Probing Greenspan's Easy-Money Madness
Greenspan also defended the massive increase in household debt last year by arguing that "the rise in home and equity prices enabled the ratio of household net worth to disposable income to recover to a little above its long-term average."
You realize what the head of the nation's monetary system and the most powerful actor in the global economy is doing here? After five years of volatile stock markets, he's asking us to rely on equity prices. As for house prices, they could fall steeply as the credit binge slows down. In fact, Greenspan concedes that the buoyant housing market and boom in mortgage refinancing "are not expected to continue at their recent pace." But, of course, the central banker does not predict what will happen to house prices when that pace slows right down.
Easy money causes much long-term damage to the economy. Under Greenspan, credit growth was rampant through the late '90s, which led to excessive investment by businesses, particularly in high-technology items. This investment led to the Nasdaq boom, but it took only a small uptick in interest rates to cause the whole technology sector to collapse in 1999 and 2000.
Greenspan has never accepted the blame for creating the boom that led inevitably to the bust. The Fed's Monetary Policy Report to Congress, which also came out Wednesday and accompanies Greenspan's testimony, refers to "a glut in long-haul fiber-optic" that had built up earlier. But how did the glut ever get there in the first place? Easy money, of course.Greenspan's policies haven't done anything to increase the nation's pitiful saving rate. In fact, his low interest rates have played a big role in keeping the nation's personal saving rate at around 2%. In the Monetary Policy Report, the Fed appears almost surprised by this. The central bank notes that households did not save more as their wealth fell during the stock market slump. Why might this be? Well, the Fed thinks the answer may be that households wanted to "take advantage of the attractive pricing and financing environment for consumer goods."
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV