i really do not know a clear cut answer to that question. as we have seen, Greenspan was a most outspoken critic of the 1920's Fed's lax monetary policies and the false boom they engendered. he also used to be a pretty staunch supporter of the gold standard and by extension an enemy of the fiat money system. as the FOMC minutes from Feb./March '94 reveal, that was the most recent occasion during which the FOMC expressed concern over a developing bubble in the stock market.
in light of all this Greenjean's most recent bubble disclaimers ('we can only recognize a bubble in hindsight' being the line of reasoning now) are most puzzling.
i tend to think that the Fed may have fallen victim to a deterministic fate. in other words, they could not possibly stop the bubble from forming, as the economic conditions invited the lax monetary policies at the heart of it. and likewise, they will be powerless to stop its unwinding, as a different set of economic conditions now invites tighter policy.
it is interesting that as was the case with previous bubbles (the '20's bubble as well as the '80's bubble in Japan), the bubble itself has become an important driving force in the economy, and as such can no longer be ignored by the Fed. while Greenspan is not explicitly targeting runaway stock market speculation (as the CB's in the previous bubble examples have done), he IS targeting the 'wealth effect' that is a result of the stock market bubble. obviously, the distinction is in semantics only. so we have now come full circle, to the point where the bubble has become massive enough to attract the Fed's attention and induce it to fight it.
what will the outcome be? the historical examples, if they are any guide, say the outcome will be a serious meltdown followed by a decade of economic underperformance.
and yet, Greenspan has repeatedly expressed confidence to be able to avoid such an outcome, 'by applying the correct policy measures'. this confidence stems from the repeated successful market bail-outs he has engineered over the years. however, once again, he may be victim to determinism in this case, as the previous burst bubbles resulted in liquidity traps that no amount of CB easing could alleviate.
i don't know whether he believes in the Kondratyev wave, but students of this phenomenon almost unanimously acknowledge its existence. if the Kondratyev 'winter' still lies ahead, the outcome will be impossible to avert, just as has been the case in post bubble Japan or the depression following the '20's boom.
history rhyming again, methinks. |
