I’ve written about our esteemed former Fed Chairman enough times for people to know my views of the man. However, the Maestro recently let loose a statement on MSNBC that absolutely MUST be read by anyone who wants to understand the general philosophy at the Federal Reserve as well as why the US economy is so screwed up.
"if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here." (on MSNBC’s Meet the Press).
The above statement is simply extraordinary given its source. This statement confirms what we have all suspected deep down all along: that Greenspan and the Ben Bernanke (the latter was Greenspan’s protégé) believe that the US economy’s focus is financial speculation.
In 1970, the financial industry only accounted for 10% of S&P 500 earnings. By 2003, this percentage had swelled to 31%. Put another way, by the turn of the century the financial industry accounted for nearly $1 out of every $3 in corporate profits.
Greenspan and the Fed instituted policies that helped facilitate this. They:
§ Left interest rates below the rate of inflation, punishing savers and forcing them to speculate in riskier assets
§ Told Congress to push back regulation allowing Wall Street to leverage up
§ Urged the regulators to ignore derivatives and other financial products that they themselves knew were dangerous and out of control
§ Thrown TRILLIONS of dollars at Wall Street
§ Didn’t give a hoot about incomes falling or the deterioration of other economic metrics that impacted ordinary citizens everyday lives
Greenspan’s admission also tells us why his successor, Ben Bernanke has chosen to combat the Financial Crisis by implementing policies that largely benefit Wall Street (the speculators) and punish Main Street (ordinary citizens). After all, if your primary focus is making sure that the markets stay up, who are you REALLY helping, the retiree with the 401(k) or the hedge fund trader who speculates aggressively using leverage?
Folks, this is the REAL “New Economy” Greenspan touted in the ‘90s: financial speculation. Greenspan and pals never really believed that technology would increase worker productivity. How could they? None of their policies actually benefitted technology firms or induced entrepreneurialism.
Instead, Greenspan and the Fed were trying to paper over the fact that the US had outsourced its manufacturing base and incomes were falling along with Americans’ standard of living. They fostering a credit bubble and maintaining loose monetary policies so that Americans would use credit and financial speculation to maintain the illusion that they were getting richer.
This is why the Fed ignored the bubbles in Tech stocks and the housing market. It’s also why the Fed continues to address the structural issues in the US economy (incomes, consumer debt, etc) and instead are trying to blow yet another bubble in the financial markets.
There are different types of “wrongness.” There is the wrongness of simply having no clue what one is talking about (for example, if someone asked Greenspan about bubbles and he started talking about taking a bath) and then there is the wrongness of being intelligent, having a clue about what one is talking about, but simply focusing on the WRONG goal/ strategy.
Greenspan, in the above quote, has established in clear terms that the US Federal Reserve is in the latter group. These folks can form clever theories and write erudite academic papers, but they are focusing entirely on the WRONG goal. People do not pay their bills from their stock picks, they do so from their incomes.
On top of this, financial speculation is an extremely unfair practice in terms of the parties involved. Even with discount brokerage rates, you’re starting own LOSING money the second you establish a position courtesy of the brokerage fees and commissions. Combine this with the fact most people don’t even make money in the market (the buy and hold crowd can attest to this in the last ten years) and it’s clear financial speculation benefits those on Wall Street a whole lot more than those on Main Street.
And yet, this is exactly the financial system Greenspan and Bernanke want. And I have no doubt this New “Wrong” will turn out just as poorly as the “New Economy.
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