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April 9, 1999
Mortgage and bond yields fell yesterday -- not far, but decisively below the tight trading range which had prevailed since February 5. The late winter range was 7.00-7.25% for low-fee mortgages, and this morning we've reached 6.875%. This "range" business is important: when a well-defined market shifts to another level, it tends to stay there, and often signals a bigger move to come.
In the financial markets, an observer can claim to identify cause and event because the electrons tell him so. Yesterday, when news that the European Central Bank (ECB) had suddenly reduced its overnight rate by .50% to 2.50%, American bonds and mortgages immediately fell in yield, anticipating a wider, deeper global slowdown. There had been speculation about an ECB rate cut, but nothing imminent, and nobody expected a half percent.
The European slowdown has been unmistakable, but worse, even at the old, 2+% growth rate, rigid labor markets in Germany and France prevented any reduction in 11-12% unemployment. In the perverse politics of central banking, an easing move had been delayed by the German Finance Minister, Oskar Lafontaine, who had demanded (daily) an ECB rate cut as the solution to Europe's unemployment and slow growth. Under that pressure, the wild-haired, six-and-a-half-foot tall ECB chairman, Wim Duisberg, a Dane as plain-spoken as any drill sergeant, refused to reduce interest rates. Lafontaine resigned in defeat last month; and, pressure removed, Duisberg could ease -- but accompanied by the following painful remarks. "Inflation is not a danger", which has "... enabled us to pay more attention to the second objective of the ECB, which is to support the economy." The first objective, unchanged: to maintain a stable currency. Then: "Monetary policy is not the cause of structural unemployment, nor is it the solution." Europe is frightened of labor competition, and all the American-style disorder it would bring; but Europe's economy cannot make healthy progress without union- and welfare state-busting. As a political-economic problem, it's a close cousin to Japan's unwillingness to fold up losing businesses at the cost of jobs, turmoil, and face. However, until they are folded up, other businesses can't make money. Japan and Europe constitute nearly half of the world economy. If they slide into deeper stagnation, it will
help American rates to fall, but it will also expose us to unstable markets, 1998-style; and renew fears of a domestic slowdown, predicted for two straight years. I'd just as soon rates stayed up, if that's the price of lower.
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