In recent decades, the Fed has engaged in a series of policy interventions and market manipulations that have paradoxically left it more powerful even as those interventions left a trail of crashes, collapses and calamities.
Needless to say, for the past 20 years the Fed has gone beyond its dual mandate of price stability and full employment to engage in full-scale manipulation of markets and the macroeconomy.
On Dec. 5, 1996, Alan Greenspan, then Chairman of the Federal Reserve, gave a speech in which he mused about whether valuations in the stock market reflected a degree of ‘irrational exuberance.’ The irony was that stocks measured by the Dow Jones index doubled in value over the next three years before crashing over 40% from their peak on Dec. 31, 1999.
Greenspan’s restraint in 1996 was the beginning of a Fed theory that said the Fed should not lean against bubbles by raising interest rates, but should let bubbles burst and then ‘clean up the mess.’
A less charitable interpretation is that the Fed encourages bubbles by misguided interest rate policy and doesn’t care if everyday investors, like you, get crushed when the bubble bursts, as long as the banks are propped up.
In short, the Fed has become an all-purpose backstop for failing banks and falling markets.
This post was published at Wall Street Examiner on January 2, 2017.
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