By Gabor Steingart in Wa****ngton -
The dollar is in a tailspin, the trade deficit is growing and a
recession is on the horizon. The American way of life is in serious
danger. But the head of the Federal Reserve keeps on pumping easy
credit into the system -- a crazy policy that will worsen the crisis.
Alan Greenspan and Ben Bernanke have more in common with the big cat
entertainers Siegfried & Roy than any of us can be comfortable with.
The Las Vegas magicians call themselves "Masters of the Impossible"
and have been fascinating audiences for decades by getting snow-white
tigers to leap through burning rings.
The legendary Federal Reserve Chairman and his successor were equally
adept at fascinating their audiences -- with a policy of miraculous
monetary growth that gave America one of the longest periods of
economic expansion in modern times. Many saw them as "Masters of the
Universe." It seemed as if the central bankers had tamed predatory
capitalism with their constant interest rate cuts.
Siegfried & Roy at times seemed at one with their cats, until the day
everything went out of control. A tiger bit Roy in the neck during a
show and looked as though it were about to devour him alive.
Greenspan and Bernanke too have lost their magic touch, and their
image has been shredded by the real estate crisis and the dollar
slide. The ravages of the financial markets aren't doing them any
personal harm. But devalued stocks, bad mortgage loans and the diving
dollar are damaging millions of small investors and savers.
It's as if the tiger has leapt of the stage and is mauling the
audience. We can't blame wild cats or financial markets for being
ruthless. It's in their nature to be brutal. Their unmistakeable
message is: you can take things this far and no further.
American Way of Life Under Threat
The credit-financed consumer boom of recent years is coming to a
painful end. Today's American Way of Life has no chance of surviving
the coming years undamaged. The virus will continue to ravage its way
through the financial system.
The property crisis is likely to spread to credit card providers soon
and will then probably infect car manufacturers, furniture makers and
all the other firms that owe their sales increases to the growth in
credit finance. "The virus will keep on infecting the system," one
management board member from a large bank said, requesting anonymity
in return for the candour of his analysis.
His argument is that banks that grant mortgages to home buyers
virtually unable to pay their bills are unlikely to be especially
scrutinizing when it comes to lending cash to the buyers of fridges,
cars and furniture. Indeed, a furniture store in Miami recently tried
to lure consumers with the following offer: buy now, pay your first
credit installment in three years, and no need for a down-payment.
The credit-financed way of life is typical of the US these days. Many
people resort to credit to plug the gap between the lifestyle they
have become accustomed to and their declining wages.
Dulling the Pain With Credit
The borrowed cash is like an anaesthetic against the painful impact of
globalisation. Private household debt has been growing by $4 billion
each business day for years.
All this wouldn't be so bad if the US economy were at least doing well
in foreign markets. But it isn't, and hasn't been for a long time.
Despite the depreciation of the dollar, which makes im****ts into the
US far more expensive while making US ex****ts cheaper in foreign
markets, US manufacturers are finding it hard to sell their products.
Contrary to forecasts by both the Federal Reserve and the Treasury,
the trade deficit has continued to grow, by 6 percent in February
alone. America im****ted $62 billion worth of goods more than they
ex****ted in February, including a disturbingly large number of cars,
computers and pharmaceutical products. Try as they might, most private
households in America can't keep up this consumer miracle. The savings
behavior of many Americans means that many of them now live from hand
to mouth.
But Bernanke is doing nothing to dampen this hunger for credit. The
former advisor to President George W. Bush is even trying to whip up
credit-financed consumption by lowering interest rates. This is
helping to fuel inflation because the monetary growth isn't being
matched by growth in real economic output. Inflation in the US
currently stands at 4 percent.
It's a paradox. The private commercial banks which have just had to
make billions of dollars in write downs have become more cautious.
They're scared of further risks. The management resignations at
Citigroup and Bear Stearns have had a sobering impact.
Patriotic Madness
Meanwhile the Federal Reserve is urging the banks to go on taking
risks. It has been injecting cash into the banking system for the past
half-year while urging bank CEOs in confidential chats to offer more
credit. The aim is to keep on financing consumer spending and even to
stimulate it further -- for reasons of patriotism.
There's a word for this policy -- madness.
But because there is method in this madness, the meeting of mighty
central bank governors and finance ministers in Wa****ngton over the
weekend remained silent about it, at least officially. Outside the
meeting rooms, though, there were murmurings about the poisoned legacy
of Alan Greenspan and Bernanke's irresponsible behavior.
One participant told me: "There's an unwritten code of honor that says
central bank governors should refrain from criticizing each other."
Not least out of respect for the independence of central banks.
But the US is unlikely to realize the error of its ways on its own.
"The Americans will always do the right thing," British Prime Minister
Winston Churchill once said, "after they've exhausted all the
alternatives."
Central bankers and tiger tamers have something else in common --
obstinacy. Roy has recovered from his wounds and wants to return to
the stage in Las Vegas. "The magic is back," came the defiant
announcement.
Alan Greenspan cut a similarly indestructible figure at the weekend.
Even though criticism of his cheap money policy was only murmured
privately, the 82-year-old legend of central banking said: "I was
praised for things I didn't do. I am now being blamed for things I
didn't do."
Not that he ever complained about getting false praise.
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