Today, Ben Stein, in his New York Times column, “Larry, Curly, Moe and the Economy,” uses the Three Stooges as metaphor for the Fed’s actions: the central bank, like the celluloid comics, keep hitting the wrong person on the head. According to Stein, the Fed is unduly preoccupied with inflation and it should instead engage in “highly stimulative measures.”
Aside: I’d be careful about accusing the Fed of acting like the Three Stooges. Sounds like projection to me.
As I have said before, there is typically so much wrong in a Stein column that I could write a near-thesis dissecting it, and I don’t want to encourage him further (or drive myself crazy) by giving him that much attention. And Felix Salmon and Dean Baker take pleasure in Stein-thrashing. So I’ll limit myself to a few observations.
First, Stein cavils that the Fed is “behind the curve.” Yet it was Stein himself who said on October 21 in “The Gloomsayers Should Look Up“:
The economy is basically in fine shape. Not perfect, but darned good. Almost all mortgages are not in default. Almost all workers in the labor force who care to work are not unemployed. The largest percentage ever of American household units, what were called “families” in the old days, own their own homes.
The stock market, in both absolute terms (the number on the Dow) and relative terms (the relationship of price to earnings), reflects optimism and an extraordinary, robust level of profits.
On a more sophisticated note of analysis, the spread between the interest rate paid on risk-free Treasury issues and on the Merrill Lynch master junk-bond index is far, far less than it was in the dark days of the tech meltdown from 2000 to 2002. (This data comes from Marty Fridson of FridsonVision, le dernier cri when it comes to junk.) This is a sign of less than horrific fear about high-risk debt.
Newspapers (which often sell on fear, not on fact) talk frequently about a mortgage freeze. However, for all but the least qualified buyers, mortgage money is plentiful, and in fact the potential borrower is bombarded with offers. Hotels and airplanes are full. Casinos in Las Vegas are jam-packed. There is still a long waiting list for Bentleys in Beverly Hills…..
NOW, let me go back to my role as Little Benjy Sunshine. None of this will sink our glorious economy. The losses are nothing compared with the losses in the tech debacle. They will be nothing like the numbers bandied about in the fear-mongering media. If there is a questionable $200 billion pool of loans, that means a small percent will be lost, not all of it. This big, strong economy will sail on through.
In the intervening paragraphs, Stein did inveigh about the excessive risk taking by big financial players who hold inadequate reserves and the fact that their CEOs will get handsome payouts even if the taxpayer winds up holding the bag. But there was not a single word about the need for stimulus or rate cuts.
This was admittedly six weeks before the December FOMC meeting. I don’t watch CNBC, so I can’t be certain, but I sincerely doubt Stein recanted before the Fed’s last rate action.
Second, Stein tells us that the inflation that the monetary authorities are so worried about is really all due to oil, directly and indirectly. Ne claims that food inflation is the result of ethanol subsidies driving up the price of corn.
Guess Stein hasn’t looked at any other commodities prices. Gold rose nearly 4% last week and is near $900 an ounce. Platinum is at an all time peak. Copper and zinc have eased but are still high by historical standards.
Similarly, ethanol is hardly the biggest culprit in agricultural inflation, although it is undeniably a factor. The big cause is more people in the third world starting to consume a third world diet. Jim Rogers in the late 1990s said for the Chinese to meet their goal of having everyone eat one more egg a week would require a tripling of world grain output. The pressure has been made more acute by poor harvests.
And he blithely ignores another culprit, the fall of the dollar. Yes, oil (along with other commodities) has risen in price against all currencies, but it has been most dramatic in dollar terms.
Which brings us to our third (and final) point. Stein tells us: “It’s pretty much agreed by now that inflation comes from the demand side.” Huh? There is debate within the profession as to whether inflation is a monetary phenomenon (per above, oil costing more due to overly lax US and other advanced economy monetary policies) or demand driven. And there are more specific mechanisms: cost push versus demand pull, for instance. The jury is very much out, even though Stein would have you believe otherwise.