Political Economist

Allan Greenspan’s testimony to Congress and the U.S FED interest rate policy

Greenspan’s last words?

Jul 20th 2005 From The Economist Global Agenda

Alan Greenspan, the chairman of America’s Federal Reserve, has given what may be the last of his twice-yearly speeches to Congress on monetary policy before his expected retirement. Those pleading for lower interest rates—or at least an end to the rises—found that he has not gone soft in his old age

OVER the last decade, as the baby-boomers have watched retirement lurching closer, an aura of mania has hovered over the American marketplace. Telecoms were going to carry workers along the information superhighway to the land of effortless wealth, and dotcoms promised to turn the stock market into a sort of perpetual-motion money-making machine—at least until the Y2K bug brought the entire world to a crashing halt. Now those fads are regarded with (rueful) nostalgia, and Americans are ploughing their money into real estate, with expectations of recouping a modest 20% or so a year on their investment.

Despite the madness of the crowd, at least one man has remained remarkably steady: Alan Greenspan, the chairman of America’s Federal Reserve. Credited with godlike powers by the markets in the late 1990s, he has taken something of a shellacking in the press in recent years for the usual sins with which central bankers are charged: making monetary policy too easy, which causes inflation and encourages people to bury themselves in debt; or making monetary policy too tight, which throws people out of work and makes it hard for people to pay the debts they amassed when monetary policy was looser. Open a newspaper these days, and you can often find him accused of both within a few pages.

Despite entreaties from both sides, Mr Greenspan has held his ground. The Federal Reserve has been increasing interest rates at the slow, steady pace originally promised as the economy inched out of the 2000-01 recession. As he headed into his biannual testimony on monetary policy before Congress on Wednesday July 20th, all eyes were watching to see if his words would presage any wavering from this course. With Mr Greenspan expected to step down in January, two months before his 80th birthday, this may be his swan-song before the legislative body.

The dollar rose sharply ahead of Mr Greenspan’s testimony, in the expectation that he would hint at more interest-rate rises to come—as indeed he did. Even so, there are those who feel it is nearing time for Mr Greenspan to let them level off, as they approach the range which many analysts believe to be “neutral”—neither low enough to spur economic growth, nor high enough to hinder it. That level is believed to be somewhere between 3.5% and 4.5%. In recent months, the Federal Reserve has been raising interest rates in quarter-point increments, most recently to 3.25% (see chart above).

Though economic growth has remained strong (especially compared with sluggish Europe), there are ample worries to fuel the case for restraint. Oil, the fuel of the world’s economy, remains expensive. And America’s job market is still surprisingly subdued considering how far the nation is into the current economic expansion. Unemployment stands at 5%, down from a high of 6.3% in June 2003, but much of the early improvement came from workers leaving the labour force, rather than job creation. Labour-force participation remains well below its 2000 peak, and payroll headcounts have only this year returned to their 2001 levels. Consumer spending remains strong, but (it is feared) increasingly dependent on housing wealth and desperate corporate measures to shake consumers loose from their hard-earned dollars—the Big Three automakers have offered their employee discounts to the entire country to move backlogs of 2005 models off the lots.

Nonetheless, even before he testified it was clear that Mr Greenspan's words would not satisfy those hoping for easier money. In a July 11th letter to Representative Jim Saxton, the chairman of Congress’s joint economic committee, the Fed chief said that the economy seemed to be coping with higher oil prices, and that the narrowing spread between short-term and long-term interest rates, which can herald a recession, should not be cause for alarm. Mr Greenspan's testimony confirmed this view. Saying that “the US economy has remained on a firm footing, and inflation continues to be well contained”, Mr Greenspan made it clear that the bank is not done yet with rate increases. Another 0.25% increase is expected in August, and rates are likely to hit 4% by the end of the year—provided the economy remains co-operatively robust.

There are worries in some quarters, however, that this is not hawkish enough. Mr Greenspan’s letter also indicated that the bank is not acting to rein in the bubble which many fear has developed in America’s housing market. Mr Greenspan has long held that interest rates are not a good tool for bursting asset-price bubbles. This position has brought him grief from critics who blame him for allowing the stock market bubble of the late 1990s to continue to inflate long after he warned of its “irrational exuberance”. There are fears that the economy has simply lurched from depending on increasing stock prices to relying on house price appreciation to fuel growth—and that the longer this goes on, the stiffer the price Americans will pay when the bubble pops.

