Is Greenspan Deliberately Engineering a Recession?

[Abe]

And thank goodness there’s only one of you, or we’d be in a real pickle. You accuse me of seeking scapegoats, then you focus forcefully on all manner of side issues to attempt to disprove my points.

You can’t understand the economy very well if one obsesses about equity prices.

This is no excuse to take the opposite position and ignore equity prices. Don’t distort my arguments. My position is that the Fed needed to take a more holistic view of the rapidly evolving and interacting markets and economy.

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.

ALL these factors provide indications as to where the economy is going. Leave out one factor, and you have a different situation. Hence my argument that the Fed needed to consider certain factors more carefully.

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.

Market behaviour is an important factor in the economy of any country, especially given the trends of increasing investment. I have held this position since the start of this discussion. It just looks like you are avoiding the main argument when you hammer the ludicruous point that I may be looking for a scapegoat. Irrelevant to the argument, and false to boot.

Squeeling from the stock market obsessed should be ignored.

That is absolutely not what I referred to when I said that the Fed “appear to have ignored the loud warning reactions of US and world markets to their repeated interventions”. Market reactions are not necessarily the squealing of the “stock market obsessed”. Talk about blanket statements! The markets are one thing. The ones who obsess about markets are another. Plus, if the obsessors have a significant impact on the markets, and the markets have a significant impact on the economy, and the Fed is concerned with the economy, then it is logical for the Fed to take the harmful effects of market-obsessors into consideration too.

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.

They links were not as significant in 1987 simply because IT has exploded across the world since that time. As I said earlier, IT plays a large role in efficiency of all kinds. We now have a far more responsive and sensitive set of markets, thanks in part to IT. You can either accept this and take it into careful consideration along with all the other factors, or you can make the same mistake Greenspan and the Fed made. Ignorance, since you bring it up, is often a matter of preference.

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.

Factors that must be considered, along with others. Acting without taking into consideration possible side-effects is reckless.

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.

I have no problem with the latter part of the quote. The beginning part, however, strikes me as a contradiction. Saying that the Fed exerts influence that causes the economy to behave in a certain way is virtually identical to saying that the Fed controls or partially controls the economy.

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.

Markets (and economies) all over the world have been adjusting to allow for the factors you mention since at least one year. Unfortunately, they had to cope with the Fed’s excessive intervention too. The problem (which appeared to be correcting itself gradually) was compounded.

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 is a significant influence on the economy; influence is at least partial control. The bubble problem was of a different nature. At any rate, the bubble had been in correction for a year, and the markets were all adjusting themselves nicely.

No, they changed tack when the economy changed tack.

A statement that I have made before. The Fed played a role in changing the economy’s tack. They caused a reaction that they were not able to predict for lack of proper analysis, and after the problem became evident they attempted to compensate for their earlier excess.

This situation brings to mind an inexperienced player playing Atari’s classic “Lunar Lander”, in which you can never quite figure out the vectors, with the result that you usually apply too much thrust, overshoot, then have to swing back again and make another attempt–and so on. Check it out online at http://www.games.com.

Flamboyantly schoyently. Empty words.

You are right, flamboyant is an inappropriate word. I’ll stick to “exaggerated” or “excessive”.

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.

True. Sometimes those problems are going to be severe, and sometimes they will be almost negligible. The distortions that were due to the bubble were significantly attenuated in just one year. The markets were in processes of correction.

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.

One sees many contributing factors, including some that the Fed apparently overlooked or underestimated.

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.

Yes, there is a pattern to bubbles. That is what I have already stated. This was a bubble in the process of correcting itself. If the Fed hadn’t jacked the interest rates excessively, the resulting fall would probably have been much softer and more in line with a healthy correction to both the markets and, subsequently, the economies in general.

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

Yes, and we’ve seen what a great job they did!

This part of your post is my favourite because it contains three classic traits: the unsupported (and in this case physical) dismissal of opposing arguments; the infamous “whatever”, last resort of minds more interested in egos than subject matter; and the attempt to ridicule a speaker of the opposite position. I don’t claim to be the best debater and I apologize if my statements sometimes appear abrasive, but at least I never stoop that far.

[hawthorne]

Hindsight in a wonderful thing.

It’s too early to say whether Greenspan boobed – but it’s easy to answer the OP: no, of course not.

Monetary policy is hard. It is subject to long and variable lags, which means that you don’t know what the economy’s like when you take action and you can’t tell when your actions have had their effect. The import of a particular piece of information is often really hard to discern – and there are always people lobbying for higher or lower interest rates on the basis that inflation’s about to re-emerge or that we’re sliding into recession.

Perhaps Greenspan raised interest rates for too long, and was still trying to dampen demand when the US economy was on the skids. Too early to say. If you have a soft landing I suspect his reputation will be enhanced by this episode.

