Bloomberg TV

Wednesday, October 05, 2005

"You're Doing a Good Job, Greenie"

With the Fed putting the pedal to the metal, damn everything else, the stock markets aren't exactly prospering at the moment. The DJIA is down over 210 points over the past two days, and the Nasdaq isn't doing any better. I noted a while back that the Fed would continue on its "measured pace" of 25 bp hikes if it was serious about controlling asset price bubbles, regardless of the consequences. Indeed, it's a bitter pill to swallow courtesy of Greenspan and friends, but it's necessary in order to regain a measure of sanity. That is, it's better to reduce consumer dissavings and speculation in property markets than risk possibilities like a one trillion dollar current account deficit in 2006 and mass personal bankruptcies reminiscent of the S&L debacle. (On second thought, scratch the latter: it's likely to happen anyhow.)

What's evident now is the flimsiness of the so-called recovery post-9/11, fuelled as it is by relatively unproductive pursuits such as consumerism gone wild and housing mania. As the Fed ratchets up rates, consumers have hit a wall, and housing has suffered from the prospect of consumers facing significantly bigger monthly payments and stagnant to falling house prices. As many have pointed out, consumption and construction are pursuits that basically do nothing to narrow the current account deficit and are instead drivers of further widening. Why Greenspan waited this long to douse everything with cold water is beyond me. So much for"The Wizard of Bubbleland" retiring on a high note. This tightening cycle should have begun long ago, and if it did, the results wouldn't have been as spectacularly explosive as we're likely to see.

Posted by Emmanuel |

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