US Fed not doing McCain any favours

Business Times - 08 Aug 2008

His only hope of winning the White House is if voters ignore their economic situation


FORMER Federal Reserve chairman Alan Greenspan recalls in his memoirs, The Age of Turbulence, that one of his four bosses, president George HW Bush blamed him for his re-election loss in 1992 against Democratic challenger Bill Clinton.

In fact, as Mr Greenspan noted in a recent interview on US Public television (PBS), the first president Bush blamed him 'fully' for his failure to get re-elected for a second term. Why was Mr Bush so upset about the policies of Mr Greenspan's Fed?

'We started to ease interest rates after the credit crunch in the late-80s and he felt that we were not lowering them sufficiently rapidly to re-galvanise the economy,' Mr Greenspan told PBS, adding that 'the Federal Reserve essentially, in a unanimous voice, disagreed with him'.

Mr Greenspan insisted that the Fed's monetary policy was driven only by economic considerations. After all, the Fed is supposed to be an apolitical institution that is required to resist pressures from the White House and Congress. Hence, president Bush's re-election strategy wasn't a factor in the Fed's decision not to lower interest rates.

It's not that Mr Greenspan wasn't taking into account the impact of the conditions of the economy on the electoral outcome. The economy during the last year of the First Bush's presidency 'was picking up and, indeed, when elections come around, there are a bunch of models which endeavour to try to figure out what the vote should be, given how the economy is doing and the like', Mr Greenspan noted. And these models 'suggested that George HW Bush would be re-elected, given the nature of what the economic system was doing at that time, so I didn't think that, so far as economics was concerned, he had anything really seriously to worry about'.

The problem was that most American consumers/voters would only begin experiencing the economic recovery only after the November election that Mr Bush had lost to Mr Clinton. Hence, the loser's grumbling that if only Mr Greenspan had pursued a more speedy process of lowering interest rates before the election, he could have returned to 1600 Pennsylvania Avenue.

Maybe. We will never know whether a different policy by Mr Greenspan's Fed would have changed the results of the 1992 election.

But when it comes to this year's presidential election, it's clear that even if current Fed chairman Ben Bernanke and his colleagues in the US central bank were seeking to influence the outcome of the race to the White House by helping President W Bush and his presumptive successor, Republican presidential candidate John McCain, there is not much that they can do to achieve that goal.

Indeed, this week's decision by the Fed's policymakers on holding its interest-rate target steady at 2 per cent reflects the bleak economic realities facing Mr Bernanke and the members of the Federal Open Market Committee (FOMC). The central bank, which had already cut the fed funds rate by 3.25 points, needs to balance the risk of inflation with the threat that continues to hang over the financial markets resulting from the sub-prime crisis. And after the collapse of several financial institutions, led by Bear Stearns, the question being asked by investors is not 'whether' - but 'when' will the other shoe fall?

Under these conditions, Mr Bush as well as Mr McCain and his aides couldn't have expected the Fed to lower interest rates. In fact, they have probably breathed a sigh of relief over the fact that the Fed decided not to increase interest rates despite the signs of inflation.

'Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated,' the FOMC said in the statement issued after its meeting on Tuesday. 'The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.'

One member of the FOMC, president of the Federal Reserve Bank of Dallas, the inflation hawk William Fisher, voted against the decision on Tuesday, calling on his colleagues to raise interest rates.

Most of the economy-effects-election models Mr Greenspan referred to suggest that based on the current economic indicators and the way Americans perceive their economic condition, the presumptive Democratic candidate should win the coming election. It's unlikely that changes in the economic trends, including the signs that oil prices are falling from their peak at US$150 a barrel is going to change the mood of the American electorate. If anything, the fall in commodity prices, and especially the levelling-off in energy prices, reflects lowered demand of American consumers. This only highlights concerns that the American economy is entering - or is already in a recession.

House prices are continuing to fall and there are no indications that the credit crunch is coming to an end. At the same time, most Americans have already spent the tax rebates they had received in the mail in the first months of the year and are cutting back on their purchases.

Ironically, some of the steps that have been taken to alleviate the housing and financial crises, including the bailout of Fannie Mae and Freddie Mac are producing inflationary pressures that would make it less likely that the Fed would cut interest rates anytime soon.

So, the only hope for Mr McCain and his supporters is that unlike in previous elections, voters will not make their choice based on their economic situation.

Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.


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