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> AG is responsible for guiding the monetary and interest rate policies of
the
> US and this includes managing and preventing excessive speculation and
> consumption whether it be in banking, real estate, credit, or stock
markets.
> Allowing bubbles to build and then explode wrecks the economy for
everyone,
> not just the irresponsible speculators - clearly an area where government
> has a responsibility to act.
Earl, what is you're definition of "speculation" and "bubble?" I think most
people (myself included) define these terms as meaning asset prices that
have been artificially inflated through the use of margined or borrowed
money. If you agree to that definition, then there is simply no evidence
for your claim. Over the past 5 years (since the stock market first began
to take off), the amount of stock purchased on margin as a percentage of all
stock outstanding has actually FALLEN. In absolute terms, the figure has
grown significantly, but as a percentage of the whole market, it's down.
Where's the bubble?
> Early in his career, AG wrote some papers on
> the crash of 29 which criticized the central bankers for allowing
excessive
> speculation and credit to grow unabated.
And I agree with him. Back then, investors (speculators) only had to put
down 10% of the face value of the stock in order to buy it, and even that
rule was rarely enforced (the SEC hadn't been created yet...). This led to
massive leveraging in the market, and eventually the crash. Today margin is
limited to 50%, and US investors as a whole haven't even come close to using
that amount (no margin allowed in IRAs and 401Ks).
Just because people are placing a higher value on US stocks doesn't mean
they're speculating (by my definition...). As I said in a post on the Omega
List over two years ago, the money flowing into the stock market is "real"
money. It is not borrowed or leveraged. Once again, where's the bubble, or
the 1929 scenario here?
> Just a few years ago, AG had it
> right when he spoke of "irrational exuberance", however he was unwilling
to
> pay the (probably very substantial) political price of raising interest
and
> margin rates to head off the bubble.
I personally wouldn't be opposed to higher margin rates (as long as they
don't apply to S&P futures, of course...), but raising interest rates is a
bad approach to subduing the stock market. You mentioned earlier how
innocent people get hurt when bubbles burst. Well, nothing hurts innocent
people more than higher rates (higher car and mortgage payments) in the name
of punishing speculators. Isn't that kind of like destroying the village in
order to save it?
> Nor have our central bankers and
> politicians been willing to bring an end to the import of endless cheap
> goods which have held inflation in check and spurred consumption while
> exporting a major portion of the US manufacturing base and building an
> incredible trade deficit.
Big economics question here, maybe too off topic so I'll skip it!
> Consequently, by most historical measures, US
> equity and credit markets have bubbled to the point where a prick of the
> bubble poses a serious threat to not only the US economy, but the world
> economy as well.
>
Once again, your definition of bubble comes into play, but if 1929 is one of
your "historical measures," we're simply nowhere close to that...
Bruce
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