Is Greenspan Deliberately Engineering a Recession?

[tsunamisurfer]

Irrational Exuberance.

That’s Greenspan’s well-publicized take on the bull market and white-hot economy over the last several years and he has made no bones about his belief that certain excesses needs to be squeezed out of the economy if sustainable (albeit slower) economic growth is to continue.

Fine. But don’t you get the nagging feeling that the old goat deliberately stalled the economy and, furthermore, is deliberately stalling on dropping interest rates because he believes a major correction is needed? Yes, Greenspan is obsessed with inflation, but the man is too brilliant to have not noticed the economy’s downshifting a good half year ago. Jumpstarting a stalled economy takes time and he knows it. His goal, I surmise, is to engineer a mild recession and correct the excesses.

Your thoughts?

[matt_mcl]

At some point we will have to figure out whether we want growth or low inflation rates.

[Abe]

My thoughts are that Greenspan started seeing himself as a little bit too omniscient and omnipotent. The last couple of interest raises were the biggest mistakes he could have made.

The reason why the economy was doing so well was in part due to the Information Technology sectors. I can’t speak for other sectors, but I feel that Greenspan understands nothing about the dynamics of these IT industries: he made a horrifying error in assessing the situation. Anyone in the IT field could have told you that this kind of exaggerated growth would taper off as the markets adjusted themselves. We already saw the bubble burst and a market adjustment begin to take place, and many economists learned from that lesson. Not Greenspan.

In Hong Kong, which is one of the financial capitals of Asia, we have been expecting the US pseudo-recession for several months. It was obvious to everyone here that the interest rate hikes were going to cause problems. I say that because so many of our markets are dependent on American markets.

The markets of the world are still consolidating themselves. A barrage of interest hikes had the predictable outcome of destroying what little balance was beginning to establish itself. Now a great part of the world faces unwarranted and artificial market problems.

[SpyderA48]

I’m not the brightest bulb in the lamp when it comes to economics, especially on a national scale, but it seems to me that every time people start to get happy, start buying more because they have more cash, construction goes up because interest rates on loans are low and food prices are not too high, the Fed ups the interest rates.

As soon as they do that, everything takes a dramatic drop. I’ve watched it happen many times and it always both confuses and angers me.

I’m already not very happy with banks charging not only enough fees to fill a wheelbarrow to use their services, but charging the maximum allowed interest on their loans. Credit cards screw everyone as it is with interest rates from 19 to 21%, which not all that long ago would have been considered racketeering.

It’s like Greenspan and the Fed want to prevent people from getting too far out of debt.

I don’t understand it all.

[Morpheous]

Mr. Greenspan decided to play tough guy with the equities market by stubbornly raising interest rates and then maintaining them. He saw the inflated equity prices as a major threat to the long-term stability of the markets. Frankly, I think wanted to show the snot-nosed, newly minted millionaire kids of the “New Economy” just who is in charge.

What he didn’t count on was how quickly things unraveled. In the past, his timeline made sense. But now, even he’s shocked at the speed at which his monetary policy slowed GDP growth.

Now he’s in the tough position of trying to boost the markets in order to prevent a recession without creating the expectation that the Fed will always come to the rescue of investors.

Although here’s not Japan, NASDAQ’s performance over the last two years has an eerie resemblance to the Nikkei Index during late 80s; which has played no small part in Japan’s decade long economic quagmire.

Here’s the real kicker: if we’re heading into a recession, then sectors other than technology have yet to price in that fact.

Whether his monetary policies of the last few years were wrong or not does not diminish the fact that he is the most brilliant economist of our time. As a private investor and a business owner, I sleep better at nights knowing he’s guarding the economy.

[system]

(1) Greenspan: Excellent central banker so far. Does his best. Not the most brilliant economist if we’re talking about intellectual firepower as displayed in publications. I dunno where people get that. Must be like the Einstein thing. (Not putting him down, he just does different things. He might have some candlepower stored away, just his job is to be a Central Banker) Perhaps a bit of a nitpick, but this kinda irked me. (I also don’t thnk he cares much for showing anyone who’s in charge, which is why I think he’s a good CB – I think he’s got his eyes on the data, not the squawking on the media that he’s either not understanding X or he’s a god.)

