Janice,
You wanna debate monetary policy - here's some fuel for the fire, from IBD.
I mostly agree with them, but think they got a little carried away. I don't think that Greenspan was threatening action (e.g., rate hikes) - simply reminding neophytes like me that markets go both ways. Nothing wrong with "Look before you leap."
The problem is that he thinks he's some kind of mystic/psychic, and that the more cryptic and mysterious he is, the more people will pay attention to him. And he's right, based on what we saw today. It was the first world-wide game of "Telephone"; started in DC, and by the time it got to Japan, they didn't know what the f**k he really said - only, that it must have been something very ominous.
E D I T O R I A L The Exuberance Is Rational
Date: 12/9/96
The markets were right to do no more than hiccup over Fed chief Alan Greenspan's odd comment last Thursday
night. Like the U.S. economy, they have every right to be ''exuberant'' - so long as Washington doesn't mess
things up.
We excerpt below the key passages of Greenspan's talk. The comments really aren't much, in and of themselves.
They don't promise a rate hike, only nod to the fears of some that the Dow has gone ''too high.''
We'd only worry if we thought Greenspan shared those absurd fears, and meant to act on them.
The chairman of the Federal Reserve Board did fret over ''irrational exuberance'' in the financial markets and
''unduly escalated asset values.'' He went on to claim that keeping an eye on financial markets must be ''an integral
part of the development of monetary policy.''
Indeed, the Fed should watch the markets - along with all the rest of the economy. But we wish Greenspan had
picked his words with more care. Too many took his comments as endorsing the view that the central bank
should kick the legs out from under the market if it gets out of hand.
After all, the Wall Street Journal has been at it again in recent weeks, blaming (blaming!) the global stock-market
boom on central banks' easy credit and money policies.
These worries are absurd, as our ''Perspective'' column noted the morning before Greenspan's talk. We pointed
out that the Fed's job does not include manipulating the prices of specific markets to desired levels.
Why? Neither the Fed nor anyone else has any idea where the stock market should be: It's an auction market.
That means prices are set each and every day (or minute) by thousands of buyers and sellers.
People buy and sell based on how they view companies' earnings prospects - not because the Fed has poured
some extra money into their pockets.
And right now, many of those prospects are darn bright. Just look at a few broad factors:
The Baby Boom, a generation long known for cultural and economic impact, is entering its peak earning years -
creating more wealth than ever, and socking away large chunks of it for retirement.
Whole new technologies are opening doors to fresh avenues of value -and the biotech revolution, for one, has
barely begun.
America won the Cold War, leaving communism and socialism on the ashheap of history. Nations once fettered
by statism are now largely free - and their markets are burgeoning with opportunities.
More than half the world's population is only now entering the modern economy - and, despite what Ross Perot,
Richard Gephardt and Pat Buchanan tell you, willing workers add to the general prosperity.
A wave of deregulation and privatization has swept the globe, putting on the market for the first time many
undervalued assets.
Here at home, the threat from Washington is at its smallest in decades. The man in the White House might prefer
bigger government, but he had limited luck getting it even before Republicans took and then held Congress. Now
the talk in D.C. isn't about raising taxes, but about shrinking government.
Inflation is low - for which Greenspan deserves some credit -and the economy has grown now for a little over five
years.
Even after last month's bump, unemployment is a relatively low 5.4%. Americans are just starting to reap the
benefits of nearly 10 years of wrenching change at U.S. companies - changes that have made our firms the most
competitive on earth.
People are buying stocks because they see value - not because of some sort of mass madness that drives them,
lemming-like, to march off the stock market's edge.
The markets' recent surge presents no threat to the dollar or economic growth. Quite the contrary, it underpins
them.
Since the end of World War II, growth has averaged about 3.3% a year - recessions included. Since Greenspan
took over, we're below that. In fact, this expansion is the slowest in over a century, with growth averaging about
2.4%.
About the only thing many investors have going for them these days is the stock market - a chance to invest in the
future and build wealth. It does not need to be taken down.
Yes, there are potential downsides - companies, and even whole sectors and emerging markets, will sometimes
drop. Yet the main systemic risk is still political.
It bears repeating: We are troubled by the lack of competence and common sense in the nation's capital. Whether
failing to cut taxes, to reform Social Security or to clean up their own ethical house, people there never seem to
get around to doing what they're elected to do.
We can at least insist that they ignore ''experts'' who want the Fed to manage the markets.
Markets rise and they fall. The billions of dollars in jobs and wealth they represent are nothing to tinker with - they
are America's future.
(C) Copyright 1996 Investors Business Daily, Inc. |
