Letters to the Editor
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Losing all credibility
One of the things that gave the market such confidence in Alan Greenspan was the depth of his opacity. The pieces of data and considerations that affect the price level, asset markets and the economy are not all that difficult to speak to in clear layman's language. But that was not Greenspan's style. Greenspan mostly spoke without saying anything, employing a variety of ambiguous and highly technical jargon when discussing or justifying policy. And, rational as they are, investors mostly mistook that for a rarified intelligence, and his policy moves as virtuosity. This created the impression that Greenspan was this monetary deity, a 'maestro', orchestrating the economy from up on high, which proved exceptionally calming to investors who operate in an uncertain world with potentially very expensive consequences. The bulls had their man in charge of the controls, and even the most factually compelling and exceptionally worrying bear case could be swept aside by a flick of the maestro's wand.
Of course, it was all a mirage. Those without bull market stars in their eyes- a vast minority if you took in earnings multiples then and real estate prices since- knew that something was rotten in Denmark. And most of them knew that Greenspan was well aware of the extent of bad credit that was being created, and the concomitant asset bubbles- that he simply couldn't stomach the consequences of addressing it. That his ego wanted very dearly to believe what his mind would not sign off on.
Enter Ben Bernanke, the fruition of Greenspan, the guy who lapped up the Kool-Aid and asked for seconds. Fittingly, he now sits atop the massive inverted pyramid credit nightmare he helped to create. As these things tend to work out, Mr. Bernanke is also the weak-kneed heir to the throne who's just not up for it. In testimony on capitol hill, he's been bullied and sat there with his tail between his legs. In just the past few months he's been cowed into huge changes in policy- slashing the Fed Funds rate in both instances. Jim Cramer, and now Larry Kudlow- two of the most discredited analysts in investment history- can now claim to have influence on our nation's central bank. Added to this shameful record, Mr. Bernanke has done away with Greenspan's lack-of-transparency, to his detriment. To date his Pollyanna public forecasts, (sub-prime was successfully 'contained', the economy was strong...), have proved to be woefully off base. And just now the FOMC has taken to being dishonest- in today's statement they don't even mention the stock market, notwithstanding how patently obvious is the catalyst for their extreme and unprecedented action, (the fed has never cut by 75bps, and never this close to scheduled meeting). What a joke!
So, an underreported story on the back of all this is that Chairman Bernanke is quickly losing any semblance of respect or credibility from investors, and that will cost him and us very dearly if as I suspect this thing gets much more serious. Remember the US dollar is a Fed liability...
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http://www.youtube.com/watch?v=YWyCCJ6B2WE
re: "juicing the stock market is now considered Job #1 for the Federal Reserve Bank"
SEE:
Plunge Protection Team
http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm
And:
"We have the responsibility to prevent major financial market disruptions through development and enforcement of prudent regulatory standards and, if necessary in rare circumstances, through direct intervention in market events".
-Remarks by Chairman Alan Greenspan at the Catholic University Leuven, Leuven, Belgium (January 14, 1997)
http://www.federalreserve.gov/Boarddocs/Speeches/1997/19970114.htm
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Social Security, re-balancing, and sleep, blessed sleep
Alkaline, very intriguing idea and I think you are very much onto something concerning the subterranean tie between the failure to privatize Social Security and the hangover from the wheee, houses for free party.
And all this helpful advice lately in the quarterly newsletters from the 401K providers to periodically rebalance your holdings? Yep, I was up at 4 a.m. last night, sweating, rebalancing all right. Put every last penny in the humble stable value category. I don't know crap about the stock market, but I know I can't take the nausea of this tilt-a-whirl anymore. I am over and out from this insane -- or more politely, bi-polar -- asylum.
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Calling all Chicken Littles
To the anonymous poster who's cashing in all the stocks in his/her retirement account: assuming you're redeeming mutual funds to rebalance your 401(k) portfolio, by the time your transactions are made at the end of trading today, all you will have accomplished is to lock in massive losses.
No long-term investors should make any drastic moves based on what the Fed, or the market, does on any particular day. If anything, you should be buying stocks.
Leonard's comments on the Fed cut... er, capitulation... are spot-on. What the Fed has just done is greatly increase the prospect of high inflation, which would be horribly detrimental to the average person's finances. Their actual goal seems to be something other than the welfare of the macro economy.
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Bush has tried
to counter bad economic fundamentals with deficit spending. That put a gloss on the economy for about 5 years, but no longer. The housing bust is way too much for even the massive deficit spending of the Bush presidency to counterbalance. Predictably, Bush proposes ever greater deficit spending which will result from his proposed tax rebate. That would provide a bit of relief for a short time, but will not address fundamentals.
What's required and what I suspect no politician will even mention much less actually do, is to agressively redistribute income downward via taxation and spending policies. In other words, we have to increase taxes on the wealthy and continue strong government spending. Increased infrastructure spending would be a good idea. That would put money in the hands of those who have lost so heavily during the Bush years. Because those folks are poor and middle class, they'll spend the additional money which will spur economic growth. It's just New Deal economics. We've known this for decades. All we have to do is do it.
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keroseend
You are 100% wrong in what you wrote. It's the pooling of ever more massive amounts of wealth at the top that is the chronic problem. The acute problem is the bursting of the housing bubble which exacerbates the chronic problem. Both take money from the poor and middle class which depresses aggregate demand. That depresses wages and prices which equals recession. Tax cuts do the opposite of what is necessary. Because the wealthy pay more per capita in taxes than the poor and middle class, tax cuts put money in their hands resulting in the pooling of money at the upper levels of the economic ladder. That's bad economic policy at any time, but particularly now.