July 11, 2004

Greenspan gave us recession & now inflation. "The ills that the Federal Reserve is fighting are largely of its own making. Now that it finally is hiking rates, the effects could be brutal for a lot of people. Fity the Fed. With its first quarter-point increase in late June, the central bank is trying to unwind years of leaping financial leverage and speculation without heavy casualties. Ironically, the problem is largely the Federal Reserve's own doing. When Chairman Alan Greenspan made his December 1996 "irrational exuberance" speech, the stock rally was 14 years old, a good time to curb excesses. But rhetoric was all Greenspan deployed. There was no action. The gun-shy Fed didn't even send a sobering signal by raising margin requirements, the amount investors must put up to borrow for stock purchases. So rampant dot-com speculation unfolded. The bubble, rivaling that of the late 1920s, spilled over to make the economy hyperactive. When the Fed finally got serious and started to tighten in June 1999, it was too late. Then, as stocks collapsed, the credit authorities shifted to massive easing to save the economy from a horrible recession and to fight deflation. Unfortunately, this did little to stamp out the excesses, which simply shifted into housing and consumer spending. With low rates, money for mortgages and credit cards remained ample. Tax cuts and leaping government spending helped fuel the spend-a-thon. The value of owner-occupied residences mushroomed from $8.7 trillion in the fourth quarter of 1997 to $15.2 trillion in the first quarter of 2004, bringing along with that much higher debt burdens. The home equity craze allowed people to plunge even deeper into debt to buy flat-screen TVs, boats and vacations. A nationwide fall in house prices, the first since the 1930s, would be devastating to the 69% of American households that own their own abodes. Big mortgage financers Fannie Mae and Freddie Mac, with $1.7 trillion in debts, could require government bailouts .. ". MORE -- Gary Shilling The Fed Is to Blame. Posted by Greg Ransom | TrackBack