Tag Archives: Alan Greenspan

The Stock Market And Its “Wealth Effect”

On February 18 I wrote a post concerning Alan Greenspan’s comments regarding the stock market “as a stimulus.”

In this post, I would like to highlight comments made by Federal Reserve officials (Bernanke and Sack) as well as another made by Greenspan, as I believe that these official comments regarding the stock market’s “wealth effect” and related themes deserve recognition and scrutiny.

From Bernanke’s November 4 Washington Post Op-ed “What the Fed Did and Why…”, in which he is commenting upon the Fed’s plans to buy $600 Billion in long-term Treasuries (i.e. QE2):

“This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

From Brian Sack of the New York Fed, in an October 4 speech titled “Managing The Federal Reserve’s Balance Sheet” :

“Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.”

From Alan Greenspan’s “Activism.” (pdf) :

“Equity values, in my experience, have been an underappreciated force driving market economies. Only in recent years has their impact been recognized in terms of ‘wealth effects’. This is one form of stimulus that does not require increased debt to fund it. I suspect that equity prices, whether they go up or down from here, will be a major component, along with the degree of activist government, in shaping the U.S. and world economy in the years immediately ahead.”


My comments:

I could write extensively about this collection of comments.  For now, I will say that until recently, the idea of prominent Federal Reserve officials publicly talking of the stock market as an instrument for creating a “wealth effect” would have seemed rather foreign.  I see considerable peril, for a variety of reasons, in having officials make these types of comments.

Can an asset class such as the stock market be reliably counted upon as a means unto itself to create sustainable, broad-based wealth?  Especially if, as I believe, the stock market is currently a bubble?  I think we should reflect upon our (national) experience in housing before answering this question.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1313.80 as this post is written


Alan Greenspan On Impact Of QE2

Recently Alan Greenspan wrote a paper titled “Activism.” (pdf)   While I don’t agree with many of its analyses and conclusions, I am finding it to be an interesting document.

On March 4, CNBC interviewed Greenspan.  I found one response by Greenspan to be especially notable.  The question happens at the 42 second mark:

interviewer:  “…isn’t QE2 some government activism that could be actually hurting the strength of the economy rather than helping it?”

Greenspan:  “I think we’re not going to know the answer to that question until after the fact – because you have to go full-cycle on these types of projects…”


A Special Note concerning our economic situation is found here

SPX at 1298.05 as this post is written


Alan Greenspan – On “The Stock Market As A Stimulus”

Alan Greenspan gave an interview to The Wall Street Journal on January 7.  I found various parts to be of interest, and in many instances I disagree (partially or fully) with what he says.  I  wrote a February 3 blog post on his comments in the interview concerning the primary purpose of a central bank.

Given the recent steep climb in the stock market, I think it is interesting to highlight his comments on the interaction between The Federal Reserve and the stock market.   While his entire thoughts on the issue are notable, I found his comment at the 16:24 mark to be, for a number of reasons, very provocative:

“…the stock market overall is the only type of stimulus that you can get in the economy which doesn’t have any debt associated with it.”


I’ll likely further comment on this, as well as other recent comments made by Federal Reserve officials on the stock market, in a future post…


A Special Note concerning our economic situation is found here

SPX at 1339.26 as this post is written

Alan Greenspan On The Primary Purpose Of A Central Bank

On January 7, The Wall Street Journal conducted an interview of Alan Greenspan.

I found a few aspects of this interview to be interesting.  Perhaps most notable was the following comment by Greenspan, seen at the 13:58 mark:

“…the primary purpose of a central bank is to protect the value of the currency…”

I will likely reference this quote in a subsequent post(s)…


A Special Note concerning our economic situation is found here

SPX at 1304.03 as this post is written

Two Quotes From Alan Greenspan

As an extension of the last post concerning bubbles, here are two of Alan Greenspan’s past comments that I find particularly relevant given our current environment:

This is from a September 26, 2005 speech he gave in which he speaks about how negative “shocks” may impact the economy.  I find this quote interesting as it is an example of, among other things, how one can overlook the severity of embedded risks in a bubble environment:

“How significant and disruptive such adjustments turn out to be is an open question. Nonetheless, as I have pointed out in previous commentary, their economic effect will, to a large extent, depend on the flexibility inherent in our economy. In a highly flexible economy, such as the United States, shocks should be largely absorbed by changes in prices, interest rates, and exchange rates, rather than by wrenching declines in output and employment, a more likely outcome in a less flexible economy.”

This next quote is from his “The Crisis” paper, p. 45:

“‘…history has not dealt kindly with the aftermath of protracted periods of low risk premiums.'”

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SPX at 1217.28 as this post is written

Greenspan’s Most Notable Phrase

Alan Greenspan recently gave a lengthy video interview on Bloomberg.  A short summary is found at this link; the actual video is the first listed near the bottom of the article.

I found the video to be most interesting.  Greenspan elaborates upon his recent “The Crisis” paper, which I mentioned here.  As well, he discusses many other issues.

While there is much I can comment upon in this interview, I want to focus on a key phrase he mentions with regard to what is now happening:

“You can see the whole blossoming of finance.”

I believe this to be the most notable of all of Greenspan’s famous phrases.

I think we are seeing a blossoming – not of “finance”, but instead of (hyper)bubbles.  I think there are many bubbles of severe magnitude throughout the worldwide economy.  I have previously written of these bubbles in a variety of posts.

I strongly disagree with those who think that bursting bubbles are not something to be unduly concerned about.  In fact, Greenspan says in the interview, “Remember that the bursting of the bubble by itself is not a big catastrophe. We had a dot-com bubble, it burst, and the economy barely moved.”

While it may be pleasant to ignore the existence of bubbles, and downplay the potential significance of their bursting, I believe that the existence and prevalence of bubbles in today’s worldwide economy is perhaps the largest threat to achieving Sustainable Prosperity.

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SPX at 1166.59 as this post is written

Greenspan’s “The Crisis” Paper

Last Thursday, Alan Greenspan’s “The Crisis” paper (pdf) became available.

I assume this is the paper that Alan Greenspan has previously spoken of, as seen in my previous post on his defense of his tenure.

For now I simply want to post a link to the paper.  I may further comment upon the paper at a later time.

I think the paper is valuable in that it provides a unique perspective on the financial crisis.  However, I don’t agree with many of the points made in the paper.

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SPX at 1166.49 as this post is written

Alan Greenspan “Takes On His Critics”

The March 1 edition of Fortune Magazine has an article titled “Alan Greenspan Fights Back.”  The link is found here.

I found the article interesting for a variety of reasons. As the article mentions, rarely has Greenspan addressed his purported culpability in creating the housing bubble and its accompanying impact on the economy.

Greenspan’s tenure at The Federal Reserve is most fascinating.  One aspect of this is how his performance was perceived over time.  Throughout most of his tenure he was effusively lauded (i.e. “The Maestro”) – but this widespread acclaim has been (severely) tarnished over the last decade.

As the Fortune article says, “Four years after leaving the Fed as the Greatest Central Banker Ever, the longest-serving chairman, the Maestro, Alan Greenspan is the designated goat.”

As the article indicates, Greenspan is preparing a 12,000-word article in his defense.  I look forward to seeing this article and analyzing his argument.

As far as Greenspan’s performance and actions are concerned, I do not believe there has been an accurate assessment yet provided.

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SPX at 1102.41 as this post is written