WASHINGTON — Most notable economic slumps and stock-market collapses in the United States have come in the years after presidential elections: Witness the string from 1837 through 1929 to 1981. Political leaders and Federal Reserve officials have been skillful at filling the punch bowl in election years and postponing the hangover 12 months.
But if 2000 is the year when the usual rule fails--if Federal Reserve Chairman Alan Greenspan raises interest rates two or three notches and takes away the election-year refreshment--the economic and political climates could start changing as quickly as the weather. And in a speech Thursday, Greenspan's language did get a bit tougher.
Meanwhile, the public's outlook for 2000 is jauntily simple: punch bowl, punch bowl, punch bowl. The flush times also explain why the presidential-nomination favorites in each party are heirs, not talents. Vice President Al Gore is a senator's son, in addition to being President Bill Clinton's anointed successor. Texas Gov. George W. Bush is the son of a former president. Both are the choices of their parties' fat-cat lobbyist and big-contributor wings. Both have spent their smug careers walking down red carpets. Neither has the remotest qualification to be a national crisis manager. All of which is, alas, one of the missing discussions in U.S. politics.
While we're talking about possible crises, another missing discussion in U.S. political economics involves the eerie parallels between the current financial situation and that of precrash 1929. The results may not be the same, given the number of regulatory stabilizers now built into the system, but the risks are high--and one of the most surprising and unnerving involves Greenspan and the Fed.
Greenspan, as most know, has been making occasional remarks about excessive stock-market speculation since 1997. Now, three years later, the principal market indexes have roughly doubled. None of his muted words and minor-league rate increases have cooled rthe expanding bubble. The unnerving aspect is that the last time the Fed went through similar hand-wringing and hesitancy was back in 1925-29.
The first trickle of concern about the Roaring '20s' speculative bubble came in 1925, when the New York Federal Reserve Bank reduced interest rates to buoy shaky European currencies. This easy money, in retrospect, helped feed that year's big market leap. Again, in the spring of 1927, rates were reduced to take pressure off European currencies, a move that dissenting Fed board member Adolph C. Miller later called "one of the most costly errors" of the early 20th century. Stock indexes and stock speculation soared. In 1928, the Fed raised interest rates in two small steps, but with the markets so giddy, these piddling moves had no impact.
By early 1929, a nervous Congress was seeking advice from the Federal Reserve Board. The board warned about the dangers of speculation but, nonetheless, blocked the New York Fed from implementing a proposed rate hike, from 5% to 6%. In February and March, concern about possible Fed action gave the stock indexes some bad days, but no actions followed, just confusing words. Finally, in August 1929, the Federal Reserve boosted the rediscount rate by a full point, from 5% to 6%. The market indexes barely paused, but the Great Crash was only weeks away.
It's quite a tale, and Greenspan, being an economic-history and data aficionado, undoubtedly knows it. What's so surprising is that he has managed to have somehow repeated so much of it--and even added some new speculative encouragements. Consider: In October 1987, when the stock market crashed, Greenspan was the new Fed chairman who flooded the system with liquidity and pushed the market back up. During the savings-and-loan crisis of 1989-92, he supported bailing out multimillion-dollar commercial-bank depositors, without regard to the $100,000 federal deposit-insurance limit. In 1997, despite his talk about overexuberance in the market, he produced only one ineffectual quarter-point rate increase. Then, in the autumn of 1998, when the Asian financial crisis was hot and the stock exchanges shaky, Greenspan undercut the discipline of the markets by bailing out a big hedge fund, Long-Term Capital Management, which had several former Fed officials on its board, and he cut interest rates three times to prop up weak Asian and Latin American currencies and the Dow Jones.
Last year, he took back those three cuts. But despite his expressed fears of market excesses, the Fed chairman proposed no additional hikes. In fact, in December, Greenspan unnecessarily flooded the banking system with money to deal with Y2K, and that action has been credited with fueling the December spurt in the Nasdaq composite index. Small wonder the market yawned the day after his Thursday speech.