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Joined: 28 Dec 2005 Posts: 11984
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Posted: Thu Aug 06, 2015 3:31 pm Post subject: Greenspan |
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Jeffrey Frankel:
Joseph,
I agree. As it happens, I myself asked Alan Greenspan why he didn’t support raising margin requirements to follow up on his one famous comment about possible “Irrational exuberance” in the stock market. This would have been around 1998, when the US stock market seemed more clearly to have moved into bubble territory. (At the time, I was a Member of the president’s Council of Economic Advisers; a privilege that goes with that position is a monthly lunch with the Federal Reserve Governors.) The answer he gave at the time was not “rational expectations” or market efficiency. Rather he said he didn’t think raising margin requirements would work. That didn’t seem a very good answer to me: if it didn’t work, then no harm would be done. Also, I knew some research had been done suggesting that reserve requirement might indeed have effects. (I had in mind a paper by Gikas Hardouvelis, a former student/co-author of mine. Until this January he was Greek Finance Minister.) But I didn’t argue any further with Greenspan.
JF
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PeakTrader:
Why would raising margin requirements be important in the late ’90s?
U.S. tech stocks were driven by revenues in the late ’90s and then by earnings in the 2000s.
The result was big tech firms that eventually earned high profit margins.
Anyway, controlling the macroeconomy was Greenspan’s job, not the stock market.
Greenspan achieved a big economic boom in 1995-00, a quick and massive “creative-destruction” process, mostly in 2000-02, and in a mild recession in 2001.
Then, he built an expansion on top of the 1982-00 boom, extending the “long-boom,” till 2007.
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Peak Trader,
Many of us agree that the US stock market boom of the 1990s was initially primarily by fundamentals such as ICT investment and a record-length economic expansion, but think that by the end of the decade it was in bubble territory. I thought that even before the fall in 2000-02.
Despite my comment about reserve requirements, I think Alan Greenspan generally did quite a good job as Fed Chairman during that period. In my personal view, his serious mistakes came later.
JF
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JF, I don’t know what “serious mistakes” Greenspan made. He was Fed Chairman till January 2006.
It seemed appropriate the Fed Funds Rate was raised from 1% in June 2004 to 5 1/4% in June 2006 – 25 basis points at every FOMC meeting.
In the 2000s, there was lax housing lending standards (I doubt Greenspan would go against Congress), oil prices were rising sharply, and there was overconsumption, reflected in huge current account deficits, while the country was near full employment.
When Bernanke became Fed Chairman, he raised the Fed Funds rate to 5 1/4% and maintained it, until September 2007, perhaps trying to prove he wasn’t an “inflation dove.”
Nonetheless, Bernanke was in a tough position. He began easing the money supply when oil prices continued to rise sharply, peaking at $150 a barrel in mid-2008, the economy was running out of steam, in part, because of huge household debt, and then had to deal with the moral hazard built in the financial industry.
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