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Posted by: Michael Mandel on May 04
Alan Greenspan and his Fed friends have raised short-term interest rates 8 times over the past year. Yet the best efforts of the “second most powerful man in Washington” seem to have come to naught, as long-term rates, including mortgage rates, have actually fallen over that stretch.
The Fed’s inability to push up long rates has been variously blamed on a global savings glut, lack of growth in Europe and Japan, and exposure to kryptonite (oh oh, scratch that last one).
But here’s a disturbing thought: Could Greenspan finally have lost his preternatural ability to control the economy?
After all, it was never quite reasonable that an institution as small as the Fed should be able to influence an economy as large as the U.S. The monetary base, which arguably is what the Fed controls directly, is less than $800 billion. By comparison, households and nonprofits own about $60 trillion worth of assets. That's a heck of a difference.
It may be getting harder these days for the Fed flea to control the economic whale. A bigger and bigger chunk of the financial system is out of the Fed's control, what with globalization and the explosion of new asset classes such as hedge funds.
If this is true, one consequence would likely be increased volatility, with booms and busts a more important part of the financial and economic landscape. Such volatility needn't be a horrible thing, but it would have some interesting implications for investors and for politicians, especially the ones in Washington who are debating private accounts.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.