Stocks Fall After Greenspan Comments

[mcscajun]

Source: Associated Press (via NY Times)

May 23, 2007
Stocks Fall After Greenspan Comments
By THE ASSOCIATED PRESS

Filed at 6:22 p.m. ET

NEW YORK (AP) -- Stocks wilted Wednesday as comments from former Federal Reserve Chairman Alan Greenspan and worries about upcoming economic data deflated a rally fed by takeover activity.

Stocks initially rose, lifting the Dow Jones industrials briefly above 13,600 for the first time, after the market got a fresh load of deal-related news that included a possible bidding battle over aluminum producer Alcan Inc. But the excitement waned after a media report that Greenspan expressed concern that China's stock market -- which has recently been hitting record highs -- could eventually see a sharp decline.

-snip-

Strong merger and acquisition activity has for weeks been the primary force lifting the Dow, which crossed over the 13,000 milestone less than a month ago. So after some cautionary comments from Greenspan, analysts were not surprised to see investors take a breather.

''He still carries a lot of clout,'' said Steven DeSanctis, small cap strategist with Prudential Equity Group, noting that U.S. investors are also very focused on the Chinese economy. ''You get a data point like that and people start to take profits, get a little nervous.''

Read more: http://www.nytimes.com/aponline/business/AP-Wall-Street.html?_r=1&oref=slogin&pagewanted=print

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Would somebody please tell Greenspan to take his "clout" and stuff it? :grr: One Fed Chairman at a time, please.

[Selatius]

1. At this point, I don't really hold much faith in the Fed. It's not even a federal agency.

The courts have consistently ruled that the Federal Reserve is a private corporation run for the benefit of its private shareholders.

[Kagemusha]

3. Yeah, as a restraint on the treasury. This isn't new.

You had faith in the Fed sometime before though?

[Selatius]

4. Yeah, back when I was more of a right-leaning Republican.

[Kagemusha]

5. I see.. it's just, there'd be much less faith in if it was a federal agency.

IMHO. And IMO re: a reading of financial history. Others can feel free to disagree.

[Selatius]

11. In general, I see it this way. I go back to what the writers of the Constitution had to say.

If we followed what the Framers of the Constitution had in mind, the only entity in the US that should create and destroy money is the US Treasury alone. As it stands, all banks can create money using a system called fractional reserve banking. This, of course, leads to inflation, which is a regressive tax on everybody, and by constricting the money supply at will, they can, in essence, cause recessions in an economy for their own purposes, a prime example being the Great Depression made worse when the Fed constricted the money supply even more when it could've done the opposite.

If the US economy operated on a system such as full reserve banking with the US Treasury being the only entity with the power to create and destroy fiat money, then inflation could be permanently halted or controlled, and if there is significant inflation, then the blame lies squarely at the foot of the White House and its monetary policies. It would be obvious to everybody, and the people could decide what to do in that case, as was intended by the Framers.

The notion of only giving the state the power to create currency isn't new. The prime example in the 1700s in the Colonies was Colonial Scrip, currency issued and controlled by the colonial governments. In fact, Benjamin Franklin asserted one of the prime reasons the Colonies rebelled against England was because Parliament after being lobbied by banking interests took away the power from the colonial governments to issue currency and demanded that if the Colonies needed more money, then they must take out loans from the Bank of England and pay interest on them and that debts could only be settled by debt notes backed by the Bank of England. Colonial Scrip was considered notes of credit, not debt, as Scrip wasn't backed by gold or silver, whose supply could be manipulated by, among other interests, banking interests. It was fiat in nature, as opposed to English currency, which was pegged to things like gold, which goes back to the other point of who can control the gold.

It is likely that if an economy were to operate on full reserve banking, it would grow indefinitely at a steady pace due to things such as increases in efficiency such as annual advances in production technology and science and population growth instead of rapidly expanding and contracting due to private banks artificially expanding and contracting the money supply beyond what the market would demand. The business cycle of expansion and bust could be replaced with steady growth that is sufficient to meet the demands of trade, leading to stable prices indefinitely, except of course where oil come in. There's nothing that could be done about the increasing scarcity of oil.

