Death of an Alliance

February 22, 1991

While Federal Reserve Board chairman Alan Greenspan dutifully chants the mantra that the present recession will be "shorter and shallower" than its predecessors, his actions reflect considerable concern. Not only has he aggressively lowered interest rates and increased money supply, but he has vigorously championed changes in banking rules to encourage lending. Yet -- and here's the rub -- nothing the Fed has done so far has had an appreciable effect.

Banks badly burned by problem loans remain reluctant to get back in the game. Businesses and consumers -- both suffering from a recession-induced, war-induced drop in confidence -- have been in no mood to go on a borrowing binge.

Such prudence during more prosperous times would be widely welcomed. But the lack of activity is slowing the economy, forcing layoffs, cutting profits, reducing government revenues, increasing government social costs and exacerbating the deficit dilemma. There could be an element of self-fulfilling prophesy in Mr. Greenspan's warning that a gulf war lasting more than three months would prolong and deepen the recession. Or the nation might to able to celebrate the conclusion of a short war only to discover that underlying weaknesses are keeping the economy in the doldrums.

In Washington, politicians are blaming the Fed for inducing the recession by restraining money-supply growth and keeping interest rates high until all momentum had been drained out of business activity. Yet the same politicians are willing to take comfort -- and credit -- for the low inflation rate that is one of the few bright spots in the current situation. Actually, a debt burden without precedent, weighing down government, industry and consumers simultaneously, is the real culprit.

To fault the Fed from hindsight is as simplistic as to put regulators and examiners in the dock for the appalling condition of financial institutions. For more than a decade, the Fed has had to compensate through monetary policy for the irresponsible management of fiscal policy on the part of the White House and Congress. In the last couple of years, bank regulators have had to cope with institutions that went haywire in the go-go atmosphere of the 1980s. The very fact that the Bush administration is seeking bank reforms to stop obvious excesses contradicts the finger-pointing.

This is not to say that the Fed and the banking regulators don't make mistakes and don't overreact. But as Doctor Greenspan tries to administer to a sick economy, we may have to settle for a slow recovery rather than an instant cure.

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