A 'Zombie Economy'

ECONOMIST Robert Brusca accuses Federal Reserve Board Chairman Alan Greenspan of creating a "zombie economy." The Fed's monetary policies, he writes, "have been wimpy, wimpy, wimpy; not beefy, beefy, beefy."

That's colorful language. But there's something to it. Striving to bring down inflation, the Fed's 12 policymakers (Mr. Greenspan is only one of them) have been extremely cautious in easing credit.

This is probably the longest slump since the Great Depression. After a year in which the economy grew at less than 1.5 percent in real terms, an actual recession with declining output started in July 1990. That recession may have ended technically last spring. But the economic recovery (if it is eventually defined as that by the National Bureau of Economic Research) has been extremely slim compared to other recoveries.

Unemployment has again started to rise. Bankruptcies continue apace. The politicians in Washington, facing reelection next fall, are increasingly alarmed at the resulting blue mood in the country.

Yet the nation's money supply (M2) has grown only 2.8 percent in the last 12 months and at a 2.9 percent annual rate in the last three months. In the past, the Fed has typically allowed the money supply to grow 9 to 14 percent a year after recessions.

Money, of course, isn't the only factor affecting the business cycle. Weak consumer confidence, a credit crunch, and high levels of debt could all be slowing the United States economy. Nonetheless, an adequate supply of money is essential for the wheels of commerce to begin turning more rapidly.

The Fed has cut the federal funds rate, the interest rate banks charge each other on overnight loans, 15 times since the start of the recession to 4 percent at present. But that hasn't been enough to get money growing adequately. "Anyway you slice it this Fed is doing the littlest possible and is unrepentantly tight," maintains Mr. Brusca, chief economist for Nikko Securities Co. International in New York.

One reason why money hasn't been growing much may be the large number of bank failures. An economist with the Northern Trust Company, Paul Kasriel, holds that when the government pays to close banks or thrift institutions, it takes money out of the economy. A surge of closings in the second and third quarters of last year produced the slowest growth in broad measures of money (including M2) in at least the past 30 years, he says.

Whether Mr. Kasriel is right or not, the Fed should not be taking such a high risk with the economic recovery, especially since another surge of bank and thrift closings may be on the way.

Action on the tax and spending front by Congress will be too little, and probably too late, to stimulate the economy sufficiently. So the Fed should drop interest rates again, if necessary to zero, to get the money supply growing more rapidly. The nation doesn't need "a triple dip" recession.