Hi Andy,
I'm the person from the BRCM thread who sought the Greider follow-up.
Thanks for the reference. "The Confidence Game" is on order.
I very much concur with your analysis that the mantra of 'inflation fighter' is not wholly accurate and in fact, I believe, largely disingenuous. In fact I might go so far as to suggest that the liquidity issue you raise is simply a tactical stepping stone on the way to the real goal of the Fed, which is to insure the profits and prosperity of its member banks. As a case in point on this assertion, I think we have to look no further than Fed policy regarding the derivatives market. As we all know, it was the foolish pranks of the Black-Holes crowd that in large measure paralyzed the bond market last fall. Now to someone as naive as myself, this would indicate a need for the BIS or the FRS to do 'something' to control the excesses and the extraordinary levels of risk involved in the forex, options and other markets that constitute the 'derivatives market'.
Did we learn the lesson of Short Term Capital Destruction? Of course not. And the reason, I postulate, is that the fees generated in the derivatives market are like mother's milk to the money center banks and there is no way that they will give up those fees, no matter how great a risk is involved. Greenspan is complicitous in this tight rope act and when push comes to shove, you can rely on the FRS to bail out the players on a 'too big to fail' basis.
Andy, I guess i would have to disagree with you about your overall assessment of Greenspan. I feel he has largely followed the Hippocratic oath, 'First, do no harm.' In many of the instances you cited going back to 1987, I believe Greenspan could have done far more damage. I find his course to be largely benign for Main Street as well as Wall St.
I do, however, worry a bit about his getting blindsided in the derivatives game. The assumptions of the players are so fragile that I do not believe anyone really understands the consequences of their bets. And that, after all is said and done, is what this is all about, the largest casino the planet has ever known.
Regarding the bear markets:
October 1987: I completely disagree with you on this one. In my view, the cause of the 22% drop on the 19th was caused by the sell programs initiated by all the major wire houses and the resultant inability of the market to stabilize and 'take 5'. J.M. Keynes had a very perceptive observation about the phenomenon in his "General Theory". He pointed out that in a panic, an individual may have the option to completely liquify, but that a society never has that option. This is exactly what the programs, in their misbegotten attempt to prove portfolio insurance, were attempting to do. The solution, of course, was to establish 'circuit breakers' and 'curbs' that could contain the rages of Mr. Market.
1990: The expansion of the 80's was very long in the tooth and there were a lot of excesses building up in the 'real' economy. I was in the construction biz in the Bay area at the time and some of the projects I was seeing go up and the prices paid for them made no economic sense. The proof of that came within a couple years when some recently contructed commercial projects were sold for 35-50% of their development costs. The excesses in California, Hawaii and other hot spots were happining irregardless of Greenspan's policies.
1994: I concur
1998: The primary causes of the liquidity crisis of 1998 were not a product of FRS policy or actions. The Russian default, the continuing woes of the Asian economies, the failure of the Japanese to face the reality of their banks precarious state, the goofy math of LTCM were not, in any way I can understand, a result of Fed policy. I commend Grenspan for his ability to thread the needle and get us back on trach as quickly as he did.
I will agree with you that interest rates are artificially high in a deflationary period (CRB index = 190, today). A comparable period may be the 1953-62 era, when the long bond was at 3%. Again, I believe it gets back to my original premise that the Fed is a client of the largest banks in the country. And they want to make sure that they get a healthy slice of the 'pie' that the American economy is baking. Greenspan is willing to allow this, though its probably not in the best interest of the majority of Americans.
To sum up, I don't believe we need to look to Greenspan to monkeywrench the stock market. The market is perfectly capable of doing this itself and does so on a regular basis. This has a lot more to do with the hysterical nature of human synaptic wiring than it does with Fed policy or rational analysis. Again, quoting Keynes, he cites the importance of 'animal spirits' in raising prices in bull markets. And the opposite is equally true of course. So, we wait, Wed, 2:15 PM. Should be interesting... though I might prefer the opposite.
Best, Ry |
