Academic journal article ABA Banking Journal

The Case for Aggressive Easing

Academic journal article ABA Banking Journal

The Case for Aggressive Easing

Article excerpt

ON FEBRUARY 13, CHAIRMAN Greenspan delivered his Monetary Policy Report to Congress. His comments suggested the economy may be rebounding already--a "V-shaped" recovery from the weakness of the last half of 2000. Markets responded as if the speech signaled a limited amount of easing.

Chairman Greenspan's view of the economy is more optimistic than ours. That is probably a good thing. However, it would be a mistake to ignore the possibility that January was anomalous.

Weakness appears to have returned in February--layoff announcements and unemployment claims were accelerating. Commercial paper sagged two straight months for the first time since 1994.

Plummeting consumer confidence is one of the reasons we suspect this slowdown will last longer than lust one or two quarters. We agree with the Fed chairman that recent productivity gains are secular and, in the long run, the economy will return to 4% growth. But the linkage between confidence and productivity gains is indirect. It works through capital spending that creates high value-added jobs, which return to labor not only increased wages but also a sense of confidence in the value of their skill set.

Forecasters have trouble predicting rapid reversals in consumer confidence. In the past, as shown in the chart, the labor market drove consumer confidence. Since the capital spending boom set off accelerating productivity, however, confidence has more closely tracked the stock market--with a six-month lag. That suggests stocks' current volatility could show up in confidence numbers as late as mid-year.

During the tech boom, equity stakes increased as a share of compensation. …

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