Quitting and Cutting

RAY SUAREZ:

The resignation came last night, as embattled Securities and Exchange Commission Chairman Harvey Pitt stepped down after a series of controversial actions. The half-point interest rate cut came this afternoon, as the Federal Reserve decided the nation's economy needs a jump-start.

Joining us now is Georgetown Law Professor Donald Langevoort, a former special counsel at the SEC, and Lakshman Achuthan, managing director of the Economic Cycle Research Institute, a private research organization.

Lakshman Achuthan, the last time the Federal Open Market Committee met to consider interest rates they stood pat. They made no changes; that was back in September. Now it's November. What's changed?

LAKSHMAN ACHUTHAN:

Well, the pace of recovery has become much more precarious. And I think that they had to recognize that this time around. At the last meeting, that you mentioned, they had, they stood pat and did not change interest rates but they did recognize that the risks were weighed toward weakness in the economy going forward.

This time around, while they did act somewhat dramatically, they shifted their view on the risks going forward to being balanced, and in other words they were trying to send a signal that they've done what it should take to right the economy.

RAY SUAREZ:

Let's look at what they said. The Fed said today in a statement that: "incoming economic data have tended to confirm that greater uncertainty in part attributable to heightened geo political risks is currently inhibiting spending, production, and employment." And the Fed added that the rate cut "should prove helpful as the economy works its way through this current soft spot."

Now that half a point rate cut was more than a lot of people had expected, Lakshman. Does this mean that the Fed is pessimistic about the near-term future of the economy?

LAKSHMAN ACHUTHAN:

It means that they recognize that the recovery is stumbling here. We had a sub-par recovery to begin with. It was nowhere near as strong as the typical postwar recovery. And now it has become sub sub-par if that is at all possible and I think they were recognizing that.

What they are trying to do with this dramatic move is to jump-start confidence, particularly business confidence. They want to make sure that there is no increase in the pace of job loss going forward.

RAY SUAREZ:

Is it really a different set of signals to business from the one that it sends to consumers, for instance?

LAKSHMAN ACHUTHAN:

Well, yeah, I think businesses are very much the key here because if businesses just hold where they are and don't increase the pace of firing, then consumer confidence can, even though it's under pressure, not collapse. And that is kind of has been the story of the recession and even recovery where while businesses have been pulling back the whole time, the consumers have really been saving the day by buying lots of houses and lots of autos and other consumer items.

RAY SUAREZ:

What do lower interest rates allow businesses to do that they might have been waiting to see beforehand?

LAKSHMAN ACHUTHAN:

Well, that is the question. I mean, it really doesn't… the rate of interest being charged now is not so much lower than it's going to force someone to go out and purchase when they wouldn't have purchased just yesterday.

But what it does do in the tone of the Fed's statement is speak to the confidence that the Fed has, that they've done enough. And if confidence holds, if we just believe that the consumers will continue to purchase here, then businesses don't fire and then consumer confidence is not undermined going forward. That sequence of businesses firing, consumer confidence being undermined and businesses firing is the vicious cycle that takes you into a recessionary pattern, and that is what they are trying to avoid.

RAY SUAREZ:

Well, with the overnight bank lending rate approaching 1 percent and the prime the lowest that it has been since the Eisenhower administration, are they running out of room for using interest rates as a tool? I mean, how much lower than 1.25 percent can you really go?

LAKSHMAN ACHUTHAN:

In theory, you can go 125 basis points lower, all the way to zero. I'm not sure they are going to do that. In fact, I'm pretty sure they won't do that. You need to keep your powder dry in case there is some unforeseen emergency; that is why the words used today in the statement where they balanced the risks and their view which is a is shift from the last statement are so important.

What we need to see is if business and investors believe in those words and we will not know that for the next few weeks or even months. But it is critical that in that short of a time frame, that confidence is shored up because if it isn't, as you point out, there isn't a lot of extra wiggle room.

RAY SUAREZ:

Lakshman Achuthan, thanks a lot.

LAKSHMAN ACHUTHAN:

Thank you.

RAY SUAREZ:

Donald Langevoort. Until recent days, members of the administration and the Republican caucus on the Hill were speaking of their support for Mr. Pitt, what happened?

DONALD LANGEVOORT:

Pitt made one mistake too much. It was a bad one. Not sharing information about Judge Webster, the nominee to be chair of the accounting board with other Commissioners; that was too big a mistake to allow him to survive. He was out on a political tight rope. He wasn't agile enough, and he fell.

RAY SUAREZ:

This board was being put together as part of a reform of securities oversight. What was the problem that was revealed about Judge Webster?

DONALD LANGEVOORT:

The problem that was revealed is he was chairman of an audit committee of a small technology company that happened to be under investigation by the SEC, with serious questions about how well the board, the company and the insiders were handling their corporate governance responsibilities. That goes to the question of should one be heading up this board.

RAY SUAREZ:

Judge Webster was… told Harvey Pitt about this?

DONALD LANGEVOORT:

He did. There is no reason to doubt his integrity. I think that was a bad judgment, a bad handling of that process, but it was serious enough to be the straw that broke the camel's back.

RAY SUAREZ:

So you think, absent this development of the past week, that Chairman Pitt may have been able to ride this out?

DONALD LANGEVOORT:

I think especially with the election returns from last night the environment may have changed to where he could have ridden it out. But he lost the confidence of the White House and that, obviously, was essential for him.

RAY SUAREZ:

For reasons I guess people would agree or not necessarily of his doing. This has been a rough year and a half.

DONALD LANGEVOORT:

It has been rough. It has been rough and no Chairman of the SEC could have done well during this time period. When you are asked to be both the investors champion and at the same time, part of the Republican team in Washington, in light of Enron scandals and WorldCom and all the others, it's difficult to see how anybody could perform that with grace.

RAY SUAREZ:

Where does this leave the oversight board? Do you think that Judge Webster might have to go as well?

DONALD LANGEVOORT:

Judge Webster ought to step back and say, "the process needs to be clean. We need to have disclosure, I need a vote of confidence because this board is going to have to inspire investors that it's ready to clean things up." If there is a cloud, this board is not going to work and I think Judge Webster is smart enough to know that.

RAY SUAREZ:

With all the attention on the Securities and Exchange Commission, since the decline in the stock market and the highly publicized big corporate collapses, what is the new atmosphere going to be after this new Congress comes in about oversight and about the head of the SEC?

DONALD LANGEVOORT:

Well, we're going to have to see who the head of the SEC is. I suspect there are lots of conflicted feeling feelings in Washington right now. To some extent, I'm sure some people would like to pull back on some of the reforms, the question is: are investors watching, are they paying attention because investors have a right to demand somebody with a strong voice as chair of the SEC.

RAY SUAREZ:

Professor Langevoort, thanks for being with us.

DONALD LANGEVOORT:

You're welcome.