Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Stock Market Sidelights to 1994

Stock-Markets / Stock Markets 2011 May 03, 2011 - 01:19 AM GMT

By: Fred_Sheehan

Stock-Markets

Best Financial Markets Analysis ArticleLURING THE UNSOPHISTICATED into the stock market was considered a risk by Federal Reserve Chairman Alan Greenspan in 1994. So much so, that protecting the individual investor was a mandate of the Fed. (The Fed advertises and then omits new mandates faster than spring fashions. My favorite is the brainstorm of former Fed governor Frederic Mishkin in 2007: "The modern science of monetary policy proceeds under the assumption that the central bank's purpose is to maximize the well-being of households in the economy; the objective function specifies exactly what should be maximized.") On May 27, 1994, Greenspan told the Senate Banking Committee it was for this very reason that he - his FOMC - had started raising rates in February, 1994: "Lured by consistently high returns in capital markets, people exhibited increasingly a willingness to take on market risk by extending the maturity of their investments." The People had shifted assets out of bank deposits and the like. The avuncular Fed chairman, by raising rates, was shepherding his sheep: "[S]ome of those buying the funds perhaps did not fully appreciate the exposure of their new investments to the usual fluctuations in bond and stock prices."


Given this acknowledgement, the Fed later violated its Investor Protection Mandate when it did not raise margin requirements: a means to reduce credit to the stock market, but, as much so, a warning of forbearance to those who do "not fully appreciate the exposure of their new investments." The Federal Reserve has absolute authority to raise margin requirements at any time. The Dow rose from 3,757 on May 27, 1994 to over 11,000 in early 2000; the Nasdaq from 733 to over 5,000. During these manic years, households served as sacrificial lambs to finance an economy that was funded by rising stock and bond prices.

In comparison, Ben Bernanke's Fed has explicitly stated its objective to artificially raise stock prices. Brian Sack, Manager of the System Open Market Account for the Fed (he runs the Fed's applicable trading operations) told a group of bond managers on October 4, 2010: "Nevertheless, balance sheet policy can... [add] to household wealth by keeping asset prices higher than they otherwise would be."

Bond managers were thus enlightened, but this announcement eluded the average American. Rigging prices was not universally applauded within the Fed. In a speech on November 8, 2010, Richard Fisher, president of the Federal Reserve Bank of Dallas, warned: "The rich and the quick are certainly able to exploit these circumstances to get richer. I have no problem with market operators making money; I did so myself in my previous life as a funds manager.... But I take no comfort, and see considerable risk, in conducting monetary policy that has the consequence of transferring income from the poor and the worker and the saver to the rich."

In a speech on April 8, 2011, in Dallas, the former investment manager said: "[B]y taking interest rates to zero and making money cheap and abundant so as to reliquefy the economy, those who invested the most conservatively - tucking their savings away in the safest of vehicles, like CDs, money market funds, and Treasury bills and notes - saw the income earned on their hard-earned savings dramatically reduced."

SETTING INTERST RATES TOO LOW and encouraging credit to grow too fast in the 1990s, the Federal Reserve has attempted to cover that policy error with more of the same, by controlling more markets. After nearly two decades of laying greater deceptions on earlier deceptions, only an economist could think the greater they contort nature the closer we approach perfection.

Aldous Huxley (Brave New World) wrote in 1937: "[E]conomic planning inevitably leads to more economic planning, for the simple reason that the situation is so complex that planners cannot fail to make mistakes. Mistakes have to be remedied by improvisation and rapid enforcement of new plans. It is probable these new plans will also contain mistakes, which must in turn be remedied by yet other plans. And so on. Now, where planning has come to be associated with an increase in power of the executive (and unfortunately this has been the case in all democratic countries), every fresh access of planning activity, necessitated by mistakes in earlier plans, takes the country yet another step towards dictatorship."

Huxley was not an economist but he could apply his mind to circumstances (foreseeing a war), probable government policies, and the consequences of those policies. Huxley was not advocating or ruing the future. He wrote as an observer. When it was noted that Huxley had become disillusioned, Max Beerbohm (I think) replied - paraphrasing from memory now: "Aldous cannot be disillusioned. He's never had an illusion."

This is in contrast to Ben Bernanke - or, whichever policymaker is under review - who lives entirely within his illusions. Simple Ben could not escape his abstractions even if he so desired. Of course, he will never be inclined to reconstruct his thinking since it is the security of his illusions that permit him to sleep so well at night. (As was put to me: "If you think Bernanke is losing any sleep over all this, you're wrong.")