(2) Engeinnering a recession:

This really assumes that G has much more control over where the economy is going than one can possibly achieve. It’s all about information. Let’s just consider one of the Fed’s main roles, knowing and managing the money supply. First, its damned hard to know how much money is out there. What’s most relevant, M1 M2 or another measure/estimate. Technological changes have produced real changes in the velocity of money and liquidity. Formerly illiquid assets have become much more liquid. The Fed policy makers have to make highly educated guesses. It’s not random, its not voodoo, but it may be something like spear-fishing at dusk. Then, the policy tools themselves are not precise --true the Fed can more or less manage interest rates, but it can’t directly effect bank policy (exception of course re reserve requirements, but the Fed doesn’t use that very often.) Especially for “expansionary” policy, if the market pyschology is running negative, it can be like pushing on a wet string. Or in the case of trying to contract a speculative bubble, you think you got a policy that’ll just let out some air and bec. psychology shifts it goes boom.

(3) New Economy

Crap, bullshit, crap. Abe, this new economy talk has always been crap. Good old fashioned measures always have been what really tells us what’s going on. Fundamentals. Price-earnings ratios, all the old tools that really tells us where profitability lies. Gspan has not “misunderstood” the IT sector, the IT sector divorced itself from reality in a typical speculative bubble fashion. None of the talk bandied about was new. None. Go back and review any new phenomena and you find the same “old rules repealed” talk. Sure, some yardsticks were apparently, I do stress apparently, moved by higher productivity, but we’ll have to see if those numbers stick. Otherwise, it’s just another speculative bubble.

Now the real question lies in how to manage a slow down. How much inflation to tolerate --hard line on inflation? What about the value of the dollar and continued for. investment? Important questions giving USA’s anemic savings rate --here’s one huge economic problem no one talks about, fuck Chinese factories, US dissaving is the real challenge.

In re Fed and Expansions:
Spyder the question is inflation. The Fed is not looking at Credit Card companies, whose interest rates it does not have any real control over --they tack on what 11% on the prime, really it doesn’t matter what the prime(*) is, its the 11% or whatever.

The Fed is looking at signs that demand is outstripping supply. Ever since the 70s Central Banks, in the industrialized world, have been paranoid about inflation. Perhaps a bit too paranoid, but we know from experience that if you kick off a round of high inflation, it is generally unhealthy for the economy and the pain of getting out of the cycle is often much worse than the mild recession you may cause preventing it. Something like accepting a cold so as not to get a flu.

One can argue about how much inflation is acceptable versus growth, and its not clear what’s the “best” level since different societies may have different tolerances. It’s not a black and white choice as Matt implied.

(*: Assuming prime and inflation rate are relatively close and related to each other as the Fed tries to manage the latter. Fed raises interest rates to suck money out of the economy to fight inflation, which represents too much money or an excess of demand over supply. Bit of a sloppy definition here)

[Measure_for_Measure]

Greenspan’s statement about irrational exuberance -phrased as a question, by the way- was made in December 1996. The Fed Funds rate was at 5.25. Over the next year, as the stock market continued to advance, the Fed Funds rate was increased by… one quarter of a percentage point.

In 1998, the stock market continued to increase (although there was a Q3 hiccup due to problems in Russia and with Long Term Capital Management). The Fed Funds rate stayed constant at 5.5, until it was… cut to 4.75 by the end of the year.

In late 1999, the latest round of tightening started. During that period, inflation also topped 3% for the first time in a few years. It ended with a half point increase in May 2000. In Jan 2001, the Fed funds rate was cut by a full percentage point.

Inflation has stalled at around 3.5 percent and is expected to decline as growth slows or turns negative.

So I’d be careful not to overemphasize the importance of equity price movements when predicting the Fed’s behavior.

As of May 2000
Unemployment had dropped to the lowest point in 30 years - 3.9% for April.
Foreign economies had started to recover in earnest, so that faster growth in US demand would tend to boost prices. Greater wage growth was foreseen. Furthermore, there was precious little talk of recessions in the funny papers following the Fed’s increase in rates. So if Greenspan was planning a recession, you have to assume that he knew something that the business press didn’t know.

Ref: http://www.dismal.com/thoughts/th_jl_050900.asp

All hail Chairman Greenspan!!

