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This Type of Thinking Created This Mess

First, does anyone believe anything Alan Greenspan says anymore?  The type of thinking displayed in the following Bloomberg article needs to be discredited at every turn because this type of thinking is destroying this country.

Here is the title of the Bloomberg article: Greenspan Says Stock Rally Means Lower Stimulus Need.  This is some of what he said:

The biggest stock market advance in seven decades is reducing the need for additional government stimulus measures, according to former Federal Reserve Chairman Alan Greenspan.

Ok. So, health and well being of our economy is tied to the stock market and not the opposite.  Oh really. 

“The stimulus is only a third spent, and its order of magnitude is not large enough to compare with the strength and power of the remarkable global equity increase that’s occurred since early March.  Capital gains have proved a far greater stimulus than one can attribute to the $787 billion program that has been only partially spent.”

When stock prices go up, the market value of common stock or of equity in banks and other financial institutions rises,” he said. “And the market value of liabilities is importantly affected by the size of the equity market value cushion on banks’ balance sheets.”

Wow, with all its volatility the stock market is driving and stimulating the economy.  That’s not very encouraging. What Greenspan is spouting about is asset price inflation all over again.  Remember the internet stock bubble of early 90’s and the most recent housing price bubble just last year.  How easily we forget?  But what if anything will sustain this rise in the stock market?  Economic fundamentals or real profits from sales gains as opposed to more cost cutting?

Let’s be real.  Government spending and to a lesser extent businesses rebuilding their inventories provided whatever little stimulus to the economy and not the stock market.  Check out this graph (ht to Prof. Paul Krugman)

This graph shows that the effects of the economic stimulus have already peaked but the private sector may not pick up the slack to generate economic growth.  So, what do we do?  Greenspan says don’t worry the stock market will provide the stimulus. 

What Greenspan is getting at is that asset price inflation via the stock market is what will drive consumer spending and provide the economic growth.  Just read this whopper:

“All of the statistical evidence indicates that the level of household wealth is a major factor in consumer expenditures and indeed apparently finances directly and indirectly about 15 percent of consumer outlays,” Greenspan said. “The impact on consumption expenditures is significant, largely because the amount of wealth is five times the level of income.”

True but household wealth in the past was attributed to over inflated housing prices or the stock market and the consumption was fueled by borrowing against over inflated housing prices and even more consumer debt.  How is this sustainable or even possible when debt levels are still high?

Greenspan is espousing the same old tired way of thinking that got us into to mess: let’s inflate asset prices and bring in more cheap imported goods.  But most importantly let’s keep wage growth stagnate! 

I like this quote from the same Bloomberg article - it screams something:

“There’s no need for a second stimulus,” said Philip Orlando, who helps manage $392.3 billion as chief equity market strategist at Federated Investors Inc. in New York. “People feel better about themselves. They’ve had some of their lost money restored, and now they’re going to go out and spend some of it.”

We obviously travel and socialize in different circles.  I don’t know too many people that are feeling that good about the economy and are willing to go back to spending and borrowing like it was 2006. 

Good luck.