- The Washington Times - Monday, August 29, 2005

Permit me to take a contrarian’s view on the economic outlook. It’s not the impact of high energy prices or the housing boom that worries me. Rising gas prices and home values represent the forces of good, not evil. My biggest worry is an ever-tightening monetary policy from the Federal Reserve.

On the oil-price shock, I say at least two cheers for higher prices. Why? Because I believe in markets. When the energy price rises, demand falls off and supply increases. This is the case today and it represents less than a tectonic shift.

As Dan Yergin, president of Cambridge Energy Research Associates, recently wrote in The Washington Post, rising energy prices today will cause energy supplies to explode tomorrow. With gas prices moving toward $3 a gallon, the public is now even favoring nuclear power — by 2-1, according to pollster Scott Rasmussen. Nuclear energy is the ultimate solution for clean power and reduced foreign dependence. And with the Federal Energy Regulatory Commission authorized to override localities that oppose nuclear power, liquefied natural gas or other energy forms, the likelihood of a future energy explosion is even greater. Markets work if you let them.

The spread of global capitalism to places like China, India and Eastern Europe is the main cause of the energy price spike. It’s a market signal the new and prospering world economy needs more power. So, this is not a recessionary supply crunch like we had in the 1970s. It’s a growth-oriented demand increase.

This is why the impact of high oil prices has been negligible, at least so far. Since the end of 2003, energy prices have more than doubled. But in annual terms, the economy is growing nearly 4 percent. Jobs are up, unemployment is down. Using the most accurate inflation gauges, the overall price level has increased only 21/2 percent yearly; less than 2 percent when energy is excluded. Bond rates remain very low, and stock indexes continue appreciating.



Lumber prices, meanwhile, plummet, suggesting a cooling of housing construction and home prices. Wall Street economist John Silvia believes condo markets are at the front edge of this cooling, with condo inventories rising, sale times lengthening and prices softening. Private markets, city-by-city, are making their own adjustments based on affordability and the cost of credit. There won’t be a crash, but a well-earned slowdown.

That’s not to say the housing boom hasn’t been a good thing. Like the oil spike, it’s a big positive. The wealth-creating economic benefits of increased home ownership and the real-estate rebuilding of inner cities have been huge.

That leaves us with the age-old question of whether the central bank will overtighten us into a recession. Fed policies have prevented oil inflation from spreading throughout the economy, but they should quit raising rates while they’re ahead.

Fed bankers and their fellow travelers have just gathered for an annual confab in Jackson Hole, Wyo. It’s a scary thought. Like a tennis player grooving a bad backhand, mistaken monetary ideas often reappear in the foothills of the beautiful Grand Teton. Alan Greenspan’s keynote speech referred again and again to the importance of expectations about growth and recession, inflation and deflation. But instead of deferring to the wisdom of key market-price indicators — like gold, broad commodity indexes and bond rates — he spoke about complicated models of something called “risk management.”

Right now, stable commodities (excluding energy), low bond rates and a steady dollar signal low inflation and moderate economic growth. But Mr. Greenspan’s neglect of the commodity-price-rule approach on policy raises the question if he is turning a blind eye to the markets’ message.

After all we learned of central planning’s failure in the last century, are intelligent people today willing to accept the idea government banks are smarter than markets? Or must the prudent investor worry that the Fed will overreact to home prices and energy costs by again draining too much money from the economy and smothering growth spurred by tax cuts?

Are any of the Fed bigwigs in Jackson Hole watching the market price-rule indicators? Do they understand the teachings of Milton Friedman and Friederich Hayek — that markets, which contain more information than economic models, are the best judges of economic “risk management”?

Respondents to a recent CNBC poll sizing up the leading candidates to succeed Mr. Greenspan next year chose “other” by a wide margin. This particular segment of the investor class is trying to signal the White House a truly market-driven monetary policy is the surest way to preserve low-inflationary prosperity. Is the White House listening?

Lawrence Kudlow is host of CNBC’s “Kudlow & Company” and is a nationally syndicated columnist.

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