CONGRESS DECIDED THIS DERIVATIVE STUFF, whatever it was, had gone far enough. The House Banking Committee held hearings in the spring of 1994. It called witnesses. George Soros testified on April 14, 1994. He was already famous, which gave him credibility. (Soros was also a superb investment manager, but it is fame and not skill that impresses Congress and Americans, in general.) He told the Congressmen: "There are so many [derivatives], and some of them are so esoteric, that the risks involved may not be properly understood even by the most sophisticated investors, and I'm supposed to be one of them."

After the Congressional study was completed, Alan Greenspan dismissed it. Brooksley Born should have read the newspaper summary. She might have understood that the study was for show and Alan Greenspan, as well as other regulators, were more interested in protecting bank profits than the financial system.

"Derivatives Get a Key Supporter," by Saul Hansell, New York Times, May 26, 1994:

"Strongly disagreeing with a new Congressional study, the chairman of the Federal Reserve Board, Alan Greenspan, said today there was "negligible" risk that the rapidly growing market for financial derivatives might someday require a taxpayer bailout.

"In testimony before a House subcommittee, Mr. Greenspan and other senior financial regulators said there was no need for new legislation to supervise derivatives.

"Derivatives are highly profitable products offered by banks and brokerage firms to corporations and investors.... Several large companies recently reported losses from unusual derivative transactions that combined normal hedging of risks with speculative bets on interest rates."

Note that Greenspan reminded the House Banking Committee the derivatives they might regulate were "highly profitable products offered by banks and brokerage firms." Brooksley Born did not stand a change of regulating derivatives with Greenspan and Congress running a protection service for the top growth industry in America.

Another slant: Congress decided Alan Greenspan knew more about derivatives than did George Soros.


ALAN GREENSPAN'S SO-CALLED AUTOBIOGRAPHY, The Age of Turbulence, has been described as a vital historical document. As a study of American finance in 1994, the book is negligent.

Greenspan reports (The Age of Turbulence) that he made an extraordinary contribution to central banking in 1994. All past Fed efforts to manage the "inevitable downturn" (after the growth phase of the business cycle) by "tightening rates at the first sign of inflation" had failed. This (past) approach "had never averted a recession." The Greenspan Fed opted for "a more radical approach: moving gently and preemptively before inflation even appeared." In Greenspan's words: "For decades, analysts had wondered whether the dynamics of the business cycle ruled out the possibility of a 'soft landing' for the economy - a cyclical slowdown without the job losses and uncertainty of a recession."

Whether any of the former central banker's claims to such evolutionary thinking and success should be regarded as such can be decided elsewhere. Greenspan's synopsis is of importance for what he does not say. The Age of Turbulence never mentions the 1994 markets. Therefore, we do not read that the FOMC believed it was already too late in raising rates at the December 1993 meeting. (Larry Lindsay: "[W]e all agree that the 3 percent [funds] rate is unsustainable. We all know it is too late.") This sits uncomfortably beside Greenspan's Age of Turbulence claim of a "radical approach: moving gently and preemptively before inflation even appeared."

Given that Greenspan never discusses the markets of 1994, we do not read of Greenspan's self-proclaimed ability to pop a bubble in 1994 (some of which is quoted in "Is It 1994 Again?" He made the declaration five times at FOMC meetings in 1994 and 1995.) He cannot mention this (in conjunction with his character) since, in 1999, he would wave the white flag and state it was impossible to identify a bubble in advance

As for the author's accomplishment, as construed in The Age of Turbulence: Was his fascinating and nerve-wracking "radical approach," which, if true, is worthy of a permanent display in the central banking hall-of-fame, actually a diversion from a more candid admission - that the 1994 rate hikes were largely driven by fear of asset bubbles?

The discussion of 1994 in The Age of Turbulence does not include the words "derivatives," "Orange County," or "Procter & Gamble." The consequences of Inverse IO CMOs must be learned elsewhere. Instead, the chairman closes the year in his hometown, canceling a dinner reservation at his favorite restaurant, Le Perigord on East Fifty-second Street, called away as he was by Bob Rubin to make more hall-of-fame decisions regarding the next "foreign financial crisis."

Did anybody really read his book?

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

© 2011 Copyright Frederick Sheehan - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules