The blame game begins as USA's economy hits the wall (y2k?) : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

The blame game begins as USA's economy hits the wall

Making sense of what is happening in the U.S. economy -- are we in recession or aren't we -- has flummoxed everyone from Federal Reserve Chairman Alan Greenspan to Wal-Mart shoppers.

Economists, who rely on complex formulas to forecast the economy, are not only divided on where the economy is headed, but on how it got here in the first place. Fed officials say privately that it was 100% predictable that the slowdown was going to be scary. What they didn't see was the speed of the braking and the dramatic impact it would have.

How did it happen? How did the economy mutate from strongest in a generation to feeblest in a decade?

Some say Greenspan and the other Fed policymakers went too far in raising the target for short-term interest rates in March and May last year. They should have started lowering short-term interest rates when the economy first showed signs of slowing last summer, they say.

''I would give the Fed about 100% of the blame,'' says economist Lawrence Kudlow. ''The Fed ignored very clear market signals that a significant downturn was unfolding. Their overkill is what we are feeling.''

Others say fingering the Fed is too simplistic. If the Fed had been raising rates in isolation, without a stock market boom fueling consumer spending or oil rocketing to $35 a barrel, we probably wouldn't be worrying about a recession today. Trouble is, the Fed never works in isolation.

''I would put the Fed on the low end of the list,'' says Jim Glassman, economist at J.P. Morgan. ''The real reason for the slowdown is that the economy exploded in the fourth quarter of 1999 and first quarter of 2000. People stockpiled. High-tech spending was enormous, and it made the economy feel like it was growing much faster than it actually was.''

The fourth-quarter 1999 spending frenzy was stoked by fears among consumers and companies that the Y2K computer glitch would cause major disruptions in markets and supplies. The spending carried over into 2000, propelled by unbridled optimism that resulted in record retail sales and gravity-defying tech stock valuations. Soaring stock prices created a speculative bubble that was bound to burst.

''You can't really point to any one thing that caused the slowdown,'' says Tom Gallagher, managing director at International Strategy & Investment in Washington. ''History says periods of technological innovation are accompanied by times of financial excess. We had that, and we're experiencing the fallout from it now.''

Yet, this expansion has been remarkable for relatively tame inflation. Demand hasn't been crimped by high interest rates. It is crumbling because of weaker profits, falling share prices and lackluster investment.

''Greenspan is an easy target, but what caused this was the stock market bubble, not the Fed,'' says Jeff Osborn, one of the early dot-commers who made his fortune selling UUNet to WorldCom.

''The fingers should be directed at the people who piled into the stock market and high-tech without knowing what they were doing,'' he says. ''This was an accident waiting to happen.''

Optimists, such as Diane Swonk, economist at Bank One, expect the economy to pick up as soon as the second half of the year. Pessimists, such as Morgan Stanley's Stephen Roach, expect this is just the beginning of a deeper slowdown.

Then the finger-pointing would really begin.

-- Martin Thompson (, April 09, 2001


I have witnessed their version of "SOFT MARKET". That sent thousands outta a job. They can "spin" this all they want, since they are "all comphy". I have seen this monster for over three years, I have been witness to it everyday. With more cars "Fer Sale" on the street, than I ever knew, in 30 years. It isn't pretty. "They" can cover it up all they may, not unlike a cat covering up S. Some see. Some don't. Your Choice.

-- NAME GAME (, April 09, 2001.

Ditto NameGame, I too have seen more cars sitting in the driveways for sale like never before, and this is just the auto going. There is prob. more heart-ake there than just losing the car.

-- NdewTyme (, April 10, 2001.

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