Interest-Rate Manipulation Won’t Bring Us Prosperity

It’s the new economy, stupid. Not the “New Economy” that

stock touts use to sucker the rubes with, but another new economy-one that’s

less obvious and less automatic when it comes to the making of millionaires.

A conjunction of old- and new-economy elements has aligned

itself in a pattern not seen before. We’re into the new. There are no

precedents and no past to use as guide. What happens in the next few years is

anybody’s guess.

Gone is the time when middle-class people put their savings

in a bank passbook account that may have grown slowly, but grew steadily and

safely (at least in the seven decades that the savings accounts have been

federally insured). With that change, the political economy of the nation has

changed. Now the middle class has its savings in the stock market, with the

possibility of high returns and with higher risk.

The drop in the market has killed off the immediate

possibility of creating investment accounts with Social Security money. If the

market continues to go flat or drops again, the pressure will build to

indemnify those millions who’ve seen their futures postponed or flattened. Will

the pressure be large enough for major employers to offer something safer than

401(k)’s in their retirement packages? Or what about the possibility of a

stock-market equivalent to the Federal Deposit Insurance Corporation, an agency

that guarantees stock-market investors against loss? From a business point of

view it’s a horrific proposal, but sometimes your worst nightmares come true.

A Federal Reserve Board

led by a seemingly nervous, even scared, Alan Greenspan is trying another

approach, which is to use interest rates to establish some kind of floor below

which the price of securities is not to drop. The presumption is that there’s

an automatic connection between lowering interest rates and raising stock

prices. In the past, at least, this connection has been more problematic than

automatic. We have many examples, including current-day Japan, of lower

interest rates not being able to goose up the price level of the stock market.

This year, the Fed has lowered rates four times. Sometimes

it’s gotten the looked-for kick upwards, and sometimes it hasn’t. We shall see

what happens with the latest Fed try at putting a floor on prices. The more the

Fed tries, however, the more its interest-rate obsession parallels a drug

addiction. Fix after fix seems to be necessary to keep up prices and investor


The short-run problem has been to prevent all the savings

and retirement money from evaporating. Alas, there is a long-run problem also.

With stocks paying next to no dividends, the only way that the middle class

will get a return on the savings it has invested in the market is if the price

of securities does go up, and continues to go up indefinitely. It was easier to

make a pension investment in the stock market increase when it was possible to

buy a stock as much for its dividend as for its putative price appreciation.

The much-scorned Social Security system may look better if a trillion bucks in

401(k) money sits in stocks that don’t move up in price and don’t pay


The dividends are crucial during times when no phenomenal

growth spurt is driving stock prices upward. Growth spurts are not born at the

Federal Reserve Board. Making money and credit available, which is what the Fed

helps to do, is but one element in a great expansion. The institution wasn’t designed to run the whole goddamn economy, but

there it is, worrying about the price of securities, unemployment,

interest rates, the level of unsold inventories in the warehouses of

manufacturing companies, the exchange rate of the dollar.

The underlying assumption is a hope that prosperity will

come if money is placed in the hands of investment bankers, who will lend it to

business executives who will invest it in high-tech equipment that will

increase productivity until we’re off to the Camptown races, do-dah,


Maybe it works that way.

Maybe the economy is just a huge vending machine-shove in the coins and out

comes the soda. Men and women of the counting house and the computer screen,

people like Alan Greenspan and the bankers and brokers he’s worked with for so

many years, are prone to believe that the manipulation in New York of little

green integers on video monitors makes things happen at the Caterpillar plant

in Peoria, Ill. For them, business is numbers, not people in small places and

in vast organizations doing things. It’s an American version of a numbers-run,

capitalist command economy-the old Sovplan, with private property and a guided

free market. But stop and give it a second thought. The idea that we are but a

few keystrokes away from a new burst of prosperity is as peculiar as it is


The bent figure of history is shaking a gnarled finger of

caution about such happy thinking. Alfred D. Chandler Jr., our preeminent

business historian, connects each huge forward leap in prosperity in the United

States with a singular happenstance or occurrence. Thus the first one, between

1815 and 1850, is associated with the movement over the mountains and into the

West; the second centers on railroad building, beginning around 1850 and

petering out in the 1870’s. The next period features city building and national

markets served by new kinds of commercial organizations. After that,

electricity and automobiles give business the impetus, and after World War II

institutionalized research and development brings forth electronics and high


These periods, with their attendant inventions and new

departures, spend themselves out and give way to lulls and slumps and torpor

until the Next Big Thing. Whatever the Next Big Thing may be-and it could be

lapping at the door right now-it isn’t somebody in front of a computer screwing

around with interest rates.

It can’t be repeated too often, because we don’t want to entertain

the thought (although we must): The fact is that nobody knows what the optimal

interest rate might be. Whatever it is, it’s a number that changes according to

circumstances, and since no formula exists for learning it, wisdom argues for

letting the market-lenders and borrowers-agree on interest rates. A second item

which bears endless repetition is that lowering interest rates runs a serious

risk of letting loose an inflationary seiche on the society. It would be an

irony if Alan Greenspan, of all people-a man stalked by the fear of

inflation-becomes the accidental instrument by which this curse returns to

American life.

Besides this extraordinary situation with the middle-class

nest egg and the sea of other potential troubles when interest-rate games are

played, we have the debt situation. The country is soaked in it. The most

worrisome is the hundreds of billions in secured and unsecured debt owed by

lower-middle-class, paycheck-to-paycheck families who, until the 1990’s, never

had access to credit on this scale. Perhaps they should, perhaps this is

good-but the doubt remains whether, in even a mild downturn, they will be able

to keep up with their payments.

Time and time again in history, governments have used

inflation as a painless way of paying their debts. There is a temptation to

devalue the dollar by inflating, thus getting many millions out of hock. It’s

the quick fix-and let the next bunch take care of the ensuing mess.

The people in charge can’t talk about it without causing

unnecessary trouble, but out of earshot they should be figuring what else to do

if they lose the interest-rate game. They need a new idea, and they may need it

fast to tide us over until the Next Big Thing. Interest-Rate Manipulation Won’t Bring Us Prosperity