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Alan
Greenspan/Jackson Hole Speech...Part II
Brian
Trumbore
President/Editor, StocksandNews.com
Last
week I posted Federal Reserve Chairman Alan Greenspan's
speech on the Bubble of the 90s and the Fed response.
The chairman basically said, yeah, it was a bubble,
but there was nothing we could do about it. So, with
this in mind, I present a contrary view from some
of today's better analysts of the financial scene
(though I won't say which one I normally vehemently
disagree with).
PIMCO's
Fed watcher, Paul McCulley, admitted in his latest
missive on pimco.com,
that he had to read and reread Greenspan's speech
to decipher what it meant for the application of monetary
policy overall. Following are some of McCulley's thoughts.
[On
the issue of why the Fed didn't tighten in the face
of the Bubble.]
"Greenspan acknowledged that there was indeed a bubble?(but)
he remained resolute in his argument that his job
description does not include prophylactic tightening
action against bubbles, only morning-after easing?
"While
(his record) is exemplary on the inflation-control
front, I was surprised to hear him declare that in
the absence of an inflation 'problem,' which would
justify nasty tightening action, the Fed is powerless
in the face of an equity market bubble. Indeed, he
implicitly argued?that the Fed's very success in controlling
inflation was a source of ether for the equity market
bubble."
Greenspan:
"?It was far from obvious that bubbles, even if identified
early, could be preempted short of the central bank
inducing a substantial contraction in economic activity
- the very outcome we would be seeking to avoid?"
"The
notion that a well-timed incremental tightening could
have been calibrated to prevent the late 1990s bubble
is almost surely an illusion?But is there some policy
that can at least limit the size of a bubble and,
hence, its destructive fallout? From the evidence
to date, the answer appears to be no."
McCulley:
"(But Greenspan ignored) regulatory tools, including
most importantly, prudential constraints on credit
creation for stock speculation. I'm talking about
hikes in margin requirements, of course, which Mr.
Greenspan once again? categorically rejected as a
policy avenue that he should have explored."
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Related
to the above, a point I also made in my "Week
in Review" column of August 31, come the comments
of economist Paul Krugman in an op-ed piece for the
New York Times.
Krugman
was disturbed by Greenspan's inability, in the chairman's
words, to "definitively identify a bubble until after
the fact --that is, when its bursting confirmed its
existence," along with his claim that the Fed couldn't
have done anything about it, even if they knew it
was in existence.
Krugman:
"In September 1996, at a meeting of the Federal Open
Market Committee, he told his colleagues, 'I recognize
that there is a stock market bubble problem at this
point.' And he had a solution: 'We do have the possibility
of?increasing margin requirements. I guarantee that
if you want to get rid of the bubble, whatever it
is, that will do it.
"Yet
he never did increase margin requirements, that is,
require investors to put up more cash when buying
stocks."
And
while Greenspan did nothing, Krugman continues, "he
then began giving ever more euphoric speeches about
the wonders of the new economy."
"Mr.
Greenspan's remarks reinforce a worry?that Fed officials
will respond to continuing economic weakness not with
action but with excuses.
"We've
seen the process all too clearly in Japan?rather than
risk trying to solve Japan's problems and failing,
the (Bank of Japan) has repeatedly redefined its mission
so that it doesn't even have to try."
Krugman
is worried Greenspan's Fed is going down the same
path.
---
Stephen
Cecchetti, economist, in an op-ed piece from the Financial
Times.
"Central
bankers make two arguments for ignoring asset price
bubbles. They say that there is no way to be sure
that there is a bubble out there - and even if there
is, they say, there is nothing they can do about it.
"The
first argument rings hollow?For example, it is impossible
to avoid forecasting inflation and growth?(and) it
is important to realize that buried in the bowels
of the forecasts are implicit or explicit estimates
of the asset prices, the implied equity premium and
any potential bubble. These are necessary inputs into
any forecast of consumption, investment, overall growth
and aggregate inflation. Why not just admit that you
take a position on future asset prices and be done
with it?"
On
the argument that there is nothing the Fed can do,
even if they were to identify a bubble, Cecchetti
argues:
"Taking
explicit account of the bubble by tightening is a
sound alternative. To the extent that bubbles arise
from unrealistic expectations of future economic growth,
interest-rate increases that moderate current levels
of growth can put a brake on them."
Sounds
pretty good to me.
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Lastly,
I just want to add a comment made by U.S. News editor-
in-chief Mort Zuckerman (and echoed by countless others)
concerning the Fed's current interest rate policy,
specifically concerning a statement from their last
meeting:
"The
risks are weighted mainly toward positions that may
generate economic weakness."
Zuckerman:
"This makes it all the more disturbing that the Fed
opted to confine itself to mere words. Despite sharply
lower growth in the second quarter and the summer
stock market meltdown, there was no rate cut. If a
federal funds rate of 1.75 percent was considered
appropriate last year, when we had higher stock indexes
and didn't have the shock of corporate scandals undermining
business confidence, can it possibly still make sense
now?"
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That's
all for today. Next week, some thoughts on AOL Time
Warner.
Brian
Trumbore
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