Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : All About Sun Microsystems -- Ignore unavailable to you. Want to Upgrade?

To: QwikSand who wrote (38510)	12/3/2000 3:31:17 PM
From: High-Tech East	Respond to of 64865

... what we need is a political "wet T-shirt" contest in Florida to smooth out the election ... pun intended Ken

To: QwikSand who wrote (38510)	12/3/2000 4:14:21 PM
From: QwikSand	Respond to of 64865

That L.A. Times article was an abridgement of the full article from the American Enterprise Institute's website: aei.org Most of what was removed was economic technical stuff that an average newspaper reader wouldn't understand. They omitted an interesting part, though, about the role of the Fed. --QS ( . . . ) The Role of the Fed No analysis of the entry into a recession after an unconventional investment-led expansion would be complete without examining the possible options facing the Federal Reserve. A critical question involves the degree to which the expectations of households and businesses of continued substantial increases in stock prices and wealth are contingent upon the expectation that the Federal Reserve can and will move aggressively to stem a collapse of share prices. The Fed’s objectives, to maintain price stability and orderly financial markets while avoiding systemic risk, coupled with its actions in 1998 in response to what it deemed systemic risk in the Long-Term Capital crisis, leave open the likely nature of its response to a rapid drop in share prices. The Fed’s problem is complicated by the stagflationary shock from higher energy prices and by the fact that the United States is borrowing over 4 percentage points of GDP from the rest of the world to finance an investment boom. If that investment boom ends for legitimate reasons tied to the under-performance of investments in the new economy, part of the approach to stabilizing the dollar would be to engineer a sharp drop in U.S. spending growth that, in turn, reduces American borrowing requirements with respect to the rest of the world. If the limited past experience of the role of central banks at the end of investment-led recoveries is any guide, the best the Fed can hope to do is to avoid making a bad situation worse. That would probably involve gradually lowering short-term interest rates and providing enough liquidity to avoid unwarranted solvency problems, but not to underwrite excessive borrowing. However it proceeds, the Fed must find a way to move households and businesses steadily away from the situation where the behavior of the stock market has a bigger impact on the economy than the economy does on the stock market. That situation is untenable because it leaves the Fed in the uncomfortable position of having to target the stock market in order to control the economy. Many market players already believe that the stock market is so important that the Fed must and will put a floor under stock prices to avoid a recession. The only way the Fed can move back to a situation where it aims for bedrock objectives like price stability is to allow the stock market to reflect under-lying economic realities (Emphasis QS). Once it has given a clear signal that it is not in the business of supporting any particular level of stock prices, the Fed can begin to move to stabilize the economy and encourage a resurgence of growth based on the sound economic fundamentals that still prevail in the U.S. economy. At that time, tax cuts could be very helpful as a stimulative measure. The problem facing the Fed is not the fact that U.S. economic fundamentals are unsound or that inflation is about to burst forth. Rather, the problem is that too many decisions are being made on the expectation that stock prices will continue to rise—an expectation in turn based on unrealistic predictions about the pace of earnings growth in the new economy.