Jack, I see a lot of people suggesting that if the fed's raised margin requirements, it would have somehow "stopped" the bubble from forming. I don't see that the margin requirement had much to do with the bubble, now that most stocks can be bought on margins of less than 10% through the options market, why even use margins? I think that they did not act on the margins for that reason. I really don't know if there was a good way to stop the bubble, Greenspan could have chosen to tighten during three periods, the Asian Malaise, the Russian and LTM malaise and the pre Y2K malaise. In each case, he chose to provide liquidity in order to avoid freezing of financial markets. It is difficult to say what would have been better, if he acted on each of these events to lean against the bubble vs trying to avoid freezing of the financial markets, the results could have been a immediate and drastic deflation in financial markets world wide, such a rapid dislocation could have precipitated a world wide depression. He chose the more gradual way of giving the market years to come back to more rational levels (and that process is still ongoing), such a gradual adjustment, while painful to "da bulls", will not cause a sudden 10% to 20% decrease in world GDP, and will not be associated with much excessive human misery. The current "soft landing" approach, which really, so far has not even caused a net decrease in GDP YOY, seems a better long term choice. The thought of the alternative to what he did (the alternative being 10% plus unemployment in most developed countries, and even worse conditions in under developed countries and a period of sub par growth of 10 years or more) sends shivers in my back, it could have actually resulted in massive social unrest in many countries and even major conflagrations and the associated misery to untold millions, the good old super cyclical capitalism at work. With that in mind, I would rather go through the process of gradual readjustment of the markets though a slow grinding multi year secular bear market with two to four relatively mild recessions, allowing economic growth (and eventually corporate profits), though "unspectacular", to bring back a balance between value and prices in the markets.
Zeev |
