The Power of Ideas

Comment on Article by Mike Shedlock

In an article by Mike Shedlock, appearing in, the author chastises former Fed Chairman Greenspan.

I could not agree with the sentiments expressed in that article more.  Bubble Al is the appropriate nickname for ex-Chairman Greenspan.  He practiced asymetric monetary policy.  Conditions that would justify a rate hike could never cross the threshold necessitating monetary tightening.  But when the situation called for an ease, the hurdle was non-existent.  For example. in 1995-1996, U.S. economic growth was accelerating, and U.S. consumption was exploding.  U.S. growth fueled Asian export growth. U.S. equity markets went up, Asian markets went up faster…bubble.  The argument that the economic backdrop required policy firming was pooh-poohed by the Chairman, stating that non-domestic factors were not appropriate considerations in setting domestic monetary policy.  Of course, the bubble did not take long to burst. and as Asian equities imploded (eg, the Hang Seng did not take long in going from 16000 to 10000)  the Chairman worried aloud that these non-domestic factors created a significant risk to U.S. growth.  Monetary accomodation quickly followed.

Asymetry was a repetitive problem during the last 12 years of the Greenspan era, with consequences that are eloquently eluded to in this article.  The problem is that deflating the rolling bubble will require more pain than the U.S. political system is willing to bear; as is currently evident with the reaction to the maelstrom surrounding the sub-prime mortgage debacle.  Thus, we are likely to continue to have the little boy blue effect–a monetary/fiscal band-aid will be applied to each hole in the dyke, causing a larger crack to appear somewhere else.  One day the dam will truly burst.


September 12, 2007 - Posted by | Economics, Finance, Markets, Politics

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