[pantom]

Greenspan’s behavior, that is. It’s as far from trying to engineer a recession as a central banker’s behavior gets. You have to remember that you would only attempt to engineer a recession if you still believed in NAIRU (the Non-Accelerating Inflation Rate of Unemployment, or the minimum level of unemployment you can tolerate before inflation kicks in. BS, IMO, but I’m not an economist.) But Greenspan has been publicly maintaining that productivity increases are keeping inflation at bay. He was slow to raise rates, and he’s been very quick to lower them. It’s rare, after all, for them to lower interest rates as rapidly as they have, and I’m one of those who believe that he saw something awful out there. The question is what.
My pet paranoid fantasy is the ballooning deficit in the U.S.'s balance of payments. In the third quarter of last year this hit 113.8 billion dollars, up from 89.1 billion in the third quarter of '99. That’s around 450 billion annualized, or close enough to half a trillion for government work.
At that level, we need foreigners to be confident in the dollar, so that they will continue to help finance that deficit. This appears to have unravelled in December. The trade-weighted Fed index for the value of the dollar fell from just above 118 in late November to just above 108 by the end of December. For some reason confidence in the dollar appears to have plummeted in the last month of last year (the election situation, maybe?). Combine that with all the reports of an economic slowdown that began pouring in, and you had what looked like a budding crisis, IMO, and for the nonce Greenspan appears to have nipped it in the bud.

[bashere]

FWIW, The Economist magazine has been screaming for YEARS (3 of them, if memory serves) that Greenspan’s monetary policy has been far too loose. The question isn’t if he’s trying to engineer a recession now, but if he made one inevitable by not raising rates earlier.
SpyderA48 You should remember that high inflation has typically hurt the poor as much, and possibly more, than recessions.

[Measure_for_Measure]

FWIW, The Economist magazine has been screaming for YEARS (3 of them, if memory serves) that Greenspan’s monetary policy has been far too loose. The question isn’t if he’s trying to engineer a recession now, but if he made one inevitable by not raising rates earlier.

If memory serves ME correct, they’ve been screaming that for even longer, even in the face of declining inflation and/or inflation below 2.5 percent.

IMHO, the continued prosperity of the US economy (up to, say 9/2000) casts suspicion on their view that central banks should target equity prices. Furthermore, IIRC, the Economist was advocating a tight stance last year; like other commentators (and perhaps even to a greater extent) they seem to have endorsed the Fed’s 5/2000 rate increase, which, with 20-20 hindsight, may have been overdone.

[tracer]

I thought each of the Federal Reserve Banks had its own Board of Directors – some of whom are elected by the member banks, and others of whom are appointed by the Federal government – and that each of these boards of directors had control over their respective Federal Reserve Bank’s interest rate. How come this Greenspan fellow gets to decide, all by himself, how all 12 banks in the Federal Reserve System are going to set their interest rates?

[system]

Answer, he doesn’t, he’s simply the spokesman as well as of course chef. He achieves consensus.

However, no the regional Feds do not have individual interest rates, that would be chaos. There are, as I recall quarterly meetings which interest rate targets are decided on --I believe one can even access some of the information on this publicly. Most actual market operations are done through NY.

*Originally posted by tracer *
**I thought each of the Federal Reserve Banks had its own Board of Directors – some of whom are elected by the member banks, and others of whom are appointed by the Federal government – and that each of these boards of directors had control over their respective Federal Reserve Bank’s interest rate. How come this Greenspan fellow gets to decide, all by himself, how all 12 banks in the Federal Reserve System are going to set their interest rates? **

[Measure_for_Measure]

The Federal Open Market Committee (FOMC) sets the Fed funds rate, an overnight interest rate which affects other interest rates in the economy.

From the Fed’s website:
"The Federal Open Market Committee consists of twelve members: the seven members of the Board of Governors of the Federal Reserve System [of which one is Greenspan -ed]; the president of the Federal Reserve Bank of New York; and, for the remaining four memberships, which carry a one-year term, a rotating selection of the presidents of the eleven other Reserve Banks. The FOMC holds eight regularly scheduled meetings per year to direct the conduct of open market operations by the Federal Reserve Bank of New York in a manner designed to foster the long-run objectives of price stability and sustainable economic growth… "
http://www.federalreserve.gov/FOMC/

Greenspan also gives testimony to Congress twice a year; this makes him the public face of the Fed.

