Reader Question: What Would I Do Differently Than The Fed?

 

A reader wants to know what I would do differently if I was the Fed Chair.

Irrational Exuberance History Lesson

To understand what I would do, let's review a history of what the Fed did.

In 1996 former Fed chairman Alan Greenspan delivered a speech on the burgeoning internet bubble in the stock market which he labeled "irrational exuberance".

In 1999 he goosed the stock market by lowering interest rates in response to his absurd fear of Y2K global computer breakdown regarding date handling at the turn of the century.

US Banks made massive loans to worthless dotcom companies as well loans to Argentina and other countries that defaulted. 

At the peak, just before the bubble bust, Fed minutes show Greenspan bought into the "productivity miracle" of technology and the internet reversing his call on irrational exuberance. 

Dotcom Bust

To bail out the banks from the Doccom bust and bad South American loans, Greenspan slashed interest rates to zero and held then too low, too long at that rate.

The process spawned the housing bubble.

Housing Bubble Denial

Greenspan then Bernanke denied the brewing housing bubble.

Bernanke looked more than a bit foolish when the housing bubbled collapsed and homeowners walked away from their mortgages en masse starting the Great Recession.

When things did collapse, the Fed again bailed out the banks and zombie corporations. 

Once again this reinforced moral hazard policies and more reckless behaviors.

Lessons Learned and Not Learned

The Fed never learned its lesson about the need to not blow bubbles.

But speculators learned the Fed likes to blow bubbles. And once again everyone seems to think they can get out of the way when the collapse comes. 

They can't and won't because it is mathematically impossible. At the individual level a few people can cash out, but in aggregate, someone must hold every share of every company on the way up and down. 

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