Greenspan and bubbles.
<<<"It seems reasonable to generalize from our recent experience that no low- risk, low-cost incremental monetary tightening exists that can reliably deflate a bubble. But is there some policy that can at least limit the size of a bubble and, hence, its destructive fallout? From the evidence to date, the answer appears to be no,">>>
<<<"Some have asserted that the Federal Reserve can deflate a stock-price bubble -- rather painlessly -- by boosting margin requirements. The evidence suggests otherwise,... First, the amount of margin debt is small, having never amounted to more than about 1.75% of the market value of equity...Second, investors need not rely on margin debt to take a leveraged position in equities. They can borrow from other sources to buy stock.">>>
Poor old Greenspan sounds like he just rode in on the pumpkin wagon. Eliminating margin altogether would reduce sell offs in market panics. If you can't afford to pay, you can't afford to play. Why not just walk into 7-11 and tell the clerk you want to buy $20 worth of Lotto tickets for $10 using 50% margin. Gambling with borrowed money is just plain stupid and anyone who doesn't think putting 1.75% of all the stock in the nation into circulation will move the market is brain dead.
Obviously interest rate and margin requirement policies will hardly control bubbles, but tighter control on the use of leverage by lending institutions will. The FDIC has enough funds available to cover 1.5% of the savings accounts insured by the FDIC. In the mean time, banks and finance companies are lending that money to consumers so they can buy groceries and a tank of gas, or buy a house or car with zero down. The house and the car represent a real loss of 10% the second the papers are signed, and the consumable items are history as far as collateral is concerned. Bubbles are created by the ability to leverage fantasy assets. Bubbles burst when it's time to pay the tab.
Welcome to 1929 Mr. Greenspan, and the biggest bubble in the history of the World. In terms of real liquid assets, the Dow would still be pricey at 4000. |