Other members of the Board of Governors are also appointed by the President and approved by the Senate. Some of them have occasionally complained about lack of research staff support, relative to the Chairman.

[Abe]

not to digress, but I think this shows exactly where Greenspan and the Fed went wrong:

originally posted by Collounsbury:

(3) New Economy

Crap, bullshit, crap. Abe, this new economy talk has always been crap. Good old fashioned measures always have been what really tells us what’s going on. Fundamentals. Price-earnings ratios, all the old tools that really tells us where profitability lies. Gspan has not “misunderstood” the IT sector, the IT sector divorced itself from reality in a typical speculative bubble fashion.

The fact that you talk about the “new economy” in connection with my post goes to show how poorly you understood my point; “new economy” is a phrase that I have never used, even when it was fashionable. There is no “new economy” or “old economy” unless you are an ingorant or sensationalist journalist/banker/analyst. There’s ONE economy. IT companies with good sense recognized this FROM DAY ONE! Except that you didn’t get to hear much about them because they could not afford to be as visible as the money-burners and speculators, and they did not fetch valuations of 12 billion dollars based solely on “future promise”.

The IT sector DID NOT divorce itself from reality. Think about it, where does IT money come from? From feeble-brained bankers, moronic venture capitalists, and the clueless average person buying stocks massively inflated by mob mentality demand. Stupid money chasing stupid ideas in a landscape of greed further ruined by the inane comments of “internet analysts” (the people who know the LEAST about the Internet are usually the analysts) – those are the factors that caused a bubble, certainly nothing else. Any company worth its management uses price per earnings ratios and all the usual tools; these are certainly not “old” tools that can be discarded, and if you put your money in a company that does not employ these tools, you are a greedy fool – or you are a speculator who knows exactly what he is doing.

If investors were stupid enough to put their money in companies without a business plan, without profits, sometimes even without revenues, they deserved to get burned. The market was already adjusting itself before Greenspan stepped in! Greenspan failed to understand the role played by the IT sector in US economy growth. Had Greenspan studied the situation more closely, he would have seen that all over the world, not just in the US, the markets were adjusting themselves. And you want to tell me that is a man you trust with the fate of the economy? Give me a break, it was so elementary that even my secretary saw it coming, and that is because–unlike Greenspan–my secretary understood that the IT sector is evolving rapidly and has not yet reached stability.

Thanks to whom? The bankers and analysts of course. Now we find that even the companies who did it right from the beginning, with price per earnings ratios and all the rest of the tools, are being penalized in adverse markets because of the greed of a few companies, and of all investors. That’s what the story is, and no matter how brilliant you argue Greenspan is, he was simply not bright enough to grasp this simple situation (he should have read the papers, stories on market adjustments have been circulating for over a year).

[system]

*Originally posted by Abe *
The fact that you talk about the “new economy” in connection with my post goes to show how poorly you understood my point;

Or rather how poorly you expressed it, as I continue to be unable to discern an actual critique of Greenspan.

“new economy” is a phrase that I have never used, even when it was fashionable. There is no “new economy” or “old economy” unless you are an ingorant or sensationalist journalist/banker/analyst.

Or self-promoting IT cos. Post-facto finger-pointing is a singularly unattractive feature.

There’s ONE economy. IT companies with good sense recognized this FROM DAY ONE!

IT companies with good sense, agreed.

Except that you didn’t get to hear much about them because they could not afford to be as visible as the money-burners and speculators, and they did not fetch valuations of 12 billion dollars based solely on “future promise”.

Agreed.

The IT sector DID NOT divorce itself from reality. Think about it, where does IT money come from? From feeble-brained bankers, moronic venture capitalists, and the clueless average person buying stocks massively inflated by mob mentality demand. Stupid money chasing stupid ideas in a landscape of greed further ruined by the inane comments of “internet analysts” (the people who know the LEAST about the Internet are usually the analysts) – those are the factors that caused a bubble, certainly nothing else.

And of course no IT folks played a role in the orgy of self-promotion…

Any company worth its management uses price per earnings ratios and all the usual tools; these are certainly not “old” tools that can be discarded, and if you put your money in a company that does not employ these tools, you are a greedy fool – or you are a speculator who knows exactly what he is doing.

I agree absolutely.

