. Chairman Ben Bernanke on Friday reached the half-way point in his four-year term. He expects that his rate cuts will have had their intended effect by the time the new man or woman is sworn in, prompting the new president to follow tradition and reappoint him, as Gordon Brown did with Mervyn King last week. Otherwise, it's back to the more reflective life of a Princeton academic.
Bernanke has been criticised for panicking, for trying to appease Wall Street traders, for being behind the curve, for unnecessarily weakening the dollar. But he still believes that "downside risks to growth remain", and is hoping his moves, combined with the stimulus package, will prevent a recession. They just might.
But after a period of rapid growth, slow growth will feel as bad as a recession, especially in an election year in which politicians compete to persuade voters that only they can change the bleak outlook they describe to a sunnier one. Besides, some economists — confirming that theirs is the dismal science (if a science at all) — are computing that the new 3% Fed funds rate is consistent with an annual growth rate of a mere 1%, hardly something to cheer about.
The economy did grow at an acceptable 2.2% in 2007, but managed only feeble growth in the fourth quarter, if the initial unrevised GDP report is to be believed. Good news came from the consumer sector (spending increased by 2%), business investment (up 7.5%), and exports (up 3.9%). But declines in residential investment (down 23.9%) and a drop in inventory investment almost wiped out those gains.
More important, late on Friday the government announced, in a report that will be revised, that in January the economy shed 17,000 jobs, the first drop in four-and-a-half years. Hardest hit were construction and manufacturing; only the health and education sectors managed some growth. Bad news for the economy, but a validation of Bernanke's view that it is worth risking some inflation in order to give the economy a boost. And it might need more, perhaps the 1% solution that Alan Greenspan deployed.
So much for history. Well-informed Washington sources tell me it is unrealistic to expect a revival in the housing market before 2010. Prices continue to fall, and at an accelerating rate. They are now almost 8% lower than a year ago, and are down in 17 of the 20 cities for which decent data are available. And that doesn't include hidden discounts offered by builders — houses with a Mercedes in the garage. But mortgage rates seem to be headed down, which might, just might, put a bit of a spring into the steps of potential homebuyers as they savour the bargains available.
Fortunately, there is more to the American economy than the much-reported housing market. Durable-goods orders increased sharply in December, only partly driven by a huge increase in defence spending. This is a significantly more robust performance than forecasters were expecting. And the non-profit Conference Board revised upward its estimate of consumer confidence in December.
Perhaps even more important is the restoration of some sense of normality to credit markets. Yes, there are still worries about the condition of some bond insurers, but Warren Buffett and others seem ready to pump capital into that market. And yes, foreclosures are at record levels, but it turns out that they are not quite as numerous as forecast, as sensible banks give troubled borrowers a bit of breathing space. And sovereign wealth funds are on the prowl for opportunities to invest in troubled banks. All in all, economists at Goldman Sachs are telling clients that "money markets [are] back to a more normal situation".
None of this should be taken to mean that Goldilocks has returned to centre stage. But some economists are saying that she is putting on a new coat of make-up in anticipation of a re-entry onto centre stage sometime later this year.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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