Rational exuberance

Mr Greenspan's testimony acknowledged the fears of both sets of critics, pointing to three primary areas of uncertainty that could derail his current, favourable assessment of the economy's prospects. Unit labour costs, which have remained subdued in recent years, have turned up of late, which will put upward pressure on inflation if the trend continues.

The possibility of further increases in energy prices threatens not only higher inflation but also slower economic growth, though Mr Greenspan noted that the forecast currently embedded in futures markets is for oil and gas prices to level off. And the unusual behaviour of long-term interest rates, which are currently hovering abnormally close to short-term rates, entails a current risk of excess borrowing, particularly in the housing market, and a future risk of higher rates and slower growth.

Mr Greenspan endorsed the view expressed by Ben Bernanke, the chairman of President Bush's Council of Economic Advisors, that at least part of the unusual narrowing is due to a mismatch between high levels of global savings and relatively low levels of global capital investment. With capital investment recovering in America and Japan, this problem may heal itself. But it will remain worrying until it does. As will the housing bubble: Mr Greenspan noted that, at a minimum, some local markets are distinctly frothy and a decline in prices would undoubtedly entail economic distress. However, he was careful to add that such a decline is by no means inevitable, nor sure to produce large macroeconomic effects even if it does occur.

Mr Greenspan's speech will probably reassure those who fervently hope he is steering America between the Scylla of speculation and the Charybdis of contraction. Interest rates high enough to pop a bubble could be high enough to throw the economy into a tailspin, causing more damage than they avert. Interest rates low enough to stimulate employment may also be low enough to unleash inflation, as the central bankers of the 1970s found to their dismay. So far, America seems to be muddling through. Economic growth is strong, payrolls are recovering (however slowly), and America’s monetary policy seems to be reviving the dollar from its recent lows, which should give another fillip to consumer wallets. Mr Greenspan’s powers may not be quite godlike, but many hope that he may yet have a couple miracles up his sleeve.

The following is one article of The Economists dealing with China's exchange rate policy change.

China lets the yuan rise—but how far?

Jul 22nd 2005 From The Economist Global Agenda

So far, it is not clear exactly how the new system will operate. The Chinese called it a “managed floating exchange-rate regime”, which may well imply more management than floating. Neither the currencies in the basket used to set the level of the yuan, nor their weights, have been disclosed. The fact that the Chinese have acted at all is important. But the eventual economic and political effects of the revaluation will depend on how far and how fast the yuan moves from now on. In Friday's trading it barely budged—and in fact closed a fraction below 8.11 to the dollar, suggesting the authorities are keen to damp down market expectations of further rises.

Such a slight initial revaluation is unlikely to do much to slow China's fast-expanding economy. The day before the currency regime changed, the country's official statisticians said that GDP in the second quarter of 2005 was 9.5% higher than a year before—more than most pundits had forecast and only a shade less than the figure for the same period of 2004 (see chart below). Growth rates of industrial production, ahead by 16.8% in the year to June, and investment in fixed assets, up by 25.4% in the first half, year on year, have both eased from their levels at the end of 2003, but remain strong. Inflation, as measured by the consumer-price index, is mild. It slid to 1.6% last month, down from 5%-plus a year ago.

In truth, the economy is slowing more markedly than these (highly suspect) official figures suggest. Many economists say that China has an institutionalised bias to over-reporting growth at the bottom of a cycle and under-reporting it at the top, to reduce the volatility of the numbers. Judged by physical indicators, such as electricity consumption or freight volumes, GDP growth probably peaked at over 12% in 2003 and should slow to 8% by 2006. Since China's macroeconomic growth is driven more by fixed investment than by household consumption (which dominates in the West), it is especially vulnerable to any slowing of corporate investment or public spending on infrastructure.

