Part 1
Nature or Nurture?
By ALAN ABELSON
Lenny Bruce was a brilliant, irreverent and mildly insane comedian who was done in by a deadly combination of bluenoses and bad drugs. He was uninhibitedly blasphemous and routinely profane, but what truly got under the skin of vested authority was his tendency to spritz ridicule at social pretenders and political phonies, the very people, of course, who, in most places, constitute vested authority.
Like all great comedians, from Aristophanes to Mark Twain, Lenny delighted in debunking myths, the hoarier and more popular the better. In doing so, he often found himself sizing up a contentious issue that was decidedly not the ordinary comic's cup of tea.
By way of example, as another gifted comedian, Orson Bean, recently related in a letter to the New York Times, Lenny weighed in on the still unsettled argument of nature versus nurture as the shaper of human behavior.
Lenny told the story of an infant child of a pair of celebrated astrophysicists who gets lost in the woods and is raised by a pack of wild dogs. At 16, he finds his way back to civilization and goes on to graduate with honors from MIT. However, a year after graduation, he's killed chasing a car.
Lenny Bruce's marvelous take on the subject got us to mulling the question of nature versus nurture as it applies to Alan Greenspan. Which of those two influences, we wondered, so powerfully inclined Mr. Greenspan to minimalism?
Now, we might just as well, we suppose, have pondered which of the two impels Mr. Bush to malapropism or Mr. Gore to exaggeration. But making Mr. Greenspan a more compelling focus of such speculation was the element of timeliness: On Tuesday, once again, he and his cohort raised interest rates by a quarter-percentage-point.
The ostensible reason for the action was to cool off what Mr. Greenspan properly perceives as an overheated stock market, which if left to its own thermal devices can have dire consequences both for investors and the economy. Alas, the effect was quite the opposite of what he intended. Large and small, old and young, fat and skinny, dour and giggly, investors responded with a huge thunderclap of hallelujahs and bought stocks as if there were no tomorrow (which there may not be).
The reaction seems perverse, but it was quite predictable. For every time the chairman starts to croon the familiar refrain -- "a teensie weensie rate hike" -- of the Greenspan Lullaby, the markets go wild.
As they should. No self-respecting bull market is going to pay the slightest heed to being tickled with a feather, let alone the biggest, strongest, roaringest bull market in all of history. It's going to take an awful swat to make this one take even modest notice.
We want to be fair. Mr. G is not having us on. He sincerely believes that he's acting to corral those unbridled animal spirits. Yet he keeps doing the same thing over and over again, adopting the same measured approach, even though over and over again that approach proves to be a stimulant rather than a suppressant.
So why does he do it? Simply because, whether due to nature or nurture, he simply can't help himself.
Granted, if he keeps boosting rates a quarter-percentage-point long enough, it'll have an impact. But we kind of doubt, even if he serves another two terms, Mr. G will be around to see it.
And it isn't as if there aren't other, more promising antidotes available. But the compulsion toward minimalism exerts so firm a grip on his psyche that it prevents the poor man from exploring those alternatives. Such as tux.
And we're not talking formal wear. We're talking tux as in regulations T, U and X, which govern stock-market credit via, respectively, margin requirements for brokers and dealers; margin requirements for deprived souls who aren't brokers or dealers; and restrictions on borrowers of securities credit.
As the chart below, the data for which come from our scholarly friends at Ned Davis Research, so graphically illustrates, the market has been borne aloft in no small measure on wings of borrowed money. Margin debt has swelled to an all-time peak; it also has hit a record high as a percentage of stock market value.
Moreover, Ed Hyman, proprietor and chief seer of ISI Group, reports that over the past four months, on-the-cuff buying of stocks has increased at an astounding 200% annual rate -- far and away the fastest ever!
It doesn't take Lenny Bruce's pair of astrophysicists, then, to figure out that credit is a mighty and growing spur to the runaway bull market.
And of course, that tidy $270 billion or so of market credit is only the tip of the iceberg. It doesn't include the doubtless formidable aggregate of loans taken out by venturesome types on other assets -- like their houses -- to enable them to get their piece of the booming stock market. Nor does it include the extremely leverage-friendly stock-index futures contracts, which, as Morgan Stanley's economist Stephen Roach reminds, Congress placed under the Fed's margin-setting sway in 1992.
Steve, who has been offering some exceptionally incisive observations about the economy and the stock market of late, a few weeks ago zeroed in on Mr. Greenspan's adamant refusal to raise margins. (See article for more.)
He recites the Fed's rationale for not lifting the amount of down payment necessary to buy stock: namely, that it would discriminate against the little speculators since big ones presumably could go offshore to borrow money (which, of course, they can do now if they choose) and that studies "prove" that boosting margin requirements doesn't work (the Fed has so much confidence in those studies that it is trying to whistle up some new ones).
From what Steve says, he apparently once bought into these arguments, but no longer does. As he explains, "Circumstances have changed and so has my own opinion." And, he suggests, it's time for Greenspan & Co. to change theirs.
"The shock effect of an about-face" on margins would send a message, clear and loud, to the equity market, Steve avers, that the Fed is "saying 'no' to speculative excesses."
In moving on stock credit, the central bank, Steve points out, would be applying "a market-specific remedy" to bring "asset values into better alignment with economic fundamentals." The other possibility, he warns, is for the Fed to continue to push up interest rates generally, which, ultimately, could take down "both the economy and the market."
In other words, why use a blunderbuss and risk blowing a hole in the economy when you have the opportunity to nail the market all by itself?
Why, indeed. Maybe Lenny Bruce might have had an answer. We sure don't. |
