ECON: The Fed's Y2K Recession of 2001

From: Brent Allsop (allsop@fc.hp.com)
Date: Wed Apr 04 2001 - 09:50:34 MDT


> According to Paul Craig Roberts, former undersecretary of the
> U.S. Treasury and research fellow at The Independent Institute,
> current economic turbulence can be traced directly to the Fed's
> response to anticipated public fears of the so-called millennium
> bug.

        Duu.

> "The Federal Reserve, thinking that Americans would withdraw a
> tremendous amount of cash to protect themselves against computer
> crashes, added excess liquidity during 1999," Roberts writes in a
> recent syndicated column. "But Americans did not hoard
> cash. Consequently, the liquidity found its way into stock prices."

        "American's did not hoard cash"? Boy, what out of touch
universe is this person from? He must not have seen any TV during
1999. True, the fed likely did do a bit of an overcorrection because
of the pre Y2K hysteria. But they were always way ahead of what was
"common knowledge" about what was occurring. The Fed recognized the
overcorrection long before the actual Y2K. While the rest of the
world was watching doom and glom TV shows and fearing the worst, the
Fed was already tightening monetary policies in an attempt to soak up
all the excess so many paranoid people had stashed in mattresses, and
some of which did make it into the stock market.

        Had we been on some alternative system, say a Gold standard,
for example, there would have been zero flexibility in the system to
accommodate all the paranoid hoards putting cash in their mattresses.
We truly would haver seen a huge crash in the market during the years
before Y2K. Not just a recession, but likely a real depression with
possible very long term slow down effects.

        Instead of a huge market swing in the negative direction
before Y2K, we saw an upswing. Then after the Fed soaks up all that
excess liquidity (most of which was required to accommodate the
hoarders) during Y2K, things return to normal reality. I don't know
why everyone is complaining so much. Not only is there not a
depression, we've really just barely crossed the line and it's hard
to even claim we are in a real recession. Growth has simply slowed so
we can all take a breath after the exciting times that was the
transition into the 3rd millennium. Thank you Alan Greenspan!

        It only seems bad in comparison to the clearly unsustainable
100% annual growth rates we experienced during the last few years.
I'll take a few years of unbelievable growth followed by a mere
slowdown any day over a depression and the long term consequences to
growth such would surely have.

        There could be no stronger testimony that the system is
working and that the current Federal Reserve System is doing good,
likely better than any other alternative I've ever heard about,
especially inflexible rigid unintelligent old fashioned alternatives
like "The Gold Standard".

                Brent Allsop



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