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Saturday, April 8, 2006

Greenspan v. Bernanke, different words, same tune

The use of the language is different, thank God, but the economics are the same. Alan Greenspan spoke and wrote in a manner so circular and dissembling, that while it might have been obfuscatory and fundamentally dishonest, it was fascinating, like watching a spider spin.

Greenspan never bothered to untangle the meaning from the words he used. He just left the whole mess there on the table to be dissected like chicken entrails by the shaman interpreters of Wall Street.

Ben Bernanke, his replacement as Fed Chairman, promises to have a different, cryptic, use of the mother tongue. It will be code. Certain phrases will have specific implications. For example, "continuing interest firming may be needed" means look for another quarter point hike next month. Once we know the code, there will be no knots. That may be good. It may not.

But unfortunately, tragically, the same tedious and impotent economics informs them both. Bernanke shows no more imagination than Greenspan. He will continue to focus solely and exclusively and without deviation on the interest rate, even now that the short-term rate that the Fed controls has become disconnected from the long-term rate.

[Note that the "prime rate" is now and has been for some time just the short-term rate plus 3 percent. At one time it was connected to long-term financing by banks. Now it seems to be little more than a credit card benchmark.]

Bernanke also continues Greenspan's nonsensical repition of the importance of "core inflation." Core inflation excludes energy and food. Energy and food comprise a good chunk of the average family's budget. Energy prices eventually show up in the price of other goods and services, anyway, but cutting energy loose from his calculations has a particularly troubling implication for the Fed's approach. To the Fed, to Greenspan and now to Bernanke, all inflation is demand-pull inflation. But energy price hikes are the quintessential cause for demand-pull inflation. At the same time, energy is actually a competitor of labor. A rise in energy prices is cost push inflation that simultaneously reduces demand.

Andrew Oswald of Britain's Warwick University has pointed out that everything in our economy is a combination of energy and labor. Even extraction of resources. This means that when energy goes up in price, the price of labor must go down to compensate. Since wages are "sticky" and resist going down, the price cut in labor comes in the form of unemployment. (Oswald has the distinction of predicting the 2001 recession accurately at a time when others were predicting Dow 36,000 and the arrival of permanent prosperity.)

Obviously unemployment is not now at levels that reflect the enormous rise in the price of energy. That is because we have staved off the day of reckoning by borrowing like addicts. So the threat, or likelihood, is that an inflation scare will cause the Fed to try to shut down an economy on the brink of collapse.

Greenspan left with the economy awash in a sea of red ink, a rising tide that has lifted all boats for the moment. Unfortunately this red tide stains everything in sight, including our futures. At the very time we should have been saving, we were borrowing. When we should have been investing in people and facilities and research, we were investing in passive housing. When we should have been stabilizing. We were risking.

One would hope for a better captain and a new compass for the storms we face ahead.