BTW the major importance of the equity market on Fed thinking appears to be that people were spending out of what they thought were permanent increases to lifetime wealth that were likely to be only transitory. That is people were spending out of their stock market gains, but the gains were based on an exaggerated estimate of the productivity changes occurring due to the IT sector. (A long way of saying that the bubble had distorting wealth effects.)

[Abe]

Very true. Playing the stock market is closely related to gambling, and it seems to be just as addictive. One advantage recent events will probably leave behind is that people across the board will learn that you don’t gamble with your livelihood.

[system]

*Originally posted by Abe *
And thank goodness there’s only one of you, or we’d be in a real pickle. You accuse me of seeking scapegoats, then you focus forcefully on all manner of side issues to attempt to disprove my points.

That is ** distortion Abe**. My “side issues” are nothing of the sort.

Let’s look at Abe’s first straw man

You can’t understand the economy very well if one obsesses about equity prices.

This is no excuse to take the opposite position and ignore equity prices.

No one said anything about ignoring them. I did not, Greenspan has never said anything of the sort. Rather, in their proper context.

So, in turn,

Don’t distort my arguments.

Back to you, bro.

My position is that the Fed needed to take a more holistic view of the rapidly evolving and interacting markets and economy.

And my position is you’ve given me nothing but hot air to support the idea that the Fed has not taken a holistic view.

ALL these factors provide indications as to where the economy is going. Leave out one factor, and you have a different situation. Hence my argument that the Fed needed to consider certain factors more carefully.

And my argument is that (a) no factor has been left out (b) you ahve failed to provide the slightest evidence that your assertions are valid.

Market behaviour is an important factor in the economy of any country, especially given the trends of increasing investment.

Equity markets can be an important factor, the importance of which is not clear. In many countries the market is relatively irrelevant. In the US even its “centrality” to the economy insofar as we’re talking about driving growth or recessions per se is questionable. Certainly historically speaking, their importance has been marginal in comparision with other factors, however it has been clear that the Fed has been studying the new role of equity ownership, so asserting that they have been igorning this is FALSE.

I have held this position since the start of this discussion.

And you have continued to hold a distorted position in re the markets, one I would call grossly exagerated and based on assertive speculation, not on any emperical evidence.

It just looks like you are avoiding the main argument when you hammer the ludicruous point that I may be looking for a scapegoat. Irrelevant to the argument, and false to boot.

No, I’m just offering the best explanatin for your distortions. Nothing avoiding the main argument in that, nothing at all.

if the obsessors have a significant impact on the markets, and the markets have a significant impact on the economy, and the Fed is concerned with the economy, then it is logical for the Fed to take the harmful effects of market-obsessors into consideration too.

If, if, if. All predicated on the false assumption that the Fed is not watching your ‘favorite factors’ and your sector. In re importance of the market etc., we’re already gone over this.

They links were not as significant in 1987 simply because IT has exploded across the world since that time.

Oh yeah, I forgot your sector is at the center of the world and the economy. Bullshit.

IT is great, useful and overhyped. Frankly, IT changes change inter-equity market linkages, that doesn’t ipso facto change the character of linkages to the real economy.

What will change it is the the question of impact of broad equity ownership impact on (a) wealth and savings in the US and by extension consumption (b) feedback into economy. IT has no necessary effect.

As I said earlier, IT plays a large role in efficiency of all kinds. We now have a far more responsive and sensitive set of markets, thanks in part to IT. You can either accept this and take it into careful consideration along with all the other factors, or you can make the same mistake Greenspan and the Fed made. Ignorance, since you bring it up, is often a matter of preference.

You keep asserting the Fed made a mistake and they don’t understand the changes but I see no leg for you to stand on. I do No economic analysis for it. Ergo, I am forced to conclude this is a bit of navel-gazing (It, IT, IT) combined with baseless belly aching.

Unless you have some objective reason, beyond your own words, to claim (a) Fed ignored changes in the economy (b) has not understood/followed efficiency related changes, I don’t see much point to this. Careful with this Abe, G’s comments on this are legion.

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.

Factors that must be considered, along with others. Acting without taking into consideration possible side-effects is reckless.

More hand waving. Do you have any substance to your assertions?

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.

I have no problem with the latter part of the quote. The beginning part, however, strikes me as a contradiction. Saying that the Fed exerts influence that causes the economy to behave in a certain way is virtually identical to saying that the Fed controls or partially controls the economy.

No, it does not. If you understood how the Fed works and the mechanisms which it uses, you would understand why. I ain’t gonna give you a course in this. Influence is not control Abe, stop grasping at straws.

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.

