BOSTON, July 19 (UPI) -- Americans are angry and indignant about corporate accounting scandals but not surprised.
Americans believe in capitalism and see it, rightly, as the source of their great prosperity, and yet they are always aware of the greed and unscupulousness that stalk the corridors of the big corporations. What should surprise us, however, is something different -- that while the scandals flourish and the stock market sinks, Americans go on much the same: spending.
To whom might we turn for the view of the ordinary American? There is not much that is representative of the ordinary man about the world's most powerful banker, U.S. Federal Reserve Chairman Alan Greenspan. Yet his views, expressed Tuesday to Congress, might serve us -- it seems to your correspondent -- as representative of how mainstream America appears to perceive now the turbulence in the financial world.
Greenspan said the following Tuesday on the recent accounting scandals, "At root was the rapid enlargement of stock market capitalizations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice. An infectious greed seemed to grip much of our business community."
Greenspan is right.
It is plain now that in the euphoria of the 1990s, as the day traders sought instant and huge gains on the stock market, corporate executives were doing the same. And what they wanted were huge gains for themselves not for their companies nor their shareholders. Indeed, though some shareholders benefited from the temporary inflation of share prices, others are now or are going to be those who pay for the super rewards of the 1990s executives. Greenspan shares the indignation of ordinary Americans at the rapacity of big business.
Yet there seems to be a lacuna in Greenspan's view, a blind spot. What was it that permitted the huge rise in the stock market? Was it not, to some degree, a monetary policy that did all to keep the economic boom running even when there were signs of macroeconomic and corporate excess?
Greenspan has focused in a much-lauded term in office on productivity numbers, not on growth in money and credit. He mentioned the "irrational exuberance" of stocks in December 1996 but did not check that exuberance with a tighter monetary policy: a move that Wall Street and ordinary Americans -- let us be clear -- would have disparaged at the time. They, after all, were enjoying the miracle economy and their boom.
Now Greenspan does appear condemned by his own words. For he says the soaring of stock market capitalization helped to feed the avarice that he and everyone else now condemns.
One lesson of the U.S. stock market boom of the second half of the 1990s and of the bust now taking place is that central bankers are going to have to take more account of rising stock prices. For the prices of stocks and other assets are subject to inflate and then deflate, and to have major influence on growth and employment along the way.
It is that impact on growth and employment that Greenspan and ordinary Americans still seem to be ignoring.
"The mildness and brevity of the downturn, as I indicated earlier this year, are a testament to the notable improvement in the resilience and flexibility of the U.S. economy," Greenspan said Tuesday. The economy, he said, "has withstood a set of blows ... that in previous business cycles almost surely would have induced a severe contraction."
So, for Greenspan, the worst is over, recovery is not just in sight, but occurring. But will the improvement in overall economic activity in the first quarter of this year be sustained?
Americans have gone on spending during the downturn as though, around them, nothing was awry. That, in large measure, is why in May the U.S. trade deficit rose to a new monthly record of $37.6 billion. Imports of consumer goods amounted to an all-time high of $25.6 billion. Imported cars, car parts and engines automobiles rose to $17.9 billion, another record.
The stock market fall and the fall of the dollar against the euro and the yen have not curbed Americans' consumption of imported cars and other goods. The consumer spending which played a large part in the "miracle economy" of the late 1990s and a heroic role in the resistance to recession in 2001 has barely slowed, let alone stopped. Yet if it is true that rising stocks and the wealth effect helped to feed consumption in the second half of the 1990s --and we believe it is true -- how much longer before consumers do cut back?
Greenspan pointed Tuesday to a factor which would prevent what we might call the death of the wealth effect: rising house prices.
"Particularly important in buoying spending," Greenspan said, "were the very low levels of mortgage interest rates." And he applauded the fact that "recent sizable increases in home prices ... have significantly increased the equity in houses that homeowners can readily tap through home equity loans and mortgage refinancing."
But what is it that Greenspan is applauding? In the 1990s there was inflation in stock prices which he and others now regret. Yet he is pleased to find inflation in house prices, which is again allowing capital to be extracted from a bubble and consumed.
If Americans indebt themselves further through higher mortgages and refinancings, their vulnerability to an end of the housing boom increases. If, as your correspondent believes, the economy must slow as the personal savings deficit of Americans is corrected, then house prices are likely to come down, threatening those who buy now with negative equity.
The difficult days of the U.S. economy are beginning, not ending. As Greenspan and President George W. Bush do everything possible to keep Americans spending, the correction in consumption and growth that the U.S. economy needs are simply postponed.
The party days are over. Yet no one in a position of responsibility wants to say that you can't have something for nothing. Perhaps, in that regard, the failings of America's greedy executives reflects a broader malaise in a country that has grown used to affluence and easy money.
Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Send comments to: [email protected]
