You are hereOnce again, not his fault

Once again, not his fault

By www - Posted on 06 September 2007

The Wall Street Journal reports($) on another Alan Greenspan sighting where the former Fed chairman once failed to make the connection between basic human instincts and easy money policies by the central bank.

Mr. Greenspan, Fed chairman from 1987 to 2005 and now a private consultant, said business expansions are driven by euphoria and contractions by fear While economists tend to think the same factors drive expansions and contractions, ."the expansion phase of the economy is quite different, and fear as a driver, which is going on today, is far more potent than euphoria."

The euphoria in human nature takes over when the economy is expanding for several years, and leads to bubbles, "and these bubbles cannot be defused until the fever breaks," he said.

Bubbles can't be defused through incremental adjustments in interest rates, Mr. Greenspan suggested. The Fed doubled interest rates in 1994-95 and "stopped the nascent stock-market boom," but when stopped, stocks took off again. "We tried to do it again in 1997," when the Fed raised rates a quarter of a percentage point, and "the same phenomenon occurred."

"The human race has never found a way to confront bubbles," he said.

Apparently, this is just how the world works - one bubble after another.

The rampant creation of money and credit along with encouraging an entire generation to take on more risk have nothing to do with the financial bubbles that now seem to come and go regularly.

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