"Q: You've refrained from assigning blame for all this. Are you critical at all of Fed Chairman Greenspan?"
Excerpt from ...
Monday, August 19, 2002
Taking the Measure Of a Bear
We're in a secular downturn, says a legendary analyst, but the market will rally now and then
A: I criticize him on two factors, and the second one is more a personal thing. The main fault I have with him is the discussion about a bubble in September of 1996 at the Fed when Larry Lindsey recognized there was a bubble and advised the best time to stop it was before the froth got really big. Greenspan essentially said if there were a bubble, it could be stopped by raising margin requirements. Yet he never raised margin requirements. He responded in December of that year by talking about "irrational exuberance." He needed to raise margin requirements. I'm absolutely convinced the bubble is a lot bigger than it might have been had they raised margin requirements. My other criticism is how he cut interest rates in surprise moves. It is one thing if you have an intra-monthly meeting and you decide to do something and you think the time is right. But three times he cut interest rates with about an hour left in the market. Twice he did it in an option-expiration week, near the end of the week, when all the traders are short a bunch of puts and calls. It looked like a move of genius in that it sparked huge rallies and restored confidence. But to me, it looked like manipulation of the stock market, and it backfired because it scared the heck out of the bond market. The bond market reacted as if the Fed was trying to put this bubble back together again. Since then, every time the market gets going and begins to act well, the bond market goes down. The link was broken when bond market participants felt as if the authorities would do anything to stimulate the market. To get a long-term bull market, we need a healthy bond market and we need bonds to behave, and that means yields have to keep coming down. We need to get long-term rates down. Otherwise, Greenspan has done a very good job."
[EDIT: on the last point, we do not have much to worry about because we are playing out the Japan Script, going to Zero Zero Zero]
Chugs, Jay |
