Great Greenspan Can’t Fix a Nation That’s in Hock

There are times that try our souls, as Tom Paine suggested, and there are times that try our wits. For those of us who watch the world of finance and commerce with the disinterest that relative penury makes possible, we are living in one of the latter. The evidence provided by one’s eyes, ears and common sense is difficult to square with the “information” and “vision” furnished by other people’s mouths, especially if one is not paid to believe.

I think our long, hegemonic boom is running out of gas. I don’t wish it so; I hate to think what may happen to my frail, tiny bark if a lowering, out-rushing tide makes it difficult for great yachts to stay afloat. I have no gold to anchor me against the

ebb. Equally, I am glad I am not Alan Greenspan.

For some time, this correspondent and James Grant have worried that a world economy in which the United States represents virtually all the demand is headed for trouble. I’m going to repeat what I wrote last week: The only surety of economic health is increasing wealth, widely and rapidly, earned by, and circulating among, the greatest possible number of people-people in this country, people overseas, people who can afford to buy their own stuff as well as ship it to us. A payments-trade deficit on the scale this nation has been running eventually becomes as much an exercise in enforced toleration on the part of others as a gleaming symbol of our own political-economic prowess. Sooner or later, the overseas interests piling up these dollars-including, I’m sure, not a few U.S. multinational manufacturers-become impatient or nervous. Presented with the possibility of the safe, if not exactly alluring, conversion of their dollar holdings into an improving yen or a stable Euro, they switch. That is, they sell dollars for yen or Euros. The dollar weakens. Prices in this import-driven consumer economy rise. Inflation. Alan, help!

The accepted cure for price inflation is to raise interest rates. Paul Volcker did it between 1980 and 1982 (starting under Jimmy Carter, although Ronald Reagan got the credit), and the long boom ensued. What I think really happened, and why I rate Mr. Volcker as an economic war criminal on a par with Walter Wriston, is that the draconian increase in U.S. interest rates rippled throughout the world and drove the more fragile developing economies onto the rocks-a situation from which they have still not recovered. The United States was granted a virtual monopoly on demand, Japan and Asia on production, thanks in this regard being especially due to the managements of the Big Three auto makers, who sat blissfully by during a decade of rising oil prices and let Tokyo supplant Detroit. The populations of lesser nations, impoverished by debts incurred to OPEC and Big Oil, on which they were now expected to pay Volcker-level rates, were granted relief from their misery by the distractions afforded by American films. The dollar reacquired much of the reserve status conferred upon it by Bretton Woods and arrogated to it by OPEC, with this big difference: It no longer was tied to gold.

I should also add that the “Volcker solution” exacted its price in this country as well. Lots of people who had financed businesses with money borrowed even years before Mr. Volcker took over, got killed by 21 percent bank rates. The bottom line is that there has to be a better way than “the 21 percent solution.” How can usury be a “solution” to anything?

So I ask myself, “O.K., I’m Alan Greenspan, what do I do? If I raise rates, I risk killing the market or pricking the bubble-and all that that entails. If I sit still, what about inflation?”

I think one starts by trying to determine what kind of inflation we’re talking about here. And this is important. If my doctor diagnoses me for cancer but insists on treating me for arrhythmia, I have cause to wonder, and probably to complain.

As far as I can see, the economy is presently subject to two different strains of inflation-which, as always, this space defines as an increase in price without a commensurate increase in intrinsic worth, always fueled by a credit-driven overage of demand relative to supply. An inflation in the cost of major components of consumption and production, in particular commercial rentals, which never get the focus they should, and a widespread capital-markets inflation, including the compensation received by investment bankers, which bears no relation whatsoever to value, let alone reason. Both are largely credit-driven, which is what catches the eye of the interest-rate fiddlers. But the way to deal effectively with a crisis of credit oversupply is to limit its availability, as well as its cost. The market is already doing that. Check out junk-bonds dealings: like the cucumber sandwiches in The Importance of Being Earnest , which were not available in the market, “not even for ready money,” dumb deals aren’t getting done, period, no matter how fancy the coupon.

On the consumer front, one solution might be to speed up repayments of principal while simultaneously lowering credit limits. In other words, keep minimum monthly credit-card or revolving-account payments where they are, but apply a higher proportion to reduction of the actual debt, and as the debt comes down, bring down the individual creditor’s credit limit. The result will be paradoxical: People’s ability to borrow will decline even as they are obliged to become more creditworthy. So what? In the mid-1970’s, newly minted Texas oil jillionaires had to stand in line at Dallas service stations for rationed allotments of the very commodity that was making them rich.

The effect on bank-reported earnings will be negative but will make no difference at the cash window. As a great banker once told me, the point of making a loan is to see it repaid, and even bank-stock analysts should be able to figure this out and adjust their valuations. The negative effect on marginal discretionary purchases by consumers will be greater, but one has to start somewhere, and I suspect that solid enterprises will continue to sell goods and services at a nice, profitable rate, and rabid consumers will find a way. And otherwise, well, comes the crunch, delinquencies are going to hit 20 percent or higher, mark my words!

Fiddling with the capital markets is trickier because the markets can fight back, as well as write checks for handsome sums of soft dollars to candidates for office. But I remember a time, at the end of the 1960’s, when the Fed “jawboned” Wall Street and the nation’s financial institutions into getting out of “nonproductive loans,” namely drawing on the nation’s supply of credit to finance takeovers, etc. But, of course, in those days the Fed saw itself as working for the people, not Wall Street, so we’re talking apples and oranges: the fruit of the few golden, the other-of the many-sour.

The problem here is to find a net wide enough to be effective. There are too many kinds of money in our markets, with different investors allowed to play by different rules according to domicile, tax status and so on. My instinct suggests that-apart from jawboning-no action vis-à-vis the markets may be the answer, at least not until a legislative tax-regulatory grader can be intelligently operated on the playing field. My hunch is that nothing within the Great Greenspan’s purview can meaningfully fix what’s really wrong with the markets.

The inherent fallacy of Amazon.com Inc.’s “business model” is what’s slouching toward Wall Street to be born (just take

a look at Amazon.com’s new, much-touted “zShops” pages and tell me whether you’d bid a stock up 20 percent for this kind of retail!) You may fancy Mr. Greenspan in the Sigourney Weaver-Ripley role, but I don’t see it. When that alien shows itself, I don’t see anyone doing anything but running.

Ah, well, it could be worse. I’m glad I’m not Mr. Greenspan, but let me just say that after talking to my local newsdealer about how the second issue of Talk has sold, I’m really glad I’m not another person who uses exactly the same buzz-based “business model” as Jeff Bezos. I’m speaking, of course, of Tina Brown.