Bears hold these truths to be self-evident: Problems restraining the economy aren't due to restrictive monetary policy and thus won't be solved by more easing. By trying to forestall the business cycle with its aggressive stance, the Federal Reserve is delaying the inevitable downturn, making its ultimate unraveling even worse.

You'd expect to find such conclusions in the missives of hardcore bears such as Charlie Minter or David Tice or's own Bill Fleckenstein. You don't expect them from a regional Fed bank. Reading between the lines, that's a reasonable conclusion to be drawn from a recent piece by Kevin Lansing, senior economist at the Federal Reserve Bank of San Francisco.

Admittedly, Lansing didn't say outright that the Fed is either toothless or reckless. But it wasn't difficult to draw such inferences from his report, which reflect the economist's personal views. He declined to comment further.

Shh ... Don't Tell Uncle Alan.

The official view from the central bank is that the sluggishness in business investment is due to "shocks," such as the Sept. 11, 2001, terror attacks, the Iraq war and corporate accounting scandals, which have subdued business and investor confidence. "Alternatively, in the aftermath of what many consider to be the greatest speculative bubble in history, it is quite possible that investment is being restrained by fundamental factors that will take longer to overcome," Lansing proposed.

These factors include, most prominently, vast overspending during the boom years. From 1996 to 2000, real business fixed-investment rose at an average compound annual rate of 10% per year, about 2.5 times faster than overall economic growth, he observed. "It is now clear that the investment boom of the late 1990s was overdone."

The Fed economist drew a connection between the investing boom and the stock market bubble. Without naming names (such as Greenspan), he wrote about how belief in the so-called New Economy, as well as one-time events such as Y2K, helped facilitate these "mutually reinforcing phenomena."

In sum, we are still paying a price for the bubble-era excesses, and there's very little the Fed can do about it today. Again, that's a notion many skeptics have discussed, but it's unusual to hear from a Fed source. (One suspects the higher-ups in Washington can't be too happy about Lansing's piece, assuming they've read it.)

Because of the bubble that preceded it, the 2001 recession was unique in modern American history, as Lansing outlined.

The drop in GDP from the start of the recession in March 2001 to its trough in December 2001 was "significantly less pronounced" than in the seven prior recessions going back to 1960, the Fed economist reported. He attributed the mildness of the downturn to "the amazing resilience of the U.S. consumer." (Lansing assumed the recession ended in December 2001, although the National Bureau of Economic Research, the official arbiter of economic cycles, has yet to make such a declaration.)

Because consumer spending "did not decline at all" during the 2001 recession -- thanks largely to fiscal and monetary stimulus, extended unemployment benefits and steep incentives from automakers -- "there is less pent-up demand going forward," he continued.

If the 2001 slowdown was unusual, logic suggests the ongoing recovery will not likely follow the path of its predecessors, a notion recent economic data support.

On Tuesday, the Fed reported industrial production rose 0.1% in May, the first increase since February, but capacity utilization remained stuck at a 20-year low of 74.3%. With capacity utilization so low, the basic story being peddled by skeptics remains intact: There's very little need for companies to spend on new plants and equipment. Barring a sharp increase in consumer spending, which seems unlikely given it barely ebbed during the recession, there's little reason to expect a robust recovery in capital spending.

"Expected capacity utilization is still likely to be low, given the sluggishness of demand and the fact that the starting point for capacity utilization is very low," William Dudley, director of economic research at Goldman Sachs, wrote Thursday. "This implies a moderate rather than a vigorous recovery in capital spending."

While Dudley is "getting more optimistic about the economic recovery," he is skeptical that it will be propelled by a rapid rebound in capital spending.

Rather, he believes the economy will do better because households will get tax cuts, and resultant spending will make the economy stronger and produce a "moderate recovery" in capital spending. "We don't buy the 'capital spending shoots up rapidly and generates jobs story,'" he explained during a follow-up call.

As with many equity investors, Dudley seems to believe that a combination of fiscal and monetary stimulus will keep the economy afloat and ultimately spur business spending, even modestly. Essentially, that's the bet the Fed is making as it contemplates whether to ease by 25 or 50 basis points next week. (Expectations for a 50-basis-point ease ratcheted higher Thursday after influential Fed-watcher John Berry of The Washington Post predicted the Fed will go for 50.)

"On the downside, continued weakness in the labor market and the eventual slowing of the mortgage-refinancing boom poses the risk that consumers will rein in their spending," Lansing countered. "So, to the extent that business capital expenditures are 'demand-determined,' the projected acceleration in business investment may prove to be less vigorous than the consensus forecast expects." (Weekly jobless claims fell Thursday, but the four-week moving average remained above 400,000 for the 18th-straight week.)

Fed Chairman Alan Greenspan has talked repeatedly about business capital expenditures being crucial to the economy recovery. If Lansing is right and business spending remains moribund, the post-October rally in equities could be in for a rude awakening, most especially if the consumer retrenches.

Thursday, the Dow Jones Industrial Average was down 01.2% to 9179.53 although it did bounce off its intraday lows hit shortly after 12:00 p.m. EDT. The S&P 500 was off 1.5% to 994.69 and the Nasdaq Composite was lower by 1.7% to 1648.59.

One contributor to the market's slide Thursday was a weaker-than-expected report from the Philadelphia Fed's regional manufacturing survey. At 4.0, the survey was a marked improvement from April's negative 4.8, but far below "whisper" numbers of above 10.

Expectations for a "blowout" Philly Fed number had been sparked by Monday's much stronger-than-expected Empire State Manufacturing Index.

In hindsight, excitement about the New York index was wildly overdone, especially considering it is a voluntary survey of a handful of manufacturing executives, and one that has been quite volatile during its short history. By comparison, scant attention was paid to Tuesday's capacity utilization figure, which the Fed has been providing for several decades.

Hindsight being 20-20, Wall Street was focused on the wrong number. Certainly, investors need to pay closer attention to more weighty economic numbers, even if they don't fit with the bullish view.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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