As you're aware (but others may not be), the Greenspan put is the notion that the market cannot drop too far, because Greenspan can cut rates and both a) keep us out of a recession and b) keep the market from going down too far.
These days, currencies float; also, most every loan in the country that was formerly based upon prime (and thus the discount rate) is now based upon either prime OR LIBOR, at the customer's option. The Fed just cannot have the same impact on the overall economy as it used to have. And if the Fed tries to have an impact that otherwise wouldn't be justified--say, by lowering rates beyond what is justified by the market--then it would cause harm that would be far greater than any benefit. In the case of lowering rates too far, if the Fed did this, the dollar most likely would tank and inflation would gap up.
The Fed can screw up and make things worse, but they cannot keep a recession from happening. A big piece (the major piece, IMO) in what is happening this year in the equity markets is an unwinding of massive imbalances in capital investment, both in the private and public markets. Greenspan can do nothing about unwinding these imbalances.
He's done an excellent job thus far in not screwing up. But the economy is unquestionably slowing down right now, and there's nothing Greenspan can do about it. |
