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 RealMoney.com'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."