“In investment cycles,” says Andy Xie, Asia economist at Morgan Stanley, “the leading indicators are profit margins, product prices and property prices, which forecast corporate cash flow or ability to borrow.” These three indicators are slowing. For the past five years, Chinese industrial firms have enjoyed record profit margins as revenue growth has outpaced the increase in wages and raw-material costs. In 2003 and 2004, industrial production and sales grew at an annual rate of nearly 30% in real terms, analysts estimate, but in 2005 the pace has slowed to around 15%. With commodity prices high, companies' margins are being squeezed: overheated industries such as cars, steel, cement and basic materials are suffering especially.

Property prices are also moderating after a period of extraordinary growth, particularly in big cities. Shanghai house prices, up by half since 1998 and by almost 10% in the first quarter of this year, have fallen back by 10-20% since mid-April. Transaction volumes in most urban centres have also dropped, because the government has imposed a property-sales tax and tightened mortgage requirements.

Overall, however, China seems to be managing the soft landing that it wants. The authorities have acted earlier and more decisively than they did in the mid-1990s, curbing growth before it gets out of hand. Policymakers have also been more sophisticated, targeting selected sectors with administrative restrictions while shifting to market-based measures, including last October's increase in interest rates, to rein in money and credit growth. A dearer yuan—but much dearer, probably, than after this week's move—would give the economy another downward nudge.

In addition, the economy is looking better balanced: there are signs that consumer spending is doing more to support the economy, alongside fixed investment and exports. Rising incomes are boosting households' spending power, lifting retail sales by 13% in the first half of the year, compared with the same period of 2004. And the countryside is finally playing a part: after six years of lacklustre growth, rural incomes rose by 12.5% in the first half.

That said, China's policymakers cannot afford to rest on their laurels. On the one hand, there is a risk that the economy will steam away again as spending for the Beijing Olympics in 2008 takes off. On the other, the vast amount of manufacturing capacity built up over the past few years means that a slightly sharper slowdown, perhaps triggered by lower growth in America, could tip the country back into deflation. Already, a staggering nine-tenths of manufactured goods in China are thought to be in oversupply.

In the short term, the biggest worry is that China becomes a victim of its own international success. Until recently China has been a powerful engine driving the world economy. If it slows, existing political and trade tensions could still worsen. Thus an unfortunate side effect of China's attempts to cool its domestic economy has been an exploding trade surplus, because import growth has softened while exports have remained robust. In June, China's exports rose by 30.6%, year-on-year, while imports grew by just 15.1%, widening the monthly trade surplus to $9.7 billion. The cumulative surplus for 2005 is now nearly $40 billion, more than for the whole of last year. This year's current-account surplus could reach 9% of GDP. “Just one year ago, China was the world's fastest-growing importer of heavy industrial products,” says Jonathan Anderson, chief Asia economist at UBS. “Today, the mainland is actually a growing net exporter, with shipments of not only textiles but also steel, other metals and chemicals accelerating visibly.”

Slowing imports (of everything but commodities) are bad news for international companies, at a time when those doing business in China are already suffering from increased competition and oversupply. And mainland firms are becoming aggressive exporters of everything from textiles and steel to electronics and even cars. Ningbo Bird, based in Zhejiang province, is flooding Asia with cheap mobile-phone handsets it cannot sell profitably at home.

Revaluing the yuan should make some of the tensions created by all this less acute. American politicians, in particular, have been demanding a step in this direction—President George Bush's spokesman welcomed the move. However, some congressmen have been demanding a much bigger stride. And investment is becoming as touchy an issue as trade has been. China is no longer using its huge stock of foreign-exchange reserves—over $700 billion—merely to buy American Treasury bonds, but to snap up physical assets too. The $18.5 billion contested bid by CNOOC, a big Chinese oil company, for America's Unocal is causing an uproar in Washington, DC. China's currency move may dampen calls for trade protection and revaluation for a while. But if its domestic economy slows and thus becomes less supportive of global growth, such calls are likely to return soon.

* The Dalai Lama

The Dalai Lama is one of the most prestigious spiritual leaders of Buddhism not only in his own country, Tibet, but also around the world. After the Chinese government’s invasion and occupation of Tibet, he escaped to India in 1959. Since then he has continued to preach to Tibet people nonviolent and peaceful independence movement.