If investors were stupid enough to put their money in companies without a business plan, without profits, sometimes even without revenues, they deserved to get burned.

Agreed.

The market was already adjusting itself before Greenspan stepped in!

False premise that Greenspan steps in because of the market. Firstly, he’s only a first among equals. Secondly, I find the case that Greenspan is an equity watcher first and foremost, to be poorly supported.

Greenspan failed to understand the role played by the IT sector in US economy growth.

Rubbish? Why?

Had Greenspan studied the situation more closely, he would have seen that all over the world, not just in the US, the markets were adjusting themselves.

Riiiiiiiiiight. Well, with all these broad statements (when he stepped in… etc.) It’s really hard to be precise. I fail, in the end to see your real point. You seem to be blaming Greenspan for current market woes, if I read you correctly. Yet at the same time you (correctly) indicate the speculative bubble has been on its way to deflating. You seem to make a logical leap that somehow G is responsible for… what precisely? For over investment? Frankly it seems you’re making an illogical and inconsistant case, G is both all-powerful and not.

And you want to tell me that is a man you trust with the fate of the economy?

This is the man I trust more or less, insofar as any person (and behind him the Cmtee) is fallible, to run a Central Bank. No more, no less. CB proper role is to maintain a degree of monetary equilibrium, watching out for both inflation and deflation. It strikes me that the Fed was been successful in a proactive yet flexible management of the situation. After that, exagerated ideas about how much the Fed can truly ‘control’ the economy and the markets should be left aside.

Give me a break, it was so elementary that even my secretary saw it coming, and that is because–unlike Greenspan–my secretary understood that the IT sector is evolving rapidly and has not yet reached stability.

This strikes me as non-sensical navel-gazing.

Thanks to whom? The bankers and analysts of course.

And finger-pointing. See comments above.

Now we find that even the companies who did it right from the beginning, with price per earnings ratios and all the rest of the tools, are being penalized in adverse markets because of the greed of a few companies, and of all investors.

Dat’s the markets for you. Always has been that way. Nothing new.

That’s what the story is, and no matter how brilliant you argue Greenspan is,

I have not said he’s brilliant. I have said he’s a damned competent manager of the Fed. Also a fallible human being, but all in all he’s done a very decent job.

he was simply not bright enough to grasp this simple situation (he should have read the papers, stories on market adjustments have been circulating for over a year).

And this is just an empy insult. “Bright enough” to grasp? Bother.

[Abe]

originally posted by Collounsbury
Or rather how poorly you expressed it, as I continue to be unable to discern an actual critique of Greenspan.

If you can’t discern a critique from my post, it’s because there isn’t one. It does contain criticism though. So let’s see: I make a simple point, you blast me for supporting the “new” economy (something that is impossible for me to do), I explain that you jumped the gun in attacking with expletives what you thought was my position, and I am the one who is not making his points clear? Slow down when you scan messages.

originally posted by Collounsbury
Post-facto finger-pointing is a singularly unattractive feature.

Even less attractive are obtuse generalizations and insipid platitudes. Come up with something better than that trite remark if you desire to attack my position, which I and others have held for considerable time and is certainly not ex post facto.

originally posted by Collounsbury
And of course no IT folks played a role in the orgy of self-promotion…

IT folks are not evil goblins to be blamed for the woes of the world; they are trying to sell their product as much as everyone else is. Every car manufacturer claims they produce the best car on the market. Every bestseller is touted by its publishers as a “tour de force” or “best book of the millennium” when they are in fact crap (except for “mammoth blockbuster” Straight Dope). It would be great if we had laws against crap products, but crap products are everywhere and everyone involved with them will try to sell them to you. Self-promotion is by no means restricted to the IT sector.

originally posted by Collounsbury
False premise that Greenspan steps in because of the market. Firstly, he’s only a first among equals. Secondly, I find the case that Greenspan is an equity watcher first and foremost, to be poorly supported.

That’s true, Greenspan AND the Fed. Like others, I am guilty of pouring the blame on Greenspan alone, when of course the Fed ought to be blasted too.

The IT sector, in spite of the battering it took, is still an enormous driving force in the US economy. The burst of growth the US experienced in recent years was in part due to the phenomenal advances of IT. IT companies, which did not exactly exist in droves a few years ago, began sprouting like mushrooms and creating new jobs. That’s the rate at which the Internet operates. Fast operation and fast growth—and in many cases application of IT to a business results in dramatically increased efficiency (and better growth).