Markets (and economies) all over the world have been adjusting to allow for the factors you mention since at least one year. Unfortunately, they had to cope with the Fed’s excessive intervention too. The problem (which appeared to be correcting itself gradually) was compounded.

Again, Abe, you keep throwing around words like excessive, and keep tacking the blame on the Fed for what reflects your typical bubble wind down. Why do you think I refer to scapegoating. That’s ** all ** I see here.

snip more assertions by Abe in re Fed control blah blah.

Final comment, learn some econ, learn how the Fed actually works.

(And Abe, spare me the martyr comments.)

[Abe]

Your bubble world of classical and immutable economics is fascinating. In spite of your base assertions, I have provided any number of points to support my arguments. All I have seen from you is a strong aversion to change, a dislike for the questioning of authorities, and the flinging of frequent insults. And of course, automatic gainsaying, often in the guise of “this is bullshit”. These are not arguments. I have tried to be decent, but I see less and less point in maintaining the effort.

It is your points, for the most part, that are bullshit. You focus on and distort small individual parts of my arguments in order to give the appearance that the whole is compromised. You accuse me of withholding evidence, mechanisms, etc., but you don’t provide any information yourself beyond dusty aphorisms that do not fully relate to the predicament. And when I do provide mechanisms, you automatically gainsay them using whatever notion of classical economics you can grasp at the time. Times are changing. So is the economy.

All I can say is get with the times and understand that what applied 15 years ago does not necessarily apply now. As for your amusing contempt for IT…

IT will be the fulcrum of every single business operation. I won’t waste my time explaining how, because that’s an entire education. If you think this unprecedented trend has no or minimal impact on the economy, I believe you are in grave error. Just as the introduction of the telephone, the fax, and personal computers in offices created (on a lesser scale) new business dynamics, the integration of the Internet and related technologies in businesses–with far higher rates of uptake–is bringing changes that the vast majority of economists do not yet fully understand. That’s because they are still very new and different from the accepted notions valid until recently.

And my position is you’ve given me nothing but hot air to support the idea that the Fed has not taken a holistic view.

Once more, and hopefully for the last time, the Fed’s incorrect assessment of what the economy required (more interest rate raises) is hardly hot air. It’s clear they could have handled the situation better by avoiding or delaying the most recent raises.

And my argument is that (a) no factor has been left out (b) you ahve failed to provide the slightest evidence that your assertions are valid.

Read back. The mechanisms I put forward, and their explanations, are all in previous messages. As for your factors, if they were all indeed carefully considered then why was the Fed’s end result off by so much?

it has been clear that the Fed has been studying the new role of equity ownership, so asserting that they have been igorning this is FALSE.

I originally said “I feel that Greenspan understands nothing about the dynamics of these IT industries: he made a horrifying error in assessing the situation.” I know the Fed have been studying the role of equity markets, and I have never claimed that they don’t. However, if the Fed recognized the full impact of IT on economics, they probably did ignore it or downplay it, given their incommensurate interest raises in the face of a self-correcting bubble with an influence on the economy.

quote:

if the obsessors have a significant impact on the markets, and the markets have a significant impact on the economy, and the Fed is concerned with the economy, then it is logical for the Fed to take the harmful effects of market-obsessors into consideration too.

---

If, if, if. All predicated on the false assumption that the Fed is not watching your ‘favorite factors’ and your sector. In re importance of the market etc., we’re already gone over this.

If you dismiss distinct possibilities and links such as the ones I listed above, I can see why you are defending the Fed so fiercely. That’s an evasion of the argument. This has nothing to do with my favourite sector. And you don’t have a clue what my “favourite sector” is.

oh yeah, I forgot your sector is at the center of the world and the economy. Bullshit.

IT is great, useful and overhyped. Frankly, IT changes change inter-equity market linkages, that doesn’t ipso facto change the character of linkages to the real economy.

What will change it is the the question of impact of broad equity ownership impact on (a) wealth and savings in the US and by extension consumption (b) feedback into economy. IT has no necessary effect.

This reads like rambling. I don’t see how the IT bubble (which, once again, was already in the process of correction) has no impact or necessary effect on the economy. The IT bubble is part and parcel of the economy, and as such it has an impact on the economy. After the bubble, the IT sector still has an influence on the economy because 1) it’s a significant portion of equity markets, 2) it represents numerous business-enhancing processes (leading to better overall growth).

You keep asserting the Fed made a mistake and they don’t understand the changes but I see no leg for you to stand on. I do No economic analysis for it. Ergo, I am forced to conclude this is a bit of navel-gazing (It, IT, IT) combined with baseless belly aching.

The mistake is evident, and mentioned several times in this thread.

Unless you have some objective reason, beyond your own words, to claim (a) Fed ignored changes in the economy (b) has not understood/followed efficiency related changes, I don’t see much point to this. Careful with this Abe, G’s comments on this are legion.

