Patron, do you think that Greenspan does want much higher stock market? He is in the box and he's doing the right thing - fighting deflation with all means possible. What would you do today if you were in his shoes? I'm not talking of what he should not have done years ago. I'm talking about todays situation.
EDIT:
What Steve Roach would do:
All this speaks volumes of a US economy that could continue to frustrate the Federal Reserve in its noble mission to achieve policy traction. I have long suspected that the US central bank has a "stop point" on a 2% nominal federal funds rate. There’s nothing magical about that level -- especially since it may end up being surprisingly high in real terms. But when official rates enter the twilight zone of having a "one-handle," the fears of a Japanese style conundrum suddenly become very real. The last 200 bp of monetary easing is a very precious commodity -- one that no central bank would wish to spend, unless the circumstances were so dire it had no other choice. For the reasons enumerated above, that’s precisely the outcome I now fear.
Needless to say, this message doesn’t go over very well in investor circles these days. I often get queried in response, "So what would you do?" The problem is that economics provides no clean prescriptive remedy for an economy in a liquidity trap. The best the Fed can do, in my opinion, would be to surprise the markets with a more creative and aggressive easing -- something it has been either unwilling or unable to do this year. And it should accompany such an action with an explicit signal that it intends to maintain an exceedingly low level of official rates for an indefinite period of time. Quite frankly, I’m not even certain that would help, but I sure think it beats the current incremental approach.
One tough question begets another. And I would counter by asking the Fed why it allowed all this to happen in the first place. After all, this was the same central bank whose chairman warned of "irrational exuberance" in December 1996, when the Dow was at 6400 and the Nasdaq at 1300. But rather than deal with the perils that such speculative activity was bound to foster, we find that the Fed ended up rationalizing -- and tacitly encouraging -- the ensuing asset bubble by endorsing the untested and suspect theories of the New Economy. Unfortunately, when the bubble popped, the policy gambit was exposed. Almost any monetary easing would have then been too late. And now the Fed may have little choice other than to spend its remaining basis points.
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