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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Mark Adams who wrote (6406)	7/29/2001 5:22:04 PM
From: westpacific	Respond to of 74559

MA - saw that as well, was ROLFMAO!!!! As we say day in and day out UFB. West

To: Mark Adams who wrote (6406)	7/29/2001 6:26:28 PM
From: tradermike_1999	Read Replies (1) \| Respond to of 74559

from a post on prudentbear: Alan Greenspan is on record for blaming the federal reserve for creating the USA stock market bubble in 1929. Too much liquidity created a confusing atmosphere for businesses who were not able to gather clear measurements about the true economy. In other words the Fed in the years just prior to 1929 fueled the stock bubble by having interest rates too low. To correct this situation; the Federal Reserve started to tighten the money supply by raising interest rates and to deflate the dangerous bubble. Stocks soon started to come back to earth again as the bubble burst. During the subsequent crash that followed, interest rates were lowered again several times, (much like the Green-Team has done this year.) My research and understanding of the economy of 1929 lead me to believe that the rates were lowered in 1930 to bolster the strength of banks and give incentive to big business to increase capital expenditures. The stock market was a source of revenue for many businesses in the 20's. The bubble had burst and many people were "let go" from their jobs; (just) like we see today. Apparently when the Federal Reserve lowered the money lending rates in the 30's it caused money to flow back into the market. This was contrary to the plan to get money back into capital expenditures such as by the hiring of workers. The events seem somewhat contradictory. First the Federal Reserve of the 20's created a speculative bubble; then decided to deflate it; and then tried to re-inflate it again (although not intentionally). Note the paralel to today It could be assumed that the USA Government in 1930, (like today), wanted to increase consumer consumption. Perhaps it was deducted that greater consumer demand would increase prices and therefore stimulate capital investment by corporations. This coupled with an "easy money policy" is an extremely inflationary course of action, but probably more the result of panic than sound recourse. Tax cuts were made both in December 1929 and July 2001; which could be certainly construed as incentives for increased consumer consumption. This leaves me with the logical outcome that, there is a two level attack occuring now; similar to the occurrences in 1929. The tax cuts are designed for the consumer and the interest rates are poised for business. In 1929, the grand plan went awry however and instead of business investing in capital; the money went back into the stock market. Although less people invested in the markets back then, I suppose some of their tax cuts were finding it's way back into the market too. Still it was business that was sensed as not "playing by the rules", and in August, (probably sensing the contradictory nature of monetary policy), of 1930, the Federal Reserve (raised) the lending rate again. This was a sensible move by the 1930 Fed because it was a preventative measure. The increase alleviated the potential of re-creating the speculative bubble which caused all their economic problems in the first place. Business, now had to pay more for their "trading money", and the stock markets continued their declines again in September, 1930. Temporary recoveries suckered people in, only to free fall again and again. These declines did not bottom until July of 1932. Despite more tax cuts, and optimistic speeches in the 1930's spending activity did not increase. In May 2001 it became apparent to me that some of the Fed's money started to make it's way back into the stock market. As corporate earnings decreased the Nasdaq had a mini-rally. Although stuck in a range, the DJIA keeps receiving a steady pulse of income to it's ever growing state of overvaluation despite the impending recession. The contradiction becomes apparent again. 1.) A stock mania emerges in the late 90's due to low interest rates during the Clinton years. 2.)Federal policy to deflate the bubble is undertaken. 3.)The bubble is re-inflated. The problem that becomes clearly evident is now the bubble actually makes recessive conditions (even) worse now. This was the primary cause of the Federal Reserve's decision to hike the Discount Rate in August 1930. To undertake controversial inflationary policy stances, there needs to (at least) be some foundation that warrants their implementation. The scenario becomes one where an economy is faced with rising inflation and money being averted from economic investment and consumption to an economy where money is used to fuel a speculative stock bubble. It should be reminded that the bubble is what caused the economic turbulence in the first place. Two scenarios now unfold. The first is that the bubble once again inflates with all it's problematic aspects for the economy while there is no abatement of recessive conditions now on the horizon. The other scenario is the Federal Reserve policy shifts once again (like in 1930) to reflect an out of control bubble economy that needs constraint. As mentioned the Disount Rates were raised again in 1930. (It was the fourth change in monetary policy in 3 years.) The second scenario is clearly the most sound approach of the two in light of the recent dip industrial output and mis-intended outcome of previous policy. I conclude that the FOMC should be nearing the end of it's interest rate cycle and will once again turn it's head to the real issues of the economy such as the problems of increasing consumer debt and an out of control speculative bubble. This will likely be a painful period of adjustment but one that is necessary if the USA is to be the dominant world leader in the future. Policies ushered in to fuel speculative and exuberant advances to speculative bubbles are not warranted and are more damaging than healing. If the bubble is "forced" to continue the world economy will collapse into the throngs of despair unlike anyone has seen since the dark ages. In other words there is a price to be paid for irrational exuberance and it's time to pay the piper or suffer many serious indignincies in the not too distant future. Wealth and stability is built slowly and by many years of hard work and sound investement; and not by folly and fad.