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3 Vox populi: Why the
Fed did a U-turn By
Julian Delasantellis
It is a common
perception that the Latin phrase "vox populi,
vox dei" must have derived from out of the
mouths of one the great oratorical giants of the
ancient Roman republic such as Cato or Cicero; its
translation, "the voice of the people is the voice
of God," sounds all too much like the type of
focus group fluff that contemporaneous political
speechwriters and spinmeisters provide for their
bosses to read in between bites of homemade
sausage at the county fair.
What purpose could "vox populi, vox
dei" serve other than to proclaim the innate
moral superiority of democratic societies?
The truth provides an illustration of the
importance of always examining quotes, or just
about any other information for that matter, in
their original context.
Current thinking
posits the actual authorship of the phrase to
Flaccus Albinus Alcuinus, a court scholar to
Charlemagne in the late 8th century AD.
The Carolingian rulers of Western Europe
were not at all renowned for their overwhelming
devotion to the democratic ideal, so that makes
the association of the phrase with this era and
regime somewhat surprising - until you get to the
actual quote in which "vox populi, vox dei"
was contained.
"And those people should
not be listened to who keep saying the voice of
the people is the voice of God, since the
riotousness of the crowd is always very close to
madness."
Besides "the riotousness of the
crowd is always very close to madness" being just
about the best way to describe what happened in US
real estate over the past few years, the
misinterpretation of "vox populi" is
evocative of those movie studios which, when
promoting a new film that has garnered horrific
reviews, turn a reviewer’s prose such as "Watching
this movie was an amazing waste of time" into
"Watching this movie was an amazing time."
There can be little doubt which
interpretation of "vox populi" - the modern
populist one or the actual elitist one - American
economic officials, especially Ben Bernanke and
the other governors of the Federal Reserve system,
ascribe to. Actually, recent news reports would
probably most accurately describe their view of
the matter as "vox denique res, vox dei" -
roughly translatable to "The voice of the
financial services industry is the voice of God."
Over the course of the 42 days between
last August 7 and September 18, the US Federal
Reserve initiated a reversal in policy direction
and emphasis so momentous and comprehensive that
the last time anything comparable to it was seen
in Washington DC was when Ann Coulter made her
last visit to her haberdasher with entirely new
policy guidance as to how she wanted her trousers
tailored.
After topping out over 14,000
for the first time on July 19, credit fears
deriving from renewed concern over the spreading
effects of the subprime mortgage crisis caused the
US Dow Jones Industrial Average to lose over 1,000
points in the next 9 trading sessions. It was in
this atmosphere of extreme market nervousness that
the Federal Reserve Board initiated its 2-day
midsummer meeting, on August 6.
After
raising short-term interest rates 17 times between
June 2004 and June 2006, the former Alan Greenspan
Fed and by then the Ben Bernanke Fed had been
holding interest rate policy steady for over a
year as the August meeting commenced. A few
observers suggested that, with crude oil prices
still rising towards records, generating concerns
of a late 1970s-type inflationary spiral, the
August meeting might actually result in a
resumption of the interest rate hikes in order to
tamp down on economic growth and its attendant
inflationary risks.
This was a minority
view. A greater portion of the worldwide Federal
Reserve peanut gallery looked out over the ever
darkening economic landscape, noted the trouble
that the subprime mortgage borrowers were in as
their low, introductory rate mortgages were
resetting to much higher rates. This was
generating fears that the subprime situation, and
the attendant problems it was causing in the
world’s equity market and banking sectors, would
seriously threaten future economic growth; these
observers predicted that the Federal Reserve would
begin to cut rates.
In the end, both sides
were wrong, as the Fed held rates steady on August
7, but in their post-meeting statements and
released minutes, the Fed gave every indication
that it was still far more concerned with the
possibility of resurgent inflation than it was
with the travails of the poor subprime borrowers.
From the statement released by the Fed
after the August 7 meeting: "A sustained
moderation in inflation pressures has yet to be
convincingly demonstrated. Moreover, the high
level of resource utilization has the potential to
sustain those pressures. Although the downside
risks to growth have increased somewhat, the
committee's predominant policy concern remains the
risk that inflation will fail to moderate as
expected."
Three weeks later, the minutes
from the August 7 meeting were released, once
again demonstrating that on that day inflation was
still very much the dominant concern for the Fed.
"Participants remained concerned about
factors that could augment inflation pressures,
including the continuing high level of resource
utilization and slower trend growth in
productivity. Some also pointed to the strength of
aggregate demand worldwide and the depreciation of
the dollar, and their potential effects on the
prices of imports and globally traded commodities,
as contributing to upside risks to US inflation."
As for the economy, the Fed saw every
reason to see more sunny skies ahead: "The
expansion would be supported by solid job gains
and rising real incomes that would bolster
consumption, and by increasing foreign demand for
goods and services produced in the United States …
the economy seemed likely to continue to expand
moderately in coming quarters, supported by
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