Study all the relevant factors in a situation carefully enough, and you will have an idea of the impact that change X will bring to your situation. Change X in this case seems to have brought an unexpected impact (the economy slowed down too much), therefore it is only natural to assume that not all the factors were considered carefully enough. From what you have thus far written, your explanation is that Change X and the resulting situation were perfectly warranted. I see no evidence of that.

The only explanation you have provided is that the economy changed tack, and the fed changed tack with it (to which I countered with the simpler explanation that the fed overshot beyond margin of error). This is not the Vestibule of Hell, and we are not talking about neutrals who follow the winds of change wherever they lead. We are talking about a group who takes action in order to see a result. The result they were aiming for: slow down growth. The result they did not expect: growth is now far too slow.

No, it does not. If you understood how the Fed works and the mechanisms which it uses, you would understand why. I ain’t gonna give you a course in this. Influence is not control Abe, stop grasping at straws.

You are the last person I would want a course in this from. How do you support your statement that influence is not control? I repeat my previous assertion: influence is at least partial control (certainly not full control, but that is not what I am talking about). If I have any influence on item A, and if I am able to choose the time at which I exert my influence, the magnitude of influence, and the type of influence I exert, that is a form of control.

Again, Abe, you keep throwing around words like excessive, and keep tacking the blame on the Fed for what reflects your typical bubble wind down.

Another evasion. If you had made this point (and civilly) a few posts ago, I might have told you I thought you were too categorical. I have never denied that much of what has happened is a bubble wind down–I have left that up to you, since you do such a great job of conducting my arguments by yourself. The bubble wind down is not a simple explanation though, since we’re not talking textbook absolutes here, but a very fluid situation. The Fed had a part in the process, and their influence did not exactly help things. They both accelerated the wind down, and sent shock waves across the economy in general.

(And Abe, spare me the martyr comments.)

You sure love labels, don’t you? I’ve got a few juicy ones that I am very close to sharing with you, but I grow tired of discussing this issue with someone who is utterly unable to make a civil point, and who speaks only in absolutes. I come here for discussions, not religion.

[system]

I’m tired of this Abe. Since you seem to be unable to understand what I’m saying, I’m giving up.

I return to one point only:

Once more, and hopefully for the last time, the Fed’s incorrect assessment of what the economy required (more interest rate raises) is hardly hot air. It’s clear they could have handled the situation better by avoiding or delaying the most recent raises.

This is your assertion for which I see no support. At best, it’s discussable position, at best. Upon this your entire argument rests.

[pantom]

Collounsbury’s correct, IMO. Abe appears to be asserting the argument I’ve heard touted here and there that Greenspan made a mistake in his last couple of interest rate increases, firstly, and secondly, that he should pay more attention to the equity markets and, therefore, should have given us a larger than half a point decrease in the Fed Funds rate this last go-around.

I have a real hard time with both of these arguments.

First, as to Abe’s argument that the last few interest rate increases were bad and that the IT bubble would self-correct and that the interest rate increases turned what would have been a natural bursting of the bubble into something more: this all rests on the notion that IT is more important than, let’s say, oil or autos or real estate. In the future, concievably. As of now, no. And now is where we are.
I’m a programmer, and therefore at the front lines of IT as much as anyone. But I know my place in the world: my father was an accountant, and I’m doing something similar to what he used to do, since he used to keep books manually, and now I help today’s accountants to do this through automation. It’s still the same thing: at the end of the day, it’s the numbers that count. The accountants are the ones who figure out what the numbers mean. I’m just giving them a tool by which they can do this.
So I’m an artisan. The software and hardware makers are like the toolmakers of yesteryear. Their tools do become increasingly important with the passage of time. But they are not of the same importance as the old guys just yet.
Greenspan watches everything, not just IT or the equity markets. He has to. To the extent that someone can do a decent job of this, he has.
One of his central jobs, as a central banker, is to watch the dollar. As I pointed out in an earlier post, the two highly unusual moves he made in January appeared to be a direct response to a collapse in the value of the dollar that occurred in December. He appears to have averted a dollar crisis. With that out of the way, he can now address the slowdown in the economy at a normal pace, which is why he didn’t pull any inter-meeting moves, and only lowered rates by half a point this last time around.
He’s doing his job. He’s doing it as well as anyone can.
And to those who may have been too young or don’t remember: one of the reasons that the Crash of '87 didn’t turn into 1929 all over again is that Greenspan, learning from the mistakes of his predecessors, provided liquidity at a crucial moment. Some of us will never forget that little favor he did for all of us. By what he did at that time of crisis, he showed that he knows what he’s doing. He showed it all over again in 1998. Sometimes, it seems there’s no end to his competence at what he does.