It was Greenspan who took the unilateral preemptive action to lower the fund rates based on his fear of the domino effect from a presumed collapsing of banking houses of cards. He preempted the autonomy the market for money must have to adjudicate between supply and demand. When any individual with power does that, they are punished, because the market becomes destabilized and unable to determine the price of true equilibrium. Interference in markets is the hallmark of the 20th century's pretense to knowledge. Greenspan knows that, but, nonetheless, he too has succumbed to the sirens, and the punishment will be that he resigns in ignominy.
Once you open Pandora's Box you can't close the lid. The FED is now in the position as I predicted back in October that they must slow down the rate of growth of the aggregates, because the money isn't going into C&I loans to drive real economy, rather it's going into the financial world's paper shuffle game and specifically into the stock market. This is a purely monetary effect. Since the dough won't be going to Main Street's bottom line, we have prices of stocks rising in an environment of earnings expectations that is flat to falling. Once the stock market players see this, they will exit, and selling will beget selling.
The FED believes that the stock market has become the greatest determinant of economic prosperity, so they have to keep pumping more money in to prevent the stock market from falling. This circumstance was never true in the past. As bad as they were the actions of manipulating interest rates to engineer real economy effected both real economy and the stock market, but the real economy was by far more the significant effect. The stock market would react, but would eventually follow the growth or shrinkage in earnings. The tail didn't wag the dog. Enter big money.
Big money isn't interested in long term capital projects. They prefer to spin the money wheel where superior returns presumably lie. It all works out fine until the money shuffle causes negative real economy effects. The best known is inflation, the increase of demand caused by money pumped leveraged wealth without a commensurate rise in the ability to produce at lower or equal costs. Without going into the other problems including money leakage to foreign low cost producers, the money pumped does not produce the desired and Chairman expected result. This has to occur since the FED can't stop pumping because they fear the stock market will crash. Eventually the inflation builds and FED has no option but to slam on the brakes. Exit Greenspan.
Please tell me what is going to happen to the derivatives market which by last count controlled $32 trillion in paper assets when short rates rise. I will tell you. The derivatives can take any change in price because the hedges are structured to do so, but they can't take a rise in financing rates. Both legs must be reduced. Now let's take a look at all these true American banks trying to liquidate large quantities of positions all at once. You might say, "they wouldn't do that, because big, smart guys don't panic". Proof: Greenspan didn't panic, did he.
Thus, the FED is in no position to raise rates. They have to keep pumping more drugs into the patient to prevent the very thing they fear: fear itself. But they have to raise rates, but they can't, but they have to,...It was Greenspan who started this spiraling scene, and we all have hell to pay for his guidance. He and the other FED wunderkinds broke away from monetary targeting, and went back to price controls in '94. They must have been responding to think tank's conclusion that deflation is upon us. Is that the same deflation that is causing the US Post Office to raise the price of postage stamps?
In the end it will be the free market that raises rates, not the FED, just as had occurred in the fall of '79. The FED will be throwing gasoline on the fire just like the Burns' FED did long ago. The only way out of this super cycle producing stupidity is for the FED to stop interfering in the free market for money. Unfortunately, this obvious elementary conclusion is too profoundly true for the greatest economic intellects of our time. |
