The first issue deals with monetary policy. The recovery scenario propagated on Wall Street is that Fed monetary policy will bail out the U.S. economy. All eyes and hope are on Mr. Greenspan. There is a blind faith that Mr. Greenspan will once again work his monetary magic. By lowering interest rates and flooding the markets with liquidity, it is hoped that the U.S. economy will metamorphose itself into a recovery. The belief in the efficacy of monetary policy has never been higher. Mr. Greenspan contained the collateral damage of the stock market crash in 1987. He single handedly bailed us out of the S&L crisis. He brought us out of the recession of 1990-91. He doused the fires of the Peso, Russian Debt and Long Term Capital Management crisis. Why wouldn’t he be able to fix the current economic crisis and restore economic growth in the United States?
There is also widespread belief in the “Greenspan Put,” the belief that monetary policy can put a floor underneath stock prices. However, things aren’t going according to plan. The economic formula of booming money supply equals booming financial markets which leads to economic recovery isn’t working.
After the most aggressive round of Fed easing in decades, the financial markets and the economy aren’t responding. In past economic cycles, Fed easing normally produced a recovery in the financial markets first. The rise in stock prices would signal an approaching recovery in the economy. However, signs of recovery are missing as evidenced by the Consumer Confidence Index, Gross Domestic Product, and the NAPM Manufacturing Index.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.