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« ETF Update: Are you missing the rally? | Main | Using Gambling to Learn about Investing »

September 28, 2007

Comments

RB

All you ever wanted to know about Greenie:
http://www.kc.frb.org/PUBLICAT/SYMPOS/2005/pdf/BlinderReis.paper.0804.pdf

Blinder singles out Greenspan's single-handedly identifying the productivity acceleration in the nineties and crafting monetary policy around it as his greatest achievement. He identifies his policy (positively) of mopping up after bubbles burst as his legacy.

For a view of the Greenspan Fed with all its flaws, the book by Laurence Meyer recommended on this blog is strongly recommended. With the benefit of hindsight, Meyer thinks it is possible that they overreacted in cases, such as in 1998 and to the Y2K issue.
Meyer also admits that we don't know whether LTCM was as big a disaster as thought (though as a Fed Governor he was completely in the dark about what was done). He also says that deflation is not necessarily a bad thing if it comes from a supply shock as happened during the arrival of the railroads first and automobiles next. What is bad is a deflation occurring after a demand shock such as after a bubble bursting.
It may perhaps be possible to open up the Greenspan Fed for criticism on the basis that while the Fed is an independent body, it is not "politically tone-deaf". Therefore and for other controllability reasons, it is biased towards inflation.
One item of relevance today for those who watch the Fed, might be this line from Meyer's book regarding when the FOMC might tighten rates:

"Even the presidential election plays a part -- making the beginning of the tightening cycle less likely immediately before or possibly immediately after the election."


Aaron

Greenspan is clearly a very bright man with lots of insight on the overall economic picture. I do have to question how public he is being with his monetary policy talk and predictions now though. I think he would be better off letting Bernanke have the floor now as it relates to the current state of monetary policy.

Mike C

Good post, and thanks for the link to the McTeer blog. His blog is VERY helpful in understanding Fed operations.

FWIW, the combination of your post and reading McTeer's blog has changed my mind. I was formerly in the camp that believed the Fed had made a colossal mistake by taking rates to 1% and leaving them there for the amount of time they did. I now appreciate the point that we don't know what would have happened had they NOT followed that course of action, and perhaps that alternative scenario would have had a negative outcome.

In any case, I think debating whether Fed policy/moves they make are "right" or "wrong" is neither productive nor useful. I highly doubt any pundit or blogger has any influence on Fed policy.

What is more important in my view is to identify likely Fed policy, and use that to generate themes for profitable investing. One could have made alot of money both on the long and short side with the homebuilders during the "housing bubble", and the aggressive Fed cutting which led to negative real interest rates provided the lift-off for the entire commodity complex and precious metals.

So what now? Is it one and done, or was the 50bp cut just the first move in a rate cutting cycle. My money is on the latter. What are the investment implications of that? Probably bullish for the market overall, especially stocks that benefit from a falling dollar (large exporting multinationals), and almost certainly bullish for commodities and precious metals.

As a side note to Fed policy, I think the view that inflation is understated is growing. Here is what David Merkel at Aleph Blog had to say, and I think one has to agree he takes a balanced, measured view of things, and certainly is not an over-the-top extremist

http://alephblog.com/2007/10/02/miscellaneous-notes/

"One thing that is different about my blog is that I will do different sorts of posts. I’m hard to categorize. This comment makes some very good points, most of which I agree with. I believe inflation is understated in the US, and I think that the idea is growing in the populace, while Ph.D. economists stay in lockstep with the guild, and deny it. My main article on the topic, for those with access to RealMoney, can be found here."

I'd like to read the article, but I don't have a RealMoney subscription.

RB

It's Greenspan day, hope you get some good comments here
http://fon.gs/greenspan

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