As a Buddhist spiritual leader, he asserts that we “should forgive persons who have committed crimes against oneself and humankind.”(129) According to him, however, this forgiveness has nothing to do with forgetting those atrocities. Instead, it is necessary not to forget in order to prevent such atrocities from reoccurring. Thus, his opinion to Simon’s dilemma is to forgive, but never forget.

However, Simon has no right to forgive the dying SS man on behalf of other victims in the first place. As a respected Buddhist leader, the Dalai Lama has to say that we should forgive criminals. But it is very hard for ordinary man and woman to follow his maxim.

* Mary Gordon + Cynthia Ozick

Mary Gordon is a novelist and a professor of English at Barnard College. I do not have any clues for understanding why she has been invited to respond to Simon’s dilemma, but her opinion is one of the clearest ones. Instead of asking how Simon should have behaved in such a circumstance, she asks what the dying Nazi expected from a desperate Jew. According to Gordon, Karl’s request to forgiveness from Simon was a mere “narcissistic act,” not a moral one.

From this perspective, she argues that the dying SS man’s request for forgiveness was wrong in following two reasons: firstly, by asking forgiveness, the dying SS man was asking Simon to “serve as a public symbol for all Jews.” However, Simon was not able to be such a public symbol in that circumstance. In other words, he was not in the position granting forgiveness on behalf of others. Thus, the dying SS man was asking something impossible from Simon; secondly, the dying Nazi misunderstood the meaning of confession. Even in Catholic Church, according to Gordon, sinners must acknowledge their guilt publicly before asking for absolution if their crimes had affected the public. Thus, Simon, neither as a Catholic priest nor as somebody who has moral authority, cannot grant forgiveness to Karl.

Like Mary Gordon, Cynthia Ozick is also a famous novelist. Her essay is composed of 4 parts, each of them dealing with the characteristics of Hitler’s Third Reich, differences between vengeance and forgiveness as a response to crimes, and the significance of moral responsibility of intellectuals. Even though her essay is filled with so many metaphoric expressions, it is evident from the beginning that her position to the question of forgiveness is explicit and stubborn; she asserts that it is impossible to forgive the Nazi soldier.

Ozick starts her essay by mentioning the fact that the dying SS Nazi has Catholic education. However, whether or not the dying SS man had Catholic education before does not have any significant meaning in this story. So this fact has nothing to do with the question of forgiveness.

Secondly, Ozick reveals that the Third Reich was a sort of Moloch state demanding human’s live flesh and blood to live on by citing the Second Commandment of the bible. If that is the case, how can we deal with these collective crimes? Ozick asserts the necessity of vengeance, not forgiveness. She argues that forgiveness is possible only when there is a possibility of repentance on the condition that there will not be the same mistake. However, if a murderer kills somebody, this murder cannot be “revocable” and “reversible.” In these extreme cases, she argues that there is no room for forgiveness to the dying Nazi soldier.

Of course, Ozick admits, even if we revenge somebody, this act will not also be able to bring the dead back. Yes, it is true. But this vengeance can bring public justice to evil. Contrary to public justice, forgiveness sometimes became merciless to victims, not to murderers. “Vengeance, only vengeance, knows pity for the victims,” she says.

In the last part of the essay, Ozick deals with the problem of moral responsibility. As we already know, the dying SS personnel was not the same as other brutal SS soldiers; he had a moral temperament. He was educated in Catholic Church. He was also intelligent enough to think what his crimes would bring about.

However, Ozick argues that this difference cannot be a tool for immunity privilege of the SS man’s crimes. Rather, the Nazi soldier should be punished more severely than other brainless brutes because he committed the same crimes even though he had conscience and sensibility. “The intelligent man of conscience also shovels in the babies, and it does not matter that he does it without exaltation. Conscience, education, insight – nothing stops him. He goes on shoveling. --- He is a morally sensitive man, and he shovels babies to glut the iron stomach of the idol. --- The morally sensitive SS man goes on shoveling, and shoveling, and shoveling.”(219) Here Ozick seems to insinuate the heavy moral responsibility of the intellectuals.

