NY Times, April 20, 2001 Floyd Norris: Some Patients Are Too Sick to Be Helped by the Fed By FLOYD NORRIS The Federal Reserve is doing all it can. But its rate-cut medicine will take time to work and cannot help some parts of the economy. Lower interest rates have helped the auto and housing markets, and the corporate lending market has opened up to some extent. But borrowing costs for creditworthy companies are not down very much. The Fed's four rate cuts this year have stirred hopes for a quick recovery, thereby putting upward pressure on long-term rates. The benefits are real, but they do not offset the more important fact that many companies simply cannot borrow. "You can offer really great interest rates, but if no one qualifies, it does not make much difference," noted Martin Fridson, Merrill Lynch's junk bond guru. The credit markets, having been burned, now shun many borrowers that need money the most. Young telecommunications companies could easily borrow a year ago, but now the banks and bond buyers are not interested. So the companies do not have money to stay in business. That means the lower rates won't help that part of the economy. Another part that still can borrow money doesn't want to. The boom that has ended produced huge overinvestment in some industries, as companies like Cisco Systems learned too late. No interest rate is low enough to persuade a company to build a plant to produce products it cannot sell. The Fed is being unfairly criticized for having raised rates last year, thus causing the slowdown. The more reasonable criticism is that it should have acted sooner to slow the boom that led to the bubble in so many technology stocks. The economic rebound would come quicker if the excesses had been less. As the bubble progressed, companies with no real hope were sustained by suppliers that provided financing to keep peddling products and convince investors they were doing well. Now those vendors are haunted by those decisions, as credit losses pile up. In December, Winstar Communications, a wireless phone company, was able to borrow $200 million from Siemens. That cleared the way for Winstar to borrow $500 million more from Lucent Technologies. But that money wasn't enough. This week Winstar filed for bankruptcy. Shares that traded for $23 in January sold for 14 cents before trading was suspended. Its bonds have fallen from 83 percent of par value to under 2 percent. Another company whose financial reports show it to have little additional credit available is Microstrategy. Michael J. Saylor, the chief executive, sent a letter to shareholders yesterday explaining why the stock had fallen. He did not dwell on the company's losses and layoffs. Nor did he point to his own sales of 15,000 shares a day. Instead, he blamed short-sellers and urged holders to make it impossible for the shorts to borrow shares. Microstrategy stock, which peaked at $333 last spring, rose $2.27, to $5.24. Winstar won't be helped by the Fed's actions. As for Microstrategy, Mr. Saylor must know that the shorts are not the real problem. "It is more difficult to raise capital," he told analysts a couple of weeks ago, without discussing interest rates. His "new business view," he said, is that positive cash flow is essential. If Microstrategy can accomplish that, the stock price will take care of itself. It is unclear whether a recession will be avoided. But a big slowdown is already here. For many companies, life will never be anything like what it was, and there is nothing that the Fed, or anyone else, can do about that. Louis Proyect Marxism mailing list: http://www.marxmail.org
