Economy

Fed prepares to “move the goalposts” to delay recession; Greenspan says “Not my fault”

By Martin Bosworth

The phrase “moving the goalposts” has been applied most heavily in public discourse of late to the Bush regime’s “strategery” regarding the Iraq war. Through the “surge” and constant reiteration that things are getting better in Iraq, Bush hopes to delay a full-scale drawdown just long enough for him to leave office, thus saddling his successor (likely a Democrat) with two choices–maintain troop levels in Iraq and be crucified by the anti-war movement, or bring troops home and be accused of “cutting and running” by the conservative base.

This kind of crass political calculus isn’t limited to the Iraq quagmire, though–you can see it in the news today that the Federal Reserve is telegraphing a cut in interest rates at its next meeting:

For the first time in more than four years, the Federal Reserve appears ready to lower interest rates to prevent a housing meltdown and a painful credit crunch from driving the economy into a recession.

A rate cut would affect millions of borrowers, with the intention of getting them to spend and invest more, which would revitalize the economy…Fed action would mean that borrowers who can obtain credit would see rates drop on a variety of loans. It would become less expensive for people to finance certain credit card debt and for homeowners to take out popular home equity lines of credit, which often are used to pay for education, home improvements or medical bills.Also, it should help some homeowners whose adjustable-rate mortgages reset in the fall.

The uncritical cheerleading by AP economics “reporter” Jeannine Aversa is genuine. It’s deliberately designed to plant the idea in the reader’s mind that this is good, that this is what the Fed should do, and in fact, will do. But the reality is that even a cut in interest rates will only delay an economic slowdown and eventual recession, not stop it. The underlying economic conditions which led to the housing boom and subsequent slump–too-low interest rates, unscrupulous lenders looking to make a buck, and ignorant borrowers trying to buy things they can’t afford–will still be in place, and a cut in rates will only spur more of the irresponsible behavior which triggered the housing boom/crash in the first place.

But this, I suspect, is part of the plan as well. Current Fed chair Ben Bernanke was a longtime Bush economic adviser before taking the job, and doesn’t want to be remembered as the man who captained the ship as it sank any more than Bush does. By supporting a rate cut, Bernanke and the current Fed board may want to spur a last-minute flurry of conspicuous consumption, buying, and borrowing that should propel the economy through the last few quarters of Bush’s reign, and then saddle his successor (again, likely a Democrat) with an even more unpopular set of choices–raise taxes to pump new revenue into the government, end the Bush corporate taxes and lose support from industry and big business, and find a way to weather the anger of voters who will only see that the economy sucks and there’s a Democrat in office.

This sort of thinking certainly has precedent, though–consider former Fed chair Alan Greenspan’s blaming Bush and the Republicans for the failing economy in his new memoir:

Mr. Greenspan, who calls himself a “lifelong libertarian Republican,” writes that he advised the White House to veto some bills to curb “out-of-control” spending while the Republicans controlled Congress. He says President Bush’s failure to do so “was a major mistake.” Republicans in Congress, he writes, “swapped principle for power. They ended up with neither. They deserved to lose.”

Many economists say the Fed, by cutting short-term interest rates to 1% in mid-2003 and keeping them there for a year, helped foster a housing bubble that is now bursting. In his book, which was largely written before much of the recent turmoil in credit markets, Mr. Greenspan defends the policy. “We wanted to shut down the possibility of corrosive deflation,” he writes. “We were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address….It was a decision done right.”

You catch that? Greenspan admits that he is responsible for fostering the corrosive housing bubble that has led to millions of Americans facing foreclosure and the collapse of banks and lenders across the globe…but it wasn’t his fault. No, it was the fault of Bush and the Republicans for acting like Democrats and increasing spending.

People like this truly have no shame, and yet they are aware at some level of how much of the burden they must bear for the catastrophic mistakes they’ve made, so they do everything they can to distort history and repaint the world into what they would have wanted. If Greenspan–and Bush–had truly been concerned about their legacies, they could have done a great many things differently, not least being never going to war with Iraq or turning our economy into a hollow shell fueled by credit consumption, overleveraged borrowing, and dubious “specuvesting” to begin with.

