Saturday, August 25, 2007
Is the Fed an irresponsible parent?
If we consider the Fed (personified by Mr. Ben Bernanke) as a parent and the American consumer as its (his) child, I'm hoping we've got the equivalent of Mr. Seavers from Growing Pains or Dr. Huxtable from The Cosby Show rather than Al Bundy from Married with Children. We (the children) need to get an occassional dose of tough love when necessary. Unfortunately, we children were previously under the foster care of "The Maestro", the esteemed Alan Greenspan, the parental equivalent of Homer Simpson. Actually, that's unfair to Homer, since Homer, although flawed in almost every way, always seems to end up on the moral side of decency, kindness, and fairness. Mr. Greenspan decided to bail the economy out of a potential recession in 2002 with a series of rate cuts that brought the overnight Fed fund rate to its lowest level in 40 years. Staying on metaphor, he basically threw us the keys to the economy and told us not to drive the 400 horse power monster too fast. More on this later. I'm pooped...
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to continue...
So, here's what happened:
Greenspan, whom by 2000 had an illustrious 13 years at the helm of the Fed (as dubious a distinction as being the captain of the Titanic, in my view), saw the train wreck that was the Dotcom bust unfold before his eyes. [Aside: Many believe (including this blogger) that Greenspan's monitary policy was actually one of the largest causes of the Dotcom era and subsequent bust. He often had a quick trigger in the dropping of the in times of market distress. His "quick-triggerness" came to be known as the "Greenspan Put", whereby the market came to expect the almighty Maestro to swoop in and save the day at the slightest hint of turmoil. "So what?", you ask. Well, after his Highness had indeed saved the day several times, the market began to rely on him to do the same in the future and market participants ("pros" and commoners, alike) began one of the most speculative bull runs in market history. After all, if I knew that a market couldn't go down because good ole'Allan would prop it up with a couple of quick rate cuts, I suppose I would've sunk the farm into Amazon, Microsoft, et. al. as well. Nutshell: Hasty rate cuts cause rampant speculation. Period. Book it.]
Back to our story:
With 13 market-prosperous years under his belt (save for a couple of hickups (crash of 10/19/87 and .LTCM, for example) that he managed away with rate cuts...), Sir Allan couldn't bear to see his tenure come to a close with anything but a crescendo of asset floatation.
Sorry, I'll have to end it here again. Bed calls.
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