Year: 2002

There was talk yesterday the Fed might take rates down yet again later this year. There are two pieces to any Fed move. One is economic, the other psychological.

Economically, even-lower short-term interest rates might help the economy and help the stock market. All those who borrow at ‘one over prime,’ say, would save some a little money as ‘prime’ – currently 4.75% – fell another quarter or half a point. They might spend that extra money on something.

Lower short-term rates would also make stocks relatively more attractive. Even if one hoped for just 5% from a combination of dividends and appreciation – well, 5% looks ever more attractive as your broker pays you, say, 1% on cash balances.

But what would a rate cut say psychologically? That the Fed is worried about the economy? That we are running out of room to cut rates? (The Fed’s ‘Discount Rate,’ at which it lends to banks, is now 1.25%, down from 3.25% a year ago. The ‘Fed Funds’ rate, at which banks lend to each other, is 1.75%, down from 3.75% a year ago.) That it is hard to push on a string? That we are headed toward the Japanese experience, where the government rate fell essentially to zero?

I don’t think we are headed for these kinds of disasters. But it shows you the kind of delicate dance the Fed must do.

(A lot of the problem stems from not having found a way to keep the stock market bubble from ballooning to the size it did. If the NASDAQ was irrationally exuberant at 1250, as Alan Greenspan seemed to think in December, 1996, what was it at 5200 three-and-some years later? I think the Fed made a mistake in not raising the 50% margin requirement – a little-used but venerable Fed lever. Nothing drastic, but a small hike from 50% to 52%, say, or 54%, to send a message . . . and then gradually higher, if needed. It would have been a way of damping down some of Wall Street’s speculative excess without unnecessarily damping down Main Street’s healthy economy.)

There are times when a rate cut is eagerly to be hoped for, an almost sure economic confidence-booster; a shot in the market’s arm. This may or may not be one of them.

Actually, what might be even more welcome is a time the Fed feels the need to tighten a notch. That will be a signal that the Fed, at least, has turned bullish on the economy.

I’m sorry, but I think I’ll just run this column every few months until we freeze the tax cut for the top 1% or 2%.

FINALLY COMING TO TERMS WITH OUR NATIONAL DEBT

I’m surprised this hasn’t gotten more news coverage. (Thanks, Paul Lerman, for bringing it to my attention.)

“My fellow Americans, we have just taken the first step toward regaining control of our finances,” said President Bush at a press conference. “Thanks to a joint arrangement between the Treasury Department, the Federal Reserve, and E-Z Debt Services of Baltimore, we are finally on our way to freedom from debt.”

Click here for the full story. (‘WASHINGTON, DC-Plagued by late fees, high interest rates, and harassing creditors, the U.S. took out a debt-consolidation loan Monday, combining the nation’s $6.1 trillion debt into a single, easy monthly payment . . .’)

That debt, by the way, comes to almost exactly $1,000 for every man, woman, and starving child on the planet. (A somewhat meaningless but still interesting fact.) And about half of it, 225 years in the accumulation, has been piled up in just the last thirteen years of slash-taxes-at-the-top-and-the benefits-will-surely-trickle-down Republican leadership. The Republicans were right to applaud the Kennedy tax cut from 90% to 70%, and Reagan was right to lower that 70% to 50% and then to want to take it even lower. I just think history shows that he overshot in taking it all the way down to 28%, and that Bush 41 undershot in allowing it to rise back only to 31%. I think Clinton/Gore, with the benefit of this experience, got it just about right, at 39.6%. It was still a great time for those at the top; but the bond market was pleased, deficits turned to surpluses, and there was even the prospect of enough money to do things like a prescription drug benefit for your grandmother. The $4 trillion question ($4 trillion being my guess at what we would add to the national debt between now and 2020 if the Bush tax cut were fully phased in and made permanent) is: Why didn’t President Bush learn from experience? What was there about the highly successful 1993-2000 economy that would make him want to try the old way again?

MOVE OVER, CITRONELLA CANDLES – HERE COMES THE DEW

Gordon: ‘I don’t drink anything diet, so I don’t know about the alleged nonattractiveness of such beverages to bugs. What I do know is that regular Mountain Dew is the world’s best bug trap. Try using a bowl of it as a centerpiece at your next picnic, and watch the bodies pile up.’

STUPID v EVIL – part deux

Michael LeBoeuf: ‘You write: ‘As a liberal, I don’t think conservatives are evil, just a tad selfish and short-sighted from time to time.’ As a conservative, I don’t think liberals are stupid, just a tad naive and overly idealistic from time to time. [Well, we are that. But only from time to time. – A.T.] Actually, I think a first-class society needs first-rate liberal and conservative minds in much the same way a car needs an accelerator and a brake. We need liberal ideas to push us forward and conservative ideas to keep us from going over a cliff.’

John Lemon: ‘Of course, anecdotal evidence suggests that at least one (compassionate) conservative can be both stupid and evil.’

