The Ant & The Grasshopper
Speaking of the Fed, The Wall Street Journal had a very good story called "Minutes from 1996 Fed Meeting Bear Out Governor's Presentiments of Market Slump." For those of you who don't know, a five-year lag always precedes the release of FOMC meeting transcripts. In any case, the story reprises some comments by former Fed governor Lawrence Lindsey that demonstrate his understanding of the mania under way and what the ramifications would be. (I guess it's no wonder that he ducked out of the Fed early.) What's clear from the Journal's report of the transcript, however, is that Easy Al did not get it. (Gee, what a shock, huh?) So, in light of my thoughts from yesterday, I believe the story is particularly worthy of people's attention, beginning with the following warning from Lindsey: "Readers of this transcript five years from now can check this fearless prediction Profits will fall short of this expectation." (That was from a meeting on Sept. 24, 1996, in which Lindsey was referring to people's expectations of 11.5%-per-year profit growth, which turned out to average about 2% from 1996 to 2001, according to Edward Keon of Prudential.) The story goes on to expand the former Fed chairman's fears: "Mr. Lindsey argued that rising stock prices could destabilize the economy, worrying at that meeting [in May 1996] that 'the investment boom and rising prices in the equity markets have been feeding on one another.'" The transcript shows that at the same meeting, Greenspan remarked, "The stock market, as best as I can judge, is high. It's not that there is a bubble in there."
Lindsey Attempts Pre-Emptive Strike, While Alan Merely Steps Up To The Contemplate Next, the story reprises some eloquent commentary from the former Fed governor: "Mr. Lindsey also argued at that September meeting that the Fed should essentially consider broadening its mission beyond containing prices of goods and services to target asset price. 'As in the United States in the 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst the bubble becomes overwhelming,' Mr. Lindsey said. 'I think it is far better to do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights.'" And what was Greenspan's reaction? "'I recognize that there is a stock-market bubble problem at this point, and I agree with governor Lindsey that this is a problem that we should keep an eye on,' he said. One decisive remedy, he said, might be to raise margin requirements for stock investors, but that would raise 'major concerns' in the markets. Still, he said, 'There are other ways one can contemplate.'"
Alan's Road Crew Fired For Botching Bubble-Residue Removal The article winds down with the famous irrational exuberance quote and says that Lindsey teased Greenspan about it: "I think that in spite of your best efforts, 1997 is going to be a very good year for irrational exuberance." However, he also warned, if a bit off on his timing, "But in each case [meaning good news on the fiscal, credit and international fronts], it is going to be creating bigger problems for us to solve down the road. So 1998 looks like the year in which irrational exuberance will meet its match."
( from Bill Fleckenstein's Market Rap grantsinvestor.com ) |