*  Dith Pran

Dith Pran is a New York Times journalist and a survivor of Cambodian Khmer Rouge regime’s labor camp. As a survivor of the brutal military regime’s concentration camp, he says that “he can never forgive or forget what the top leadership of the Khmer Rouge has done to him.”(230)

However, he asserts that we should differentiate ordinary soldiers from the leadership of the regime because what they did was to follow the orders from the above under the threat of death. Even though these ordinary soldiers are not without guilt, “there is a chasm between someone who intentionally plots to destroy the very souls of people and someone who is not only stupid and brainwashed, but fears death enough to be forced to do wrong.”(232) In this perspective, Pran says he would have forgiven the dying SS man if he were Simon.

His argument on (the necessity of the) distinction between the top leadership of Khmer Rouge and ordinary soldiers is very interesting point and seems to be very useful especially when we judge the degree of crimes. However, the problem is that this kind of distinction is not evident from the beginning. Sometimes it may be very difficult to differentiate those who are mainly responsible for the crimes from those who involuntarily follow the orders. How about those who voluntarily followed the orders or voluntarily involved in such crimes without any physical or mental threats? Should we forgive them? How and why?

Furthermore, it may be also argued that the distinction between two groups of criminals has nothing to do with forgiveness. Even though someone admits the necessity of the distinction between two or three (or more) groups of people according to their relative degrees of crimes, he or she can also argue that they do not deserve to be forgiven. In other words, the differentiation of the degree of crime has nothing to do with forgiveness because it is not about moral judgment but about the issue of legal punishment.

Thus, once again the question of forgiveness still remains untouched. Should we forgive the dying SS man. His relative degree of guilt is, of course, slighter than Hitler or Himmler. He was not an architect of the notorious gas chamber. However, he is not like “ordinary soldier” Pran mentioned. He was engaged himself in the massacre of the Jews even though he was repenting his crimes. Should we forgive him?

* Mattheiu Ricard

Mattheiu Ricard is a Buddhist monk and serving as a French language interpreter for the Dalai Lama. As a sincere Buddhist, he says that “forgiveness is always possible and one should always forgive” in any cases. According to him, “forgiveness does not mean absolution, but an opportunity for “the inner transformation” of both victim and perpetrator.” Forgiveness is a way of transforming the victim’s own grief, resentment or hatred into good.

Furthermore, the author argues that Simon should have said to the dying SS man that he should pray that he would be able to atone for his crimes by doing as much good as he had done evil in his future.” As a Buddhist, the author also argues that Simon should have felt compassion not just for the soldier and his victims, but for all sentient beings in the world until endless cycles of suffering end.

Even though the feeling of mercy and pity is one of the most significant virtues in Buddhist teachings, however, I think the author’s argument does not have any relevance to Simon’s case. Firstly, the argument that “an action cannot not be considered negative or sinful in and of itself” has nothing to do with true Buddhism. As far as I know, Buddhism is not a religion without any moral, ethical judgments regarding human behaviors. Rather, Buddhism is based on the most ethical and highly moral sentiments on human being. In other words, every human is always deemed to be judged by their action.

Secondly, if human beings are surely supposed to suffer continuously in later world due to their misdeeds in this world, there is no room for forgiveness in this world. Nobody can forgive someone who commits crimes because he or she will surely be suffering someday in the later world due to his or her own deeds. Thus if we once accept the principle of chain rule of suffering, we don’t have to decide to forgive or not to forgive the criminals. In other words, this basic circular viewpoint of the world contradicts to another Buddhist principles; so-called unconditional possibility of forgiveness.

Thirdly, I cannot accept this Buddhist’s indiscriminative attitudes toward victims and perpetrators. It may be true that “inner transformation” is the most important moment for both victims and perpetrator. However, most innocent victims are already dead without having chances for what is called inner transformation or giving forgiveness to perpetrators. The problem was that Simon was expected to forgive the dying perpetrator on behalf of other Jews who are already dead. Thus, the argument on the significance of the moment of inner transformation can only be uttered at the expense of the ignorance of sacrificed victims.

