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Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (14135)	2/15/1998 10:28:00 AM
From: Zeev Hed	Respond to of 18056

Tommaso, what do you think should be Greenspan's goals on the monetary front, controlling exuberance in the markets, or optimizing employment and economic growth while minimizing inflation? If the former, than yes, he should have started the tightening effort, but if the latter, than his hand off policy seems to be working just right. If I was in his shoes, I would follow the same philosophy, hold interest rate where they are (high relative to inflation) and let the market go on its merry way, since he knows very well that the Asian situation will sooner or later clip 500 to 1500 points from the Dow, which will then, once again take a good six month to 18 months to recover. In this manner, he is keeping the market in place (without a real major bear market) for a year or two, and letting the economic growth catch up with the market. The advantage of such an approach is not only "economic prosperity" for the White house, but flow of cash into the treasury that alleviates the debt load, or at least keep it constant and thus a smaller proportion of the GDP. I think this is a wise policy. Furthermore, by keeping interest rates artificially high (at least relative to inflation), he keeps his powder dry in the event that a market decline becomes too severe, so as to endanger the economic expansion. If the market experiences too big a decline, and the danger of a market decline induced recession appear on the horizon, he has ample room to lower interest rates to give the markets a monetary injection and avoid the need for fiscal stimulus (which will exacerbate the debt situation). So far, I would give AG an A in navigating this ship through turbulent waters. Zeev