Canute (995-1035) was a Viking warrior who became the ruler of an empire which included England, Denmark, Norway and part of Sweden. He is considered as one of England’s greatest monarchs, having maintained twenty years of unbroken peace which allowed trade, art and Christianity to flourish (more here). He is best remembered, however, for his inability to turn back the sea. Legend has it that Canute had his throne placed on the beach and said:
"Sea, I command you to come no farther! Waves, stop your rolling, and do not dare to touch my feet!"Fastforward to the present. US Federal Reserve Chairman Ben S. Bernanke is no absolute monarch, but nothing less than halting the rising tide is expected from him. He is the man of the hour. The Federal Open Market Committee (FOMC) is meeting today in Washington. It's a foregone conclusion that the FOMC will decide to cut interest rates again. The only question is by how much.
But the tide came in, just as it always did. The water rose higher and higher. It came up around the king's chair, and wet not only his feet, but also his robe.
For perspective, the single biggest reduction on record was made in October 1984 when the Fed, then under Paul Volcker, cut the federal funds rate by a hefty 1.75%, from 11.75% to 10.0%. Today, "a reduction of 1 percentage point is seen as a sure bet among futures traders and some anticipate a move of as much as 1.25 percentage points," according to Bloomberg. Assuming the pundits are proven right, will this rate cut achieve the equivalent of calming an angry sea?
I'll go out on a limb by answering NO. This crisis is far too complicated for textbook solutions to resolve. Although Chairman Bernanke is the best expert there is on depression economics, the nature of the present crisis is something he, or anyone for that matter, hasn't encountered yet, for it is all of the previous crises combined plus more. There is simply no exact historical precedent to fall back on for any useful lesson. I don't think Chairman Bernanke can outdo King Canute, but hope springs eternal.
2 comments:
If the tide of "Economic Depression" is unstoppable, is there no other measure to mitigate the depth & breadth of this fearsome inevitability other than "Federal Funds Rate Cut"? It appears to me that, by far, Economists have been using Interest Rates as the "modulator" for Supply & Demand of Currency. Have Economists no other tool?
On the other hand, I contend that the USA Economic Depression has been primarily a function of its Federal Deficit Spending caused by its War Policies. If I am correct, then Political Scientist should have the answer - not Economists.
Ernie, to put your comments in context, we have to distinguish between the financial sector and the so-called real sector of any economy (not just the US).
In the US, the Fed takes care of the financial sector (much like the Bangko Sentral does in the Philippines). Because of the strategic importance of the financial sector relative to the efficient functioning of the US economy, it is not an exaggeration to say that it is the "gatekeeper" of the economy.
Now, what the Fed does--like cut interest rates--is what you often read about in the financial news lately. But setting the fed funds rate is just one of the 3 main tools at the Fed's disposal. The 2 others are: open-market operations and setting the reserve requirements. These are used for other specific situations, and the the present crisis is not one of them, so you don't read about these being used for this purpose.
As to the real sector of the economy, where physical goods (like homes, which the financial sector finances) and services are produced and traded, this is the domain of the other economic managers in the cabinet, no longer the Fed. Do you recall the multi-billion economic rescue package put together by the Bush Administration (with the US Treasury Secretary in the lead) recently rushed for approval by the US Congress, which will give tax rebates to American taxpayers, among others? Well, this is intended to directly impact the real sector, where the economic pain is felt by real (sorry for the pun) people, not just institutions (unlike in the financial sector)--unemployment, inflation, etc.
As to the role of the Iraq war which has cost the US nearly $3trillion now, I have not studied yet its dynamics relative to the crisis in Wall Street. Vis-a-vis the falling value of the US dollar, however, I will agree that it has an effect.
The troubles in Wall Street, as far as I see it for now, are largely a result of the reckless lending to subprime borrowers which wormed its way into complicated structured finance instruments and, let's not forget, greed among the financial players, both buyside or sellside.
Lastly, as to political scientists being able to solve the present problem instead of economists, sorry if I'll say "pass" to that sensitive issue. If I answer either way, I'll be lynched :-)
Post a Comment