America Blessed with Great Fed Chairs

Last night, ABC News failed to report the second day of stock price increases, the biggest two-day gain since Spring 2003. So what’s new? Though he has little good to say about 2007, Newsweek’s Robert Samuelson does use publication of Alan Greenspan’s book to glow over good economic news of the past, even the recent past (Greenspan’s been gone since January 2006). We are talking about good news the media has scrupulously ignored since Bush’s 2000 election.

Samuelson notes that during Greenspan’s two decades, which began in August 1987:

-- The economy (gross domestic product) grew 70 percent from 1987 through 2005.

-- The number of nonfarm jobs increased 31.4 million, or 31 percent, with average unemployment of 5.6 percent.

-- Annual inflation as measured by the Consumer Price Index averaged 3.1 percent.

-- Pretax corporate profits jumped from $369 billion to $1.33 trillion.

-- The stock market quadrupled, with the Standard & Poor's 500 stock index rising from 287 (the 1987 average) to 1,207 (the 2005 average).

Truth is, we’ve had three fine fed chairs helping the U.S. economy grow for nearly three decades. Greenspan followed Paul Volcker [picture]. Through a severe recession, Volker cut inflation from 13.3 percent in 1979 to 4.4 percent by 1987. The Volcker-launched disinflation triggered a virtuous chain reaction of lower interest rates, higher stock prices, greater wealth and strong consumer and business spending. In the 1990s under Greenspan, productivity growth—old-fashioned efficiency—increased, probably reflecting the impact of computers. And then came globalization. From 1989 to 2005, the number of workers worldwide engaged in export-oriented industries rose from 300 million to 800 million -- a reflection of the entry of China and India into the global economy.

Now we have a new Fed Chair—Princeton’s Ben Bernanke [picture]. Bernanke has just surprised economists by cutting the prime interest rate by 0.5%, when the expected cut was the usual 0.25%. He also cut the discount rate by the same amount. His aggressive response to the threat bad sub-prime loans pose for the U.S. economy sent the stock market soaring. It’s too early to say how good Bernanke is, but CNBC’s Larry Kudlow certainly likes what he saw Wednesday. According to Kudlow, “Ben Bernanke‘s shock and awe, frontloading action to slash the fed funds rate [0.5%] . . . is just what the doctor ordered.”