Nice find. I thought these lines were interesting, although the whole thing is worth studying:
April 18, 2001, could well go down in history as an epiphany for America’s Federal Reserve. The central bank is now looking at the US economy through a very different lens. In the aftermath of 150 basis points of monetary easing over the past three months, a garden-variety inventory correction would hardly require another aggressive inter-meeting policy adjustment. A post-bubble shakeout would. In my opinion, the Fed is finally owning up to a very different set of macro risks. As well it should.
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With all due respect to the Fed Chairman, I fear he became an integral part of the very problem he is now facing. By raising the possibility of an asset bubble but then failing to address it, the Fed created an excruciating moral hazard dilemma. Moreover, by championing the brilliance of the New Economy, Alan Greenspan joined with the New Paradigm crowd in tacitly encouraging businesses and consumers to do the same. And they did. Companies became convinced that open-ended technology spending was the source of hyper growth in both productivity and earnings. Capacity excesses then took on legendary proportions as the Old Economy embraced this new macro framework and erected e-based platforms that now stand side by side with traditional business models. In an era of hyper growth, such dual cost structures seemed to make great sense. In a period of sluggish growth, they make no sense. At the same time, consumers became convinced that stock-market returns were an accurate reflection of new corporate earnings power; financial assets were perceived as a permanent source of saving that fully justified a drawdown of earnings-based saving and a debt-financed, wealth-induced spending binge. The financial bubble had truly infected the real economy. And the Fed did nothing to stop it.
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Perhaps the weakening of the long bond indicates that his position isn't as strong as it might seem, but it is probably far stronger than Abby Cohen wants to believe. |
