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What Greenspan didn´t know / Artikel, engl.

verfasst von JÃœKÃœ, 07.03.2002, 20:06

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What
Greenspan Didn't Know
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by William J. Stepp

[Posted March 7, 2002]



[img][/img] As
a young man, Alan Greenspan considered himself to be a follower of Ludwig von
Mises. Like Mises, he favored capitalism, free markets, and sound money. He
cofounded a successful economics consulting firm and earned a Ph.D. in economics
at New York University. He served as chairman of President Ford?s Council of
Economic Advisers. In 1987, he became chairman of the Federal Reserve.

As Fed chairman, he orchestrated one of the greatest stock
upswings ever. It featured a remarkable bull market within a bull market, the
great Internet bubble that lasted from August 1995, when Netscape issued shares
that soared in value, to March 2000, when the market peaked. Along the way, in
his"irrational exuberance" speech of December 5, 1996, he famously
warned about the overvaluation of stocks. On several occasions, Greenspan
expressed skepticism of the bull market and recognized that a stock market
bubble existed.

As Morgan Stanley economist Stephen Roach makes clear in a
February 27 report, Smoking
Gun, behind the scenes the central monetary planners"appreciated
the full gravity" of the market balloon. Roach quotes Greenspan at a
September 1996 FOMC planning session as he declared that the Fed could eliminate
the bubble by raising margin requirements for stock purchases."I guarantee
that if you want to get rid of the bubble, whatever it is, that will do it,"
he said. The Fed, which has sole control over margin requirements, refrained
from changing them. The Fed chairman also said, somewhat darkly, that he was not
sure what else raising margin levels might do. The Morgan economist himself
argued for raising margin requirements in Barron?s, March 27, 2000.

Stephen Roach quotes Fed Governor Lawrence Lindsay as saying
at the same meeting that the Fed should have burst the bubble in its early
stages before it did too much damage to the economy. The damage he referred to
included"scarce financial human capital," i.e. speculators, devoting
resources to acquiring wealth.

It apparently did not include the misallocation of resources
that occurs when the central bank forces the rate of interest to fall below the
natural rate established in the markets for investible resources--equity and
debt capital. If his insights had included this Austrian point of view, both he
and Chairman Greenspan would have been forced to admit that the great stock
bubble was of their own making, and that the solution would have been to let the
market work.

First, let it work by cleansing the economy of the
malinvestments caused by the central bank-engineered credit expansion. Then,
free the economy of the central bank--the Federal Reserve--itself. Let interest
rates"tell the truth about time," in the illuminating phrase from
Roger Garrison, by guiding entrepreneurs in making investment decisions in
markets where the supply and demand for investible resources are not distorted
by monetary central planners. Free markets, including free capital markets, are
the key to maximizing employment, productivity, and income.

Both Alan Greenspan (somewhat uneasily) and Stephen Roach (more
confidently) claimed that increasing margin requirements would have checked the
bubble. Neither economist learned this in his economics training. Neither of
them ever read it in a money and banking text. Changing margin requirements is
not a tool of monetary policy because it has no effect on the monetary base. If
they studied for the Series 7 exam (one of two licensing tests stockbrokers must
pass), they would have been taught otherwise, because the theory that margin
requirements affect the money supply is a staple of its section on monetary
policy. Unfortunately for the nation?s stockbrokers, and for Messrs. Greenspan
and Roach, the idea that manipulating the stock loan market can break bubbles is
dead wrong.

Altering margin requirements simply shifts the flow of central
bank-juiced asset purchases from stocks to other assets, such as cars or homes
(in the case of an increase), or from other assets to stocks (for a decrease).
It simply moves the bubble from one asset class to another; it does not cause a
net bubble reduction. Just as tellingly, because stocks cannot be purchased on
margin for thirty days after an initial public offering, how would they explain
the fact that scores of internet IPOs soared in value their first day and for
many days before the margin restriction period ended? Enthusiastic bulls
didn?t wait to buy them until their twenty-first trading sessions, when they
were first able to purchase them on margin.

More to the point, the theory of tinkering with brokers?
loans (which should be determined on the free market anyway and not restricted
by the Fed) ignores the fact that the bubble is caused by central bank
manipulation of money and credit. By focusing on the market for brokers? loans,
the monetary central planners and their Wall Street critics miss the fact that
the market for these loans (even if margin requirements weren?t frozen by the
Fed), would be distorted anyway by the influence of credit manipulation on the
loan market, just as it distorts every other capital market. The axis of
influence is from the Fed?s manipulation of, typically, the Fed funds rate to
the brokers? call rate.

Using changes in the margin regulation as a stick to beat the
stock bubble does not work, fails to solve the underlying problem, and further
injures investors by restricting their choices. What Fed Chairman Greenspan
didn?t know is something that the young Greenspan and his mentor Ludwig von
Mises did: that monetary freedom is the way to end market bubbles once and for
all.


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William J. Stepp is a New York writer who is active in anarcho-capitalist
intellectual circles in New York. Send him MAIL,
and see his Mises.org Articles
Archive.



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What Greenspan didn´t know / Artikel, engl. - JÃœKÃœ, 07.03.2002, 20:06