Americans, it is widely known, are not big savers—they are big spenders. If they have money, it tends to end up in stocks or in similar assets. The Fed did not realize these following points, put most simply:

1. Americans were putting a lot of money in unstable investments

2. Bubble formed around the IT sector owing to huge demand, which in turn was due to over-enthusiasm of brokers, analysts, bankers, etc., which in turn fueled enthusiasm of public by appealing to their greed

3. Markets all around the world have been correcting themselves for over a year now, as the “survival of the fittest” phenomenon is alive and well in the IT sector (we have seen a few cases of “survival of the fattest” but those cannot last)

4. In spite of the above, the Fed kept raising interest rates because of “alarming growth” during this past year

5. World markets shudder fearfully every time interest is raised –there’s a BIG warning sign right there for the thickheaded

6. Much of the growth Greenspan was so worried about was directly attributable to IT industry—not just IT companies, but also the increased efficiency that IT can bring to any corporation or SME.

7. Markets had to correct themselves AND deal with exaggerated and unwarranted interest rates. Result: exaggerated, artificially induced slow-down and possibly a recession

8. World markets reel, and Americans who did not sell quickly enough find they have lost a lot of their savings, thereby compounding the problem of the slow-down

9. Unless we see more idiocy, the markets will probably stabilize after an initial period of 4-12 months, especially as the high quality IT companies become more prominent and regenerate investor confidence. Perhaps bankers and analysts will have learned that it is dangerous to CREATE markets, and they will stick to analyzing them for the ignorant masses

Now that’s my point of view and it’s one of the points of view from the IT industry. Clearly there are other factors, such as the energy crisis in recent months, Japan’s ailing economy, etc. but probably nothing on the same domestic scale. If Greenspan and the Fed decided not to take such factors into consideration, they were living in denial. If they did not identify such obvious contributing factors to the economy, they botched their job big time. Either way, it seems obvious they went wrong somewhere, because their attempt to slow down growth was a little too successful.

originally posted by Collounsbury
This strikes me as non-sensical navel-gazing.

That strikes me as yet another cheap deflection without any value to this discussion. I won’t address the remainder of the comments, as they tend to be in the same vein.

[system]

Well, let me get to the heart of this:

The Fed did not realize these following points, put most simply:

I see absolutely no evidence that the Fed “did not realize” any of these points. I also fail to see a coherent critique.

1. Americans were putting a lot of money in unstable investments

Well known.

2. Bubble formed around the IT sector owing to huge demand, which in turn was due to over-enthusiasm of brokers, analysts, bankers, etc., which in turn fueled enthusiasm of public by appealing to their greed

Usual bubble story.

3. Markets all around the world have been correcting themselves for over a year now, as the “survival of the fittest” phenomenon is alive and well in the IT sector (we have seen a few cases of “survival of the fattest” but those cannot last)

To an extent true, the peak was reached last March or so in US markets.

4. In spite of the above, the Fed kept raising interest rates because of “alarming growth” during this past year

You have once more made the unsupported leap that the Fed is watching equity markets and not inflation. Insofar as I see no unequivocal support for this, I await substantive proofs. As I see it, the Fed properly responded to signs of reawakening inflation risk as refelcted in rising producer prices, as well as other inflationary signals. That also seems to be the understanding of most Fed watchers, for better or worse.

5. World markets shudder fearfully every time interest is raised –there’s a BIG warning sign right there for the thickheaded

Perhaps a big warning sign for the thickheaded would be a proper understanding of the focus of Central Banks, rather than illogical leaps seeking scapegoats.

Further, it stirkes me the very premise is contradicted by a review of the history of bubbles: there is no reason to assume that the IR changes are not simply the excuse for the panic rather than the real cause. See comments below.

6. Much of the growth Greenspan was so worried about was directly attributable to IT industry—not just IT companies, but also the increased efficiency that IT can bring to any corporation or SME.

Irrelevant, see point 4 above. Until you begin to empirically connect Fed interest rate moves to equity market concerns, and refute focus on inflationary concerns, e.g. in re energy prices etc, I see no basis for your unsupported attacks on the Fed. They ain’t perfect to be sure, but your critique strikes me as baseless whinging.

