Not a knight to remember

CONFERRING the rank of Knight Companion of the Order of the British Empire on Federal Reserve chairman Dr Alan Greenspan may seem ironic.

It comes just as the supposedly best central banker of all time is in danger of being seen as the man who got it wrong.

On the other hand, it may strike some as appropriate that he is being made a knight of a non-existent empire at a time when the recovery he is supposed to have fostered also looks non-existent.

He has taken a chainsaw to interest rates. Yet it is a remarkable fact that corporate America is now paying out more in net interest charges than in March 2000, when the bear market began.

General alarm has meant the downgrading of a vast array of corporate bonds, making borrowing more expensive. Added to which, despite the cuts in Fed rates, the market is now demanding a higher interest rate on so-called junk bonds - those not carrying 'investment' status - than when the bear market began.

The Fed reports too that though banks can borrow more cheaply from it, more of them are tightening rather than easing loans than was the case in early 2000. So the absence of the sort of recovery the Fed was cheerfully discussing a few months ago is not really so surprising.

Tough nut
ONE cloud on the economic horizon, Brazil, seemed to lift when the International Monetary Fund announced its big bail-out, despite having been so unsympathetic to Argentina.

You didn't think, did you, that this had anything to do with big American banks being heavily exposed in Brazil, but not in Argentina?

What an unworthy thought. As every right-thinking person knows, the IMF acts with total impartiality in these matters. But not with outright success in Brazil's case. The package has not restored confidence.

The fear is that if the IMF signals that Brazil is too important to be allowed to fail, then the country can happily elect a Left-winger in the presidential elections in October.

The hope is that forthcoming consultations between the current president and the candidates will produce an acceptance of the IMF terms, to include budgetary restraint. If that is not forthcoming or qualified it could spark off new troubles.

Public interest
LORD Keynes became a revered figure for the Labour Party because of his 1930s doctrine which argued that recession should be dealt with by more government spending - very acceptable to the Left.

Keynesianism could become fashionable again in Britain if we face an economic downturn. But the evidence that this policy regularly works is decidedly mixed, depending on a country's economic condition.

Keynes proposed official spending because lower interest rates had apparently failed. That was like 'pushing on a string' when prices were falling (certainly not Brazil's problem). But in Britain today, lower interest rates work - look at the housing market.

And more public spending must mean that instead of money being spent by people on what they want, which is inherently efficient, it is spent instead on what politicians want, which is inherently inefficient. The spending urges of governments represent in theory what the public also wants. But, despite democracy, the link is tenuous at best.

In any case, it takes time for programmes of public works to be established. By the time they are in operation, the cycle may well have turned and the extra government spending may then be a cause of interest rates having to rise again.