Bazooka Alan
Alan Greenspan spent his entire career creating and popping bubbles. He appeared on the cover of Fortune in October of 1987 saying inside that the dollar was overvalued. He should have been soaking up excess dollars and money supply via higher interest rates. Treasury Secretary James Baker appeared on Meet the Press that Sunday saying he wouldn't support the dollar. The next day the stock market crashed.
So what did the future maestro do? He flooded the market with dollars and liquidity to keep the market from falling further and taking Wall Street with it. That was the right move, which the Fed didn't do in 1929, but it was in response to his own mistake. And of course, you eventually have to clean up all those dollars you added to the system, and when he did, we had three years of crappy growth and a recession in the early 1990s.
Shall I go on?
Alan tried to prick what he thought was a bubble with his Irrational Exuberance comment in December 1996. Was there a bubble then? Hardly. The stock market was paying up for the next several years of growth and technological innovation. Why prick that? His jawboning didn't work, did it?
Actions are louder than words. In November of 1999, our boy Alan raised rates another quarter point, the third of the year. Inflation raging? Hardly. He was wrongly expanding money supply again, and rather than the Fed mop it up, it ended up in the stock market. So here he was pricking his own bubble again.
And then came the height of stupidity. Fearing crashing planes and stuck elevators would lead to a global economic meltdown because of Y2K, he preemptively flooded the market with liquidity in December of 1999. Y2K never happened, did it? But those dollars flooded into the stock market, and how. Even mopping up those dollars in 2000 didn't change the psychology of investors, many just finally becoming true believers in early 2000. Ouch. Dotcoms crashed in March-April 2000, and the rest of the market by the fall.
9/11 saw more liquidity and more mopping up, this time the economy and the market caved until mid 2003, and Alan once again overreacted by taking rates down to 1%, creating cheap financing to build and buy those third homes in Palm Beach. A zillion rate hikes to reverse that mistake, and here we are today. Bill Gross can have him.
Do we need a Federal Reserve? Yeah, probably. In emergency times. But why have these guys trying to second guess where the market and inflation are going when the bond market already figures it out for them with every tick of the tape. Remember what I said. You can find the root of all bubbles in some piece of legislation or in this case, non-elected government official.
Comments (7)
I agree.
Greenspan did a poor job.
What can one expect from a Randian acolyte?
May 18, 2007 8:26 AM | Reply | Permalink
Maybe there is simpler answer, perhaps it's that the Fed makes a lot of money expanding and/or contracting the currency. Non-elected government officials is a stretch when talking about the FED, the Chairman is appointed for a term two and half times that of a president and pretty much independent after that; plus all the board members the chairman leads/heads are from the private sector.
The Federal Reserve is neither federal nor a reserve; it is not what the founders intended and incorporated into the Constitution for the control of the nations monetary system nor should it exist as a private baking empire, which is what it is. The FED should be nationalized and there by truly federalized if any one should profit from the creation of money through fractionalized banking and fiat money it should be the government not private banking firms and those profits should go to off set income taxes. The FED, as it now exists and the way it expands and contracts the currency, is to my mind little better than legalized stealing from the citizenry. The nations money supply should not be created and controlled by private banking corporations
May 18, 2007 4:31 PM | Reply | Permalink
I find the mythology surrounding the Federal Reserve to be quite interesting. They really make no money on the buying and selling open market operations. It is really just paper transactions as when they buy Treasuries, they merely increase bank reserves via computer transaction. The reverse is also occurs. The interest the Federal Government pays on those Treasury holdings (some $600 billion plus the last time I looked) goes right back to the Federal Government.
In my view, the Fed is a needed institution and while not perfect, they have done a fairly good job regulating the money supply over the last 25 years. Inflation is moderate and there have been few recessions. What recessions there have been have been shallow and short-lived.
100 years ago, bank failures were common, recessions frequent, and periodic, chronic high rates of inflation. Those monetary risk phenomena are largely gone, due in part to the Federal Reserve's supervising the banks and regulating the money supply.
Like I said, the Fed is not perfect, but it performs a valuable function. That is my opinion on the subject.
Best Regards,
Jim Ashmore
May 19, 2007 5:47 AM | Reply | Permalink
Greenspan was an old Nixonian (Chairman of the Council of Economic advisors and I believe other positions under Nixon) who created the slowdown and crash of the tech bubble in attempting to bring the economy to a crashing halt before the 2000 elections. (Remember the recession that Bush and nobody else saw on the near horizon?) He then created the real estate bubble in response. Greenspan's term as head of the Fed was marked by overreactions to inflation followed by overreactions to slowdowns. The timing of his loosening and tightening however, always seemed to coincide with elections and whichever would help Republicans. Between times, he seemed to live in terror that somebody would get a job. Whenever unemployment fell - time to tighten!
May 19, 2007 8:05 AM | Reply | Permalink
Re: The timing of his loosening and tightening however, always seemed to coincide with elections and whichever would help Republicans.
This did not quite play out in 2000 (to the GOP's benefit, that is). Indeed, as the author noted Greespan lowered interest rates at the end of 1999, about the last point in time when any such change would have time to affect the economy and then the voters' perceptions of it before the election. So if anything, he was seeking to influence the election in Gore's favor, not Bush's-- hardly surprising when you consider he heartily approved of Clinton's economic policies and was initially quite cool to Bush's.
Note also that the economy really didn't start to head south (in a perceptible manner affecting the average voter) until rather late in 2000; employment, for example, did not fall off a cliff until the following year.
Also, a question: is Greenspan on public record as fretting about the Y2K bug in late 1999? By then only a few die-hard paranoids were still predicting doom since software of all kinds was already dealing with dates past Jan 1 2000 with few glitches.
May 19, 2007 11:41 AM | Reply | Permalink
The only myth I'm aware of associated with the Federal Reserve is the one that the FED is a government organization and that it is a benevolent not for profit organization that makes no money from its control of the nations money supply. If that were true I'm sure it would be willing to put down it's heavy burden and let a wholly government controlled organization assume the task the control of money expansion and contraction as when, for a single example, JFK ordered the Treasury to print an issue of United States Notes rather than Federal Reserve Notes. (those bills had a red seal affixed…I own several of those United States Notes notes) Those notes disappeared (recalled and destroyed) from circulation and were never printed again after that single mad assassin Lee Harvey Oswald blew John Fitzgerald Kennedy's brains all over Dealey Plaza (talk about your popular myths)
Just my opinion,
Cheers
May 20, 2007 1:20 AM | Reply | Permalink
He did however, spend all of 2000 franticly raising. It's true that he flooded the markets with liquidity prior to the y2k nonevent, taking numerous measures to prevent the meltdown-that-never-was, but he did his best to make up for that in 2000 - not his fault that it took too long for the raises to bite.
In answer to your question, I don't think so (more accurately, don't remember. Seems to me he made soothing noises though.) What he did however was to take a number of extraordinary measures including preparations to rush large amounts of cash to adversly affected banks.
May 20, 2007 1:35 AM | Reply | Permalink