7. Markets had to correct themselves AND deal with exaggerated and unwarranted interest rates. Result: exaggerated, artificially induced slow-down and possibly a recession

First, I regard your seperation of market correction from the interest rate climbing to be non-sensical. Anyone with a glancing acquaintance with post-1970s CB policy in the West should have been able to price in rising interests rates as production clearly began to reach ‘the production frontier’ and inflationary pressures took over.

Second, I in on way see the Fed I.R. moves as either exagerated or unwarrented. Your tarring them as so seem to be mostly supported by your desire to blame the bubble bursting on someone or something.

Like I said before, unwarrented finger-pointing.

8. World markets reel, and Americans who did not sell quickly enough find they have lost a lot of their savings, thereby compounding the problem of the slow-down

Typical bubble bursting. Unwarrented confidence finally had to come face to face with economic reality. If not interest rates, then somthing else. Historically speaking, unfortunately, bubble pyschology has followed the boom-bust pattern – not the soft landing scenario.

Your using the Fed as a monocausal scapegoat is frankly unwarrented and disappointing.

9. Unless we see more idiocy, the markets will probably stabilize after an initial period of 4-12 months, especially as the high quality IT companies become more prominent and regenerate investor confidence. Perhaps bankers and analysts will have learned that it is dangerous to CREATE markets, and they will stick to analyzing them for the ignorant masses

Shrug. Scapegoats. Comforting I am sure.

Either way, it seems obvious they went wrong somewhere, because their attempt to slow down growth was a little too successful.

It may have escaped you but no one has ‘control’ over the market. Bother.

[IzzyR]

I think the central issue that Greenspan has to deal with is the economy vs. the stock market. It appears to be concensus of most economists that the economy, independent of the stock market, is actually not doing too badly (though it has obviously slowed down). By contrast, the market is doing poorly. It was the opinion of Greenspan, and many others, that when the market was rising it rose too far, and a correction was needed in any event. This would add to the case for focusing more on the overall economy in setting monetary policy (which would mean a shallower cut).

The counter-argument being made is that stock ownership by ordinary people has risen substantially in recent years, making the economy as a whole more dependent (ultimately) on the direction of the market (specifically, more people lose money in a downturn, the impact of which is felt by businesses and so on).

My personal feeling would be to focus on the economy and let the chips fall where they may with the stock market (within reason, obviously). Reason being that the markets are will do what they will do and eventually come around, and focusing on them risks seriously throwing the economy out of whack. But I am talking through my hat in this, not being an economist.

[Abe]

I completely agree with IzzyR’s distinctions. In my opinion you will have difficulties taking independent action on either the economy or the markets, because the two are closely related and have effects on each other.

As for Collounsbury’s points: what the heck are you going on about? I’m not looking for a scapegoat and you are uncouth to accuse me of this-- or is that your MO?

So you claim the Fed are not equity watchers. In that case I claim they are living in denial, because if you don’t watch equities you can’t fully understand the national economy–or do they leave equities entirely out of the picture when training modern economists for the modern world?? Does a surgeon perform an operation without keeping a close eye on ALL the patient’s vital signs? While equity-watching may not be the Fed’s highest priority, they appear to have ignored the loud warning reactions of US and world markets to their repeated interventions. They certainly do not appear to have taken into any consideration the strong link between equities and the economy in general.

Obviously inflation has to be managed. I don’t disagree with a couple of well-placed and judicious interest raises, but the Fed raised too high (see exhibit A: a recession-like US economy that is the result of zero-region growth). The Fed clearly admitted raising too high, because after a year of raising interest rates flamboyantly they have turned 180 degrees and are talking about reductions–what some in the field are referring to along the lines of too little, too late.

The markets are going to have an impact on the economy, especially in a country like the US, where everyone is an investor and businesses rely heavily on equity. The Fed probably learned its lesson, but it was an expensive one.

originally posted by Collounsbury:
It may have escaped you but no one has ‘control’ over the market. Bother.

It may have escaped your obsolete dogma, but there are numerous people and agencies who have at least partial control over markets. The Fed, banks, currency speculators, analysts, large public companies (in some cases even private companies), traders, those deep within the industries, the media, etc. All markets today are partially controlled by any number of these agents.

