Matt, it is untrue that there were no stock market crises before the Fed came into being. to name a few, there was the panic of 1858, the collapse of the South Sea bubble in the 18th century, the crash of 1873 and the panic of 1907. they were all accomplished without the helping hand of the Fed which was founded in 1913.
btw, J.P. Morgan , who was instrumental in the birth of the Fed, and his banker friends bailed the market out in 1907 and the need for a Federal Reserve "lender of last resort" system was recognized due to this very panic.
history aside, i am also of the opinion that the Fed has done more harm than good during the decade of the 90's by allowing money supply growth to get completely out of hand. the result is a credit, asset and derivatives bubble that has gotten so big that it seems afraid to raise rates in case that leads to a bursting of the bubble. clearly the Fed wants to avoid taking the blame for bursting the bubble, possibly due to the fact that it was almost stripped of it's wide-ranging powers in the aftermath of the '29 crash.
imo, the Fed should be abolished on an experimental basis and credit creation left to the free market. i agree fully with you that the Fed's meddling is harmful. however, AG's remarks about the stock market were simply a somewhat opaquely rendered version of the truth. risk premiums HAVE disappeared, and whenever they have done so in the past, risk assessment models have ultimately failed. thus it would be prudent if lending institutions took precautions for just such a failure of their current assumptions and models. what happens if such precautions are not taken can be seen in post-bubble Japan, where the banking system has yet to emerge from the crisis brought on by the surprise plunge in asset prices.
regards,
hb |