UPDATE: Hale “Bonddad” Stewart substantiates my theory with some sobering analysis of the economic crisis facing the next President. What better way to ensure that the losing party can retake the government in 2010-2012 than by leaving them such a massive poison pill in 2008?

10 replies »

  1. Thanks for this, Martin.

    We’re finally selling our house in NC after its having been on the market for 19 months.

    At $38K below tax value. Thanks for the rate cut, Bernanke….

    An interest cut will surely get me to do something – dump major money in my retirement investments. That means I’ll buy 2 lottery tickets a week….

    Damn Bush and his cronies to the darkest part of hell….They’ve gutted the American economy to enrich themselves and a few asshole buddies of theirs at the expense of all the rest of us….

  2. Up here in Vermont, one couple is selling their home for $280,000 and complains that the real estate agents are only marketing to wealthy. The say they wanted a middle class family to buy it. Are they that unaware that their house is grossly overpriced?

    Our town just did a property tax assessment. The listers say a house is worth $80,000, but it goes on the market at $140,000! Crazy.

  3. The last 6+ years are nothing more than a perfect storm. A confluence of events and the wrong leaders, doing the wrong things continuously that has brought us to this. I just shake my head and despair that it will be at least 20 years to undo all the economic damage wrought. And at least 50 to undo the political damage to this country. I gotta think it’ll be 100 years before we undo the damage W has done worldwide.

  4. Try to earn more money. Pay off your debts.
    Save as much cash as you can – maybe even buy gold.
    Be prepared to change careers.
    The economic / debt mess may take many years to correct
    itself – a lot of the middle and lower will suffer – and crime
    will grow. I personally just installed new storm doors –
    I will buy motion lights, cctv for the home.
    What else can I do?

  5. Martin: all is working according to plan. Specifically, the 2012 plan to re-take the White House from a Dem administration that presided over the recession.

    See? They can’t be trusted!

  6. This is disgusting. It ‘s putting a turniquet on a bleeding limb. The limb will stop bleeding, but if the injury isn’t treated, the limb will die.http://www.

    “It would become less expensive for people to finance 7/09/17/certain credit card debt and for homeowners to take out popular home equity lines of credit, which often are used to pay for education, home improvements or medical bills.”

    The medical analogy applies here. For some time, W has been against plans to allow for more families to be eligible for state children’s health plans
    W’s restrictions actually undermine some *existing* state plan requirements

    W’s rationale is [T]he program is going beyond the initial intent of helping poor children,

  7. Martin, you glossed over a very important piece in Greenspan’s quote:

    “We wanted to shut down the possibility of corrosive deflation.”

    Deflation is as bad, and sometimes worse, than inflation is. Greenspan took a risk, and in one respect it payed off – we didn’t have deflation. Yes, it created a bubble that’s popping as we speak. And now the Fed is likely going to reduce interest rates to try and ensure credit exists in order to reduce the pain of the housing bubble implosion – with the risk of higher inflation.

    The Federal Reserve has limited direct control over the economy. All the Fed can do tweak various interest rates and lend out money. This gives them control over available credit and the money flow and inflation/deflation. Congress, on the other hand, has a massive amount of immediate and direct control over the economy through the legislation process. The President’s control over the economy is almost entirely limited to his ability to lobby Congress for his priorities and his ability to sign or veto the legislation that Congress sends his way.

    Greenspan wasn’t perfect, but don’t lay all of this on his doorstep. He’s right – a significant amount of the blame belongs with Congress and the President.

  8. [quote]You catch that? Greenspan admits that he is responsible for fostering the corrosive housing bubble that has led to millions of Americans facing foreclosure and the collapse of banks and lenders across the globe

  9. Brian,

    Oh, believe me, I don’t lay this all on Greenspan. The housing bubble and subsequent bust was engineered at every level by government and industry alike, and the chain of responsibility belongs to everyone from the dumb borrower to the corrupt lender, all the way up and down the line. I just singled him out because of his ass-covering comments this week.

    Elicivilunrest,

    The predatory lending you describe couldn’t have happened without interest rates being so low–that’s what prompted otherwise unqualified buyers to go out looking for any loan they could find, and there were many dubious lenders out there who were more than happy to take their money.

    What’s good for people with modest incomes are mortgages with clear, distinct terms, fixed lending rates, and no hidden traps or time bombs that will lead to rate shock two or three years down the line.

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