Thursday, June 09, 2005
Journal--Greenspan's Medicine Creates More Problems--Amen!
In today’s (June 9, 2005) Wall Street Journal‘In Treating US After Bubble Fed Helped Create New threats’ Greg Ip notes how Greenspan’s prescription to fix the burst tech stock market bubble of 2000 may have compounded the problem:
"By many yardsticks, the Federal Reserve's response to the bursting of the stock and tech-spending bubbles in 2000 has been a remarkable success. The 2001 recession was mild and economic growth since has been brisk. Employment is up and inflation remains within the Fed's hallowed zone of price stability."
"But five years after the stock market's peak, the economy faces other threatening imbalances: a potential housing bubble, rock-bottom personal saving rates and a gargantuan trade deficit. And the Fed's post-bubble prescription bears some responsibility for all three. Fed officials acknowledge as much but say the alternatives were worse."
AMEN!
Ip then goes on to write how by pushing and keeping interest rates at 45 year lows the Fed encouraged individuals to spend, borrow more and not save. This spurred a housing bubble and created "mountains of debt’ for consumers and created a big IOU for the USA with foreigners.
The Journal then asks:
"After treating a bubble, how does the Fed manage the side effects of its medicine?"
Not to worry the article notes that "the Fed feels confident" it can resolve the imbalances it has created with minimal pain. This is frightening because those words have an eerie ring to the same confidence that the Bank of Japan had in late 1989 when it felt it could deflate the Japanese stock market bubble with minimal pain as well.
Mr. Ip then goes on to say that Chairman Greenspan believes, better yet, has faith, that the "invisible hand" will save us:
"Capitalist economies, Mr. Greenspan believes, always have imbalances but are also continuously reallocating resources and capital to correct them. Thus, imbalances seldom become crises. "The number of forecasts of crises...is far in excess of the number of crises that actually occur," Mr. Greenspan told a recent audience in Chicago. "There is something equivalent to an invisible hand which continuously is readdressing market imbalances to reach equilibrium.""
Now that is wishing, hoping and praying.
No one should be surprised that the Greenspan’s policy prescription to resuscitate the USA economy after the stock market crash has created even more trouble. We need only look to Fed Head’s tenure at the Fed to understand how we got here.
As we have consistently noted since the late nineties (http://www.jubileeinitiative.org/Japan.htm , http://www.jubileeinitiative.org/RiggedbytheFed.htm ) Greenspan has been the "invisible hand" himself bailing out all that faced financial calamity beginning with the 1987 stock market crash and continuing with the burst stock market bubble of 2000. Greenspan’s prescriptions have done more than create imbalances..They created a moral hazard, a reckless cavalier attitude among CEO"S as noted by Warren Buffet and others,.....etc..
The Journal is correct that the medicine might be worse than the disease. It is. The problem is that we have had a lot of doses that go well beyond the 2000 stock market bubble bursting.
Of course Greenspan may be able to pull off another one before he leaves. But then again as a CPA I learned that ponzi schemes whether they be the case of Equitable Funding or Greenspan’s prescriptions they eventually get too big and the piper is eventually paid.
"By many yardsticks, the Federal Reserve's response to the bursting of the stock and tech-spending bubbles in 2000 has been a remarkable success. The 2001 recession was mild and economic growth since has been brisk. Employment is up and inflation remains within the Fed's hallowed zone of price stability."
"But five years after the stock market's peak, the economy faces other threatening imbalances: a potential housing bubble, rock-bottom personal saving rates and a gargantuan trade deficit. And the Fed's post-bubble prescription bears some responsibility for all three. Fed officials acknowledge as much but say the alternatives were worse."
AMEN!
Ip then goes on to write how by pushing and keeping interest rates at 45 year lows the Fed encouraged individuals to spend, borrow more and not save. This spurred a housing bubble and created "mountains of debt’ for consumers and created a big IOU for the USA with foreigners.
The Journal then asks:
"After treating a bubble, how does the Fed manage the side effects of its medicine?"
Not to worry the article notes that "the Fed feels confident" it can resolve the imbalances it has created with minimal pain. This is frightening because those words have an eerie ring to the same confidence that the Bank of Japan had in late 1989 when it felt it could deflate the Japanese stock market bubble with minimal pain as well.
Mr. Ip then goes on to say that Chairman Greenspan believes, better yet, has faith, that the "invisible hand" will save us:
"Capitalist economies, Mr. Greenspan believes, always have imbalances but are also continuously reallocating resources and capital to correct them. Thus, imbalances seldom become crises. "The number of forecasts of crises...is far in excess of the number of crises that actually occur," Mr. Greenspan told a recent audience in Chicago. "There is something equivalent to an invisible hand which continuously is readdressing market imbalances to reach equilibrium.""
Now that is wishing, hoping and praying.
No one should be surprised that the Greenspan’s policy prescription to resuscitate the USA economy after the stock market crash has created even more trouble. We need only look to Fed Head’s tenure at the Fed to understand how we got here.
As we have consistently noted since the late nineties (http://www.jubileeinitiative.org/Japan.htm , http://www.jubileeinitiative.org/RiggedbytheFed.htm ) Greenspan has been the "invisible hand" himself bailing out all that faced financial calamity beginning with the 1987 stock market crash and continuing with the burst stock market bubble of 2000. Greenspan’s prescriptions have done more than create imbalances..They created a moral hazard, a reckless cavalier attitude among CEO"S as noted by Warren Buffet and others,.....etc..
The Journal is correct that the medicine might be worse than the disease. It is. The problem is that we have had a lot of doses that go well beyond the 2000 stock market bubble bursting.
Of course Greenspan may be able to pull off another one before he leaves. But then again as a CPA I learned that ponzi schemes whether they be the case of Equitable Funding or Greenspan’s prescriptions they eventually get too big and the piper is eventually paid.