Most financial institutions who claim to observe and forecast markets are just tripping over Heisenberg: they are in fact influencing and in many cases creating markets.

[system]

*Originally posted by Abe *
I completely agree with IzzyR’s distinctions. In my opinion you will have difficulties taking independent action on either the economy or the markets, because the two are closely related and have effects on each other.

And this is news to the Fed?

As for Collounsbury’s points: what the heck are you going on about? I’m not looking for a scapegoat and you are uncouth to accuse me of this-- or is that your MO?

Yes, you’re looking for a scapegoat, attempting to attach the blame on the Fed for as of yet obscure “errors” or overreaching in re interest rate moves.

Uncouth, uncouth is calling people stupid without any good factual basis, as per your unfounded assaults on the Fed and Greenspan.

So you claim the Fed are not equity watchers.

That’s what most people who watch the Fed claim too. That is, it seems to clear to folks not seeking to make the Fed some kind of scapegoat, that the Fed attempts to watch the real economy and not market gyrations per se. Of course, very large moves in the market are of some secondary importance.

In that case I claim they are living in denial, because if you don’t watch equities you can’t fully understand the national economy–or do they leave equities entirely out of the picture when training modern economists for the modern world??

You can’t understand the economy very well if one obsesses about equity prices. A much better understanding is had by looking at other, fundmental factors. Insofar as equity prices feed back into consumer confidence, in recent years, or in a wide sense “market psychology” of course one doesn’t idgnore that, but neither are they a good guide for where the economy is actually going.

they appear to have ignored the loud warning reactions of US and world markets to their repeated interventions.

Squeeling from the stock market obsessed should be ignored.

They certainly do not appear to have taken into any consideration the strong link between equities and the economy in general.

Why should they, there isn’t a “strong link” of necessity between the equity market and the general economy. 1987 indicates this, a review of the history of the market reveals this.

Your assumption of a strong link is false. Linkages, of course, strong link, no.

Obviously inflation has to be managed. I don’t disagree with a couple of well-placed and judicious interest raises, but the Fed raised too high

So you say. Perhaps they did. This is not a science. Fed interest rate moves have indirect effects on the larger economy – they get fed through the banking system and may or may not have fundamental effects. (1) Fed loosening of rates may do nothing if the banks are retrenching on loans due to their own risk exposure, in which case monetary policy can be like pushing on a wet string (2) raising rates may not have the desired effect depending once more on private bank lending policy.

The Fed, I will state once more, does not control the economy. It can indirectly influence it, and in this context must guestimate how a X basis point cut will actually feed through the economy. That will in turn be effected by overall market (in the broad sense, not equity market) psychology at the moment, and other factors.

(see exhibit A: a recession-like US economy that is the result of zero-region growth).

Exhibit B, lack of understanding of economics: low growth now is as much a result of over-investment and retrenching of demand bec. of cutting back in corp investment, consumer spending --high debt levels-- as the Fed’s moves.

You’re seeking a fine little scapegoat. The Fed is merely one influence in this, and frankly not necessarily a large one. Working through overinvestment because of the speculative bubble is going to be difficult.

The Fed clearly admitted raising too high,

No, they changed tack when the economy changed tack.

because after a year of raising interest rates flamboyantly

Flamboyantly schoyently. Empty words.

they have turned 180 degrees and are talking about reductions–what some in the field are referring to along the lines of too little, too late.

What field? Speculators or holders of stock options? Stock market analysts? Give me a break.

The markets are going to have an impact on the economy, especially in a country like the US, where everyone is an investor and businesses rely heavily on equity.

Half the population hold equities last I knew, not all. Businesses relied as much on debt as anything else. Frankly, whatever the Fed does, given the distortions that the speculative bubble induced, including stock repurchase oriented debt accumulation, there are going to be problems.

So, I repeat, if one stops one’s navel gazing and looks at the economic fundamentals, one sees real, solid reasons for the slow down. That its occuring this way is no surprise, stock bubbles tend to run in the pattern of exhuberance then excessive pessimism. If not the Fed ticking the rate a quarter or so as an excuse then another excuse. They remain pretexts.

The Fed probably learned its lesson, but it was an expensive one.

I roll my eyes at this. Whatever. Thank God the Fed has real economists.