Greenspan says equity stimulus is driving economy ..no sir, markets are not economy!!

It seems Alan Greenspan, former chairman of Federal Reserve, is speaking ‘Bernankian’ language these days which precisely means ‘Fed is always right’. Here are few important things he said in an interview on Bloomberg:

    • Fed rates didn’t cause housing bubble
    • Stocks are CHEAP
    • Equity stimulus is driving economy
    • Equity stimulus is underestimated
    • Housing markets are not moving for sometime now.
    • Zero-bound rates can be technically increased
    • Monetary policy be left for unelected people and Fiscal policy  should be taken care by elected ones.
    • All the economic data are based on non-financial system and financial system is excluded.

Well, I tend to disagree with many points he said but there certainly few points which he was spot on.

If Fed rates didn’t cause housing bubble then what did? Wasn’t cheap money available to people made prices to rise. If rates were not low then only the demand from creditworthy people would have decided the prices but cheap money meant anyone could demand a house, doesn’t matter if he was anywhere near to creditworthiness to pay for it.

Stocks are cheap. This statement was heard even when markets were at same level as they are now in 2007 and rising. With stock markets nearing all time high, US debt increasing, Euro crisis persisting and fear of contingency still there among the market players, how can we say stocks are cheap? Current market rally is fuelled by excess money thrown in financial system and it will continue till Fed continues its ‘keep-markets-happy’ policy. If equity stimulus is so good for the economy then why didn’t the job markets performed as good as equity markets? We are reaching pre crisis levels of stock markets but why aren’t were reaching same unemployment levels as before crisis?

Interest rates are not increasing because policy makers are trapped within their obscure models which are mostly flawed. Policy makers are trying to avoid disaster at cost of a bigger eventual disaster. Until the mess (debt) is cleared from the financial system, we can’t see real growth. Look at Japan, they haven’t been growing for 2 decades because they never cleared the debt in their system. Worst part is that the fear of crisis will never go away from the households, institutions and corporations. Long run stagflation is what would result in the end.

I definitely agree with second last point of Chairman that fiscal and monetary policies should be independent and left to their respective in-charges but that would be an ideal world for me. The way world works today is not like that. Even if central bank wants to increase the rates they will face immense political pressure and criticism. Markets are too sensitive to such policy measures and politicians know that.

Hitesh Anand

I am a post graduate from Newcastle University, UK. I like studying and analyzing economic data and financial health of world.

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