☞ Whomever could you mean? Although the truth is he’s definitely not stupid (except by comparison with his mostly very bright peers), and I would reiterate my own view: not evil, either – just a tad selfish and short-sighted. The only problem is that in his position, short-sighted has enormous, heartbreaking repercussions.

NEITHER STUPID NOR EVIL?

Just ineffective? In over his head? In the wrong place at the wrong time? Treasury Secretary O’Neill has won more or less uniform mediocre reviews, at best, so it was with interest that I read Matt Miller‘s more hopeful recent column:

DON’T BASH PAUL O’NEILL – CLONE HIM
By Matthew Miller

Cries for Paul O’Neill’s head grow louder with every drop in the Dow. But to restore the shattered confidence in corporate America that helped spark the market meltdown, Wall Street shouldn’t bash Paul O’Neill – it should clone him.

To be sure, O’Neill will never have Bob Rubin’s gift for calming markets. Rubin tended to say little of substance that was different from what the Bush team is now saying – ‘the fundamentals of the economy are sound,’ etc. – but his presence reminded folks that a former trader who could empathize with the Street’s psychoses and gyrations was on the job. (Of course, it didn’t hurt that the fundamentals were better then, too.)

It’s not clear, however, that even Rubin could find words to ease the bursting of a bubble. One of the unappreciated ways that great public officials become great is via great timing; Rubin wisely left town long before ‘irrational exuberance’ hit the wall. But if, depressingly, there’s no sure tonic for the sell-off beyond time, pain and the return of sensible valuations, O’Neill is just what the doctor ordered when it comes to the high-integrity corporate governance needed for the era ahead.

The only problem is that O’Neill’s experience makes Bush’s and Cheney’s stints in the executive suite look suspect and shabby by comparison.

For starters, O’Neill’s tenure at Alcoa was the antithesis of all those financial engineering schemes that left the CEO rich and others holding the bag. O’Neill made his money the old-fashioned way – by building value. His team transformed an old economy company in what ‘everyone knew’ was a losing industry into a superior performer that lifted the stock 800 percent in his 13 years at the helm.

O’Neill accomplished this with values largely missing from today’s CEO playbook. He made a fetish of workplace safety, reasoning that the foundation for employee support for management’s strategy was an ironclad commitment to worker well-being.

When O’Neill showed up at Alcoa, he told his CFO, ‘I don’t ever want to be accused of or guilty of managing earnings’ in ways that don’t reflect operating reality. ‘It never occurred to me,’ he told Jim Lehrer recently, ‘that this isn’t what all CEOs do.’

O’Neill asked that his base salary be set below the median of CEOs in similar firms, with options making him wealthy only if he beat the competition handily. By his own choice, O’Neill was also the only inside director at Alcoa – the rest were independent. ‘I wanted my directors to be my strongest, friendliest critics,’ he says, adding that their candor – a departure from the kabuki-like board discourse that’s the norm – helped him avoid some big mistakes.

O’Neill lacks the patience or instincts to succeed in Washington’s PR game – which matters because, to be effective, perceptions count. But he’s got a fascinating mind. In a wide-ranging conversation we had in his office recently, covering everything from health care to education and fiscal policy, there was plenty I disagreed with. But you can’t deny that O’Neill has uncommon powers of analysis and a rare ability to make you re-examine and defend your premises.

This sensibility has O’Neill pushing an idea that’s not getting the attention it deserves. O’Neill wants to require outside audit firms to tell each of its clients how its internal audit practices compare to the best in the world. The notion is that if a company knew it was going to be ranked from, say, 1 to 5 by its auditor, and that this ranking was going to be shared with the audit committee and shareholders, the CFO would have an enormous incentive not to be judged anything but a ‘1.’

‘It would tighten things up in a marvelous way,’ O’Neill says.

Why was this practical idea – which would do more to cure what ails us than all the death penalties for CEOs being rushed into law by the politicians – omitted from Bush’s recent speeches? Simple, as O’Neill told CNBC: ‘Because there are so many people working on the issues who have never been on a board (and) don’t know what they’re doing.’

You have to love a guy willing to say something like that in public about the White House staff. Which is why a lot of beltway snipers – including some on his own team – would just as soon see O’Neill leading by example back in the private sector.

Columnist Matt Miller is a senior fellow at Occidental College in Los Angeles and host of ‘Left, Right & Center’ on KCRW-FM in Los Angeles.

☞ I’d still feel a whole lot better with Bob Rubin or Larry Summers in the job, as I suspect Matt Miller (and surely Wall Street) would, too. And I also suspect that all companies would rate either 1 or – in a very few cases – 2, under the system laid out above – just as about the worst a stock is ever rated is ‘Hold’ and nearly the worst insurance rating you can get from the big insurance-rating agencies and still be solvent is ‘A’ or ‘very good.’ Still, I hope Matt’s assessment of our Treasury Secretary is spot on. We liberals may be stupid, but not stupid enough to root for a bad economy.

Have a great weekend.