After the bust in the US stock market in 2000, the US economy has shown a different and quite unpredictable behavior. I say unpredictable because USA has avoided a recession; a miracle!
Having easy credit availability is one thing and using it to further a better economic development of the nation and its citizens is another. The past few years have shown that easy credit is just being diverted into real-estate and not much into research and development or in weaving the growth fabric of the nation. Consumerism is an important component of a progressive and developing nation. To give an analogy, no student will be motivated unless s/he can see her/his work being appreciated and eventually rewarded. Similar is the economy and development of a nation, it cannot advance if people don't buy things and give that added(capitalistic) push and motivation to the people who work in innovative companies and contribute towards the progress of the nation and its economy.( Let's keep aside the Military and Security rational for spending on R&D)
While US believes much in Keynesian economy, unlike UK. It is to be noted that the research and development of each country is on par, though USA is having a lead(slowly losing its grip on that status) compared to any other democratic country in the word. So does that mean that a Keynesian economy is the underlying reason for this progress.
One thing is clear, when an economy goes bust, people go into a thrift mood, and even if there is profligacy, it will be towards a more secure and guaranteed investment. After the 2000 stock market bust, Alan Greenspan made the interest rate the lowest and it can be seen that people were ready to spend but only on very safe investments, like the real estates. Eventually making it the most unsafe investment.
So, how has Mr.Greenspan helped the economy? The intention of lowering the interest rate is to spur the economy. Why is USA economy still a laggard? And why is there a housing bubble, a bust of which sends shivers through the spines of all the economists. Would it trigger the next recession in the USA, and thus a global recession as the world is tightly clasped by various economic policies?
I personally feel that the Fed chief, Alan Greenspan, should have restricted the interest rates for more productive and innovative activities. It is debatable, though, if that would have laid the foundation for future prosperity, but it definitely wouldn't have created the housing bubble. The misallocation of money reminds me of the property bubble in Japan during the 1980s and the recent South Asian property bubble of 1997-98.
A nation should try to invest in ideas that adds value to its citizens life and eventually to the nation and not build dead walls with the "Savings Glut".
1 comment:
US Fed doesn't need to increase the interest rates in order to attract capital and reduce the deficit. A free flow of capital towards USA is, in fact, the issue. "Savings Glut" is supposedly the reason for it. Thus even if the Fed increases the interests rates, it will just further the gravity of capital towards US Treasury Bonds. To utilize the capital in a better way, is where the problem is!!
What the Fed need to do is, channelize the money into good investments and not into "Dead Walls"(real estate) as I mentioned in my blog
In order to reduce the deficit, either USA needs to consume less(highly impossible task) or innovate things that it can export. All this is simple said than done. Let's see who will guide the US Economy out of all this complex mess created by Alan Greenspan.
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