Greenspan admitted that the Fed did not really understand how the wealth effect works, indeed, even if it existed. Haven't seen anything on ol' CNBC about this:
Greenspan makes a stunning admission. (Dated 9/1/2001) -- Sep 4 2001
by Investment House
Remember back when Greenspan was trying to talk the market down and was coming up with all of those 'new' inflation gauges back in 1999? At the time we were incredulous that the Fed was viewing indicators of economic health and prosperity as new inflation measures. There was no inflation by historical standards, yet the Fed seemed to be trying to create the atmosphere that it was a real, tangible threat. To our shock, it worked.
One of those new inflation indicators was the 'wealth effect' that rising equity markets were causing. The Fed referred to it continually, but the only evidence it ever presented as to its existence was a short Fed statement that each percent rise in equities led to a percent rise in consumption. Whenever questioned by Congress on it, Greenspan would offer to meet behind closed doors with that Congressman and explain it. The Fed's statements about the stock market wealth effect were statements of fact, and those that kissed the chairman's ring (way too many smart people) accepted it as gospel.
Well, Friday Greenspan admitted that the Fed did not really understand how the wealth effect works, indeed, even if it existed. The reason: the stock market has tanked, U.S. citizens have lost trillions in retirement accounts, and yet the consumer has continued to do what by definition they do: consume. That led the maestro to wonder if perhaps it was home equity and not stock market gains that led consumers to spend. He even went as far as to ask for economists to submit data on the subject so the Fed could study what was supposedly fact just two years ago.
Could it be that consumers simply consume when they have jobs, when inflation is low, and when technology makes goods and services cheaper? Is that the wealth effect? Heck, that is just common sense, something we were saying at the time. Consumers consume. Until the economy tanks and they lose their jobs or are faced with the eminent threat of job loss, they continue to consume. We said that over two years ago, and it seems the Fed is just starting to grasp that.
Indeed, we pointed out three specific studies (as opposed to the Fed's self-generated, statistically barren conclusions) that concluded that at least 80% of stock market gains over the past 20 years have been put right back into the market to generate further returns. Not surprisingly, investors were using the stock market as a store of wealth and a method for achieving their own social security. Contrary to the Fed's statements, consumers were saving in the best place to put your money until the Fed chased wild aquatic fowl and tanked the market and then the economy.
The unbelievable, sad, pathetic, frustrating and tragic consequence of this is that the Fed acted on a half-baked theory that had NO empirical substantiation and wrecked the lives of millions of U.S. citizens not to mention sending the entire global economy into recession. We said it at the time: as the U.S. goes, the world goes. The results we see now speak for themselves. It was a bunch of guys behind closed doors deciding that things were too good and all good things must come to an end. So, they set about bringing those good things to an end, thinking with the supreme arrogance that 20 years of riding an economic boom they could not grasp engrains that they could control the rate of decent.
Just as their predecessors on the 1929 central bank fought non-existent inflation by tanking the stock market and the world economy, the 1999 Fed ushered in a stock market crash and global recession. Then to hear Friday from the author of the collapse himself that one of the very foundations of his plan of action was 'not fully understood' by the Fed is simply mind-boggling. Will he get the rebuke that he deserves? He has not yet, and thus far we have heard no strong outcry. We have said it before: when a couple of lawyers who do nothing more than read history and apply common sense can see what economic geniuses supposedly cannot, something is wrong. Either they are caught up in their own self importance, or there are other more sinister forces at work. Either way it is shocking and frightening, and the majority of the world's citizens are poorer because of it. Unreal.
Got that from LastShadows thread. |
