From the same article:
Most economists say the worst thing Greenspan could do is take baby steps in lowering rates. In other words, Greenspan must avoid giving the stock market the water torture treatment by sticking to his trademark gradualism money policy.
No one including Greenspan knows what should be done. The way to avoid getting in this hopeless situation is not to go there in the first place. The way you do that is to not interfere with the market's pricing of money. If there is no interference, then the market will reflect the true and right price for money that keeps demand and supply in balance.
No one including the market knows where that is now. The market doesn't because its price discovery mechanism has been displaced by interventionism. Greenspan et al don't know because it's a function of a million variables. They react to what happens in the past. The market reacts instantaneously to all those million variables in the present. The market gets it wrong. The market in money like the stock market is always wrong in the present. Always. They have to correct their error and both do so as long as there is no price fixer preventing the price that clears the market from occurring.
The chief criticism of letting the market do what it does so well, is that people surmise that the market ruled by wild-eyed greedy speculators would run the price all over the place. That is simply impossible. In fact, it is only possible under a fixing regime like we have now. When there is great expectation that speculators will run the price all over the place, both borrowers and lenders are very careful about their intentions and transactions. They won't accommodate translations. The only way to get price translation is to have a force in the market that can be sustained. No such force exists on the planet except the central bank. Even they are extremely limited in what they can do, but they can distort the market and create false perceptions which is precisely what has occurred over the last two years, and they can end up like they always do with an intractable situation.
The FED can't create enough money to prop up the stock market without creating monetary inflation. There's no slack left. They squandered that by their persistent pumping way over productivity for the last 5 years. They did what Rivlin wants. They used monetary policy while the Clinton gang killed fiscal policy, and now we all have to pay the piper.
The FED will try to walk the tightrope, but that won't work. The stock market needs outright injections to keep it merely going sideways. If they do that, we'll have some real tangible inflation, and then they will have painted themselves into a corner such that they will have to raise fed funds at least to 8%. Anything they attempt at this point precipitates a disaster. The only thing they can do is stay out of the market, leave the fed funds rate alone where it is, and get out of the public view.
If they do this, the stock market will have some tough sledding for several months, maybe for most of the year, but then it should bottom and start up again. This is the challenge for Greenspan. He started all this trouble with the '98 pumping bailout. If the FED doesn't do exactly what I've prescribed above, we are in real big trouble. That means you'll only be safe in PMs. The thing to monitor is outright injections like coupon passes and the response of gold stocks to such actions. |