Finally, it is surprising to see this Buddhist’s ignorance of the situations. Ricard does not want to see the situations where Simon was forced into. Simon was under the continuous threats of death in concentration camp. If he really knew what was going on in the camp, can he still argue that Simon should deliver these kinds of abstract Buddhist cannon – Buddhist would have felt compassion not just for the soldier and his victims but for all sentiment beings until endless cycles of suffering ends - in such a horrible situation?

In sum, Mattheiu Richard’s opinion seems to be based on either so highly unrealistic principles or total ignorance of the situations that Simon would not be able to find proper answer to his dilemma.

* Desmond Tutu

Desmond Tutu is a South African bishop and a member of the Truth and Reconciliation Commission. He argues that Simon should have forgiven Karl on his death chamber. In order to justify his response, he cites various examples of forgiveness in his home country. Among them are those who “have been tortured, whose loved ones were abducted, killed and buried secretly,”(267) but in front of the commission’s testimony say that they are ready to forgive. Nelson Mandela’s sublime attitude toward former Apartheid regime was also cited as a good example of forgiveness.

However, there seems to be nontrivial difference between these examples Tutu cites and Simon’s case. Contrary to Simon’s case, former victims including Nelson Mandela in South Africa are all on the winner’s position both morally and politically when they say they can forgive the former perpetrators.

For them, forgiveness may be “practical politics.” But, for Simon, who had to face ceaseless threat of death and humiliation without any hope for surviving in concentration camp, forgiveness cannot be conceived as practical politics.

From this significantly different circumstance emerge Simon’s dilemma: he had to decide to forgive or not to forgive the dying SS man when he was a prisoner of concentration camp, not as a investigation commission member; he had to accept lots of innocent Jewish people’s death as their common fate in the camp; under this gruesome circumstance he also had to decide whether or not he could forgive the dying, repenting SS man on behalf of other Jewish victims.

Once this different situation is considered, then the question of forgiveness can be justifiably brought back to Tutu and other South African leaders in different form: Can you forgive them if you were still in the position of victims? Can you forgive white racist police officers, who are torturing you, intimidating you, killing your loving sons and daughters, if you are still forced into as a prisoner of Apartheid camp? Can you justifiably say that forgiveness is always practical politics in such a situation?

* Harry Wu

Harry Wu is a Chinese writer and a human rights activist. He had experienced Chinese prisoner’s labor camp for 19 years. Instead of dealing with Simon’s moral question of forgiveness directly, he introduces his own experiences as a political conscience prisoner of communist labor camps; he was detained and imprisoned due to his refusal to join in self criticism and “struggle session.” He experienced harsh treatments and humiliations by the prisoner guards.

Upon released from the camp, he had a chance to meet Comrade Ma who played major role in his indictment and imprisonment. However, she did not apologized to him or asked for his forgiveness. Instead, she advised him to forget the past.

Harry Wu thought that Comrade Ma was a typical character the Chinese communist regime had produced. Compared to the dying SS soldier, Harry Wu exclaimed that there had been no such a person like Karl who had asked for forgiveness in China. Rather, at least for him, communist China was filled with so many “Comrade Ma” who did not care about an individual’s well-being.

In the end, Wu says that he would not have forgiven the Nazi soldier on his deathbed, but “I would have been able to say to him: I understand why you were a part of a horrible and vicious society. You are responsible for your own actions but everyone else in this society shares that same responsibility with you.”(274)

This book is about the U.S economy in 1990s, what the author calls “the age of diminished expectation.” Paul Krugman, a professor of economics at Princeton University and New York Times columnist, aims to deal with main economic problems and successes of the current U.S. economy.

In order to present the reasons for economic success and follies, he traces back to the early 1930. Unlike the age of welfare, current U.S economy is characterized by the slowdown of labor productivity since 1980s, increasing income gap among social classes and the fear of rapid inflation. Thus, according to Krugman, without the turnaround of productivity growth, the contemporary pressing issues in the U.S economy such as trade and budget deficit, financial market volatility cannot be solved.

This book is composed of 5 chapters, dealing with the roots of economic welfare after the 2nd world war, current economic problems such as twin deficit and inflation. While analyzing these issues, he also introduces how the U.S government and the Fed have adopted economic and public policies to deal with the problems not only arising from domestic market but also from international financial market.