March 2, 2008

Fed Chairman Wrestles Chicken Little

Chicken Little felt a raindrop last week and rushed around the barnyard screaming: “The Sky is falling!”

Substitute “Congressional Democrats” for the hysterical chicken – and “liberal media” for the barnyard – and you have a fitting metaphor for the heebie-jeebies that have descended on the body politic.

Federal Reserve Chairman Ben Bernanke high-tailed it to Congress with a sponge.

He proclaimed the nation is “not anywhere near the ‘stagflation’ malady of stagnant growth and rising prices of the 1970’s.”

“High energy prices are creating inflationary stress,” said Bernanke. “That complicates the Reserve’s work of shoring up the economy.”

His statement reminds us that President Jimmy Carter was overwhelmed by the self-defeating twin-problems of a stagnant economy and inflated prices.

Pump Priming

President Bush on Thursday led off a press conference at the White House by insisting the nation is not headed into a recession.

“We’ve acted robustly,” said Bush. He cited the plan for a rush package of $168 billion in economic aid “rebates” to millions of taxpayers.

Amounts – starting this month – will range from $300 to $1,200. Businesses will be granted tax incentives.

Congress and the White House – after all --can act cooperatively when the sky is falling.

The Commerce Department seemed to support rain clouds with a report that the “gross domestic product” – dollar value of all goods and services – increased an anemic 0.6 percent in the last quarter of 2007.

In the previous quarter, the economy chugged along at a respectable 4.9 rate. But, a 0.8 bump was expected.

What Happened

The world economy nose-dived when banks everywhere last month wrote off billions of dollars in “sub-prime” (high risk) home mortgages.

The housing market shuddered as buyers snapped up “fixer-upper” bargains. Developers postponed a fourth of planned projects.

Now, the U.S. home market is rebounding nicely, but builders are more cautious in starting large developments.

Nevertheless, employers trimmed their sails to gauge storm signals.

The Labor Department, also last week, reported that new applications for unemployment insurance benefits rose by 19,000 to a total of 373,000.

The National Association for Business Economics estimates that the present 2008 first quarter will slip to a 0.4 pace. Still positive, but the ragged edge of recession.

The commonly accepted benchmark for a recession is six, continuous, months in decline.

Batten The Hatches

Bernanke assured Congress last week that the Federal Reserve would lower bank interest rates again if necessary.

The Fed started cutting interest rates in September. In eight days in January it slashed rates by 1.25 percentage points. It was the biggest one month reduction in the last 25 years.

It is expected the Fed will cut rates still more at its next board meeting in two weeks -- “if necessary.”

Certainly, the tax rebates will pump cash into the economy. However, Congress seems intent on nixing President Bush’s hard won tax cuts.

Economists term this a “double whammy” – too much remedy, too quickly – that will launch excessive inflation.

Enlightenment

Bernanke’s concern about high, energy prices merits careful consideration.

Congress – responding to “tree huggers” --has subsidized ethanol gasoline from corn. Thus, the cost of corn has skyrocketed and likewise boosted the cost of corn flakes, corn-on-the cob, corn bread and cattle feed necessary for steaks.

The law of unintended consequences strikes again!

The same goes for petroleum.

Oil for gasoline is next only to food for most Americans. Consequently, foreign oil producers have kicked the price of oil to $100 a barrel (or more.)

Yet, we sit on oceans of oil in Alaska and off shore in the Caribbean Sea (read that Florida.)

Before you blow a gasket, google on to Anwar.org -- photo gallery.

The Long View

Politicians generally have considered a 3 percent inflation rate beneficial – stimulative but controllable.

The Fed – bankers all – are comfortable with 2 percent.

That 1 percent difference seems – to laymen like your writer – to be only one nail in a stout, economic horseshoe.

Yet, we are mindful of that old adage, “For want of a nail, the horse shoe was lost. For want of a shoe, the horse was lost. For want of a horse, the King was lost. For want of a King, the kingdom was lost.”

It isn’t raining yet in the barnyard – but it wouldn’t hurt to have an umbrella handy.

PARTING SHOTS

Bill Buckley – erudite columnist who invented conservatism -- has died. He was famous for his wit and polysyllabic vocabulary.

When asked what job he would like to have in President Ronald Reagan’s cabinet, Bill replied in his terse, deferential manner: “Ventriloquist.”

Barack Obama – Democrat candidate for President -- sneezed during his speech last week to a huge audience that then gave him a rousing round of applause.

They didn’t know how to pronounce Gesundheit.

Tact is changing the subject without changing your mind.

By Lindsey Wilger Williams, retired newspaper publisher and syndicated columnist