The power to issue currency today belongs to the Federal Reserve, which is a private for-profit corporation that only operates in the interests of generating profits for its shareholders and not necessarily the interests of the public at large. The power should be restored to the people, to whom it originally belonged.

[Kagemusha]

13. Don't take this the wrong way but, are you well read on von Mises?

I used to be, so I understand the arguments well. Basically it comes down to these two points.

- There's no reason to believe that the US Treasury could control inflation better than the Fed because the US Treasury is more beholden to political pressure.

- While fractional banking creates a lot of failure, it also creates far broader growth than would be otherwise possible and makes a good deal of money available to people without hereditary connections.

But anyway, #1 is the important part. "Restoring the power to the people" isn't what would actually happen. It'd be restoring the power to the government to make monetary mischief (and indeed, to be seen doing so). I have a lot of issues with the Greenspan era, a lot of issues with the Fed in general, but I really, really fail to see what would be improved by making the Treasury sec. the guy to be making those decisions; in practice, he works for the President, and for the political party of the President, just as Gonzales works for Bush at the DoJ more than "the People" when push comes to shove. In the long run, given sensitivity to politics by Fed chairmen like Greenspan, it may not mean much, but the arm's length relationship is at least SOMETHING.

That and I have no sympathy for gold standards. Fiat currency is still money; when push comes to shove, it's just a way of keeping track of the number of beans.

[Selatius]

20. I believe it could be done provided several restrictions are put in place on the Treasury

We could establish for instance that the secretary of the Treasury would likely not have exclusive power to set monetary policy. Major policy decisions would have to be made by somebody else.

A board of trustees (with perhaps the secretary occupying only one seat or not) in the Treasury would have to be established to insulate monetary policy from direct political pressure, working much in the same way the Social Security Board of Trustees has operated for 70 years despite different administrations. They would be empowered to make major policy decisions regarding the money supply.

However, if the goal is to control the effects of inflation, a trustee governing law could be passed by Congress dictating that the goals of the board should be limited only towards avoiding excessive expansion of the money supply, which is inherently inflationary, and that the goal of the board should be maintaining price stability. Furthermore, the law could demand that all deliberations of the board and the decisions it makes be a matter of public information.

If you will note, both von Mises and Friedman asserted that inflation is the result of excess money supply and that periods of deflation is the bank's failure in supporting the money supply in a liquidity crunch. Friedman went even further proposing the "k-percent rule" aimed at, not surprisingly, strictly controlling inflation.

If we want more evidence of how stable prices could be under such a system, we would have to study the work done by economist Richard A. Lester at Princeton who studied Pennsylvania's Colonial Scrip policies and published his work in 1938 reporting that in the 50 years before the Revolution and the outlawing of paper currency, prices on the paper standard were more stable than they were in any succeeding 50 year period since.

[Odin2005]

22. Wasn't Mises a right-wing monetarist nut?

[napi21]

2. I thought this nut retired? Why the hell is he being quoted????

He always reminded me of a shrivelled up old has been Pub even when he was the Chair of the Fed. What's the matter? Doesn't the media like Bernacki?

[mcscajun]

7. Exactly. He's out of the lineup, but still swinging at the pitch.

:shrug:

[Javaman]

12. Like most control freaks, he can't let go. nt

[bilgewaterbill]

21. He misses the limelight. nt

[Doremus]

6. I think his remarks were purposeful and scripted.

Sounds like somebody was getting a bit nervous about these record highs. Like, maybe somebody knows the whole thing is built on a sandbar and Katrina's coming round the bend?

Then again, WTH do I know. I just don't think Greenspan of all people is going to utter a single syllable without it serving a purpose of some sort.

[Zynx]

10. Most people with brains are quietly nervous about this market situation

China is very scary, as when they crash, they take everything else with them as we saw in Feb. They are currently obscenely far above their 200 day moving average, with literally nothing holding them up.

Add in the somewhat icky macro picture in the US and you could have a real mess.

[David Zephyr]

19. I so agree with you, Zynx

See my post #17 below. I think this is a freight train about to run out of rails and it is going to be messy...and then it could be a great opportunity to buy again. I'm missing out on some gains after pulling out early this month, but I sleep better. This can't go on. If I'm wrong, then so be it. I lost way too much in 2001 to go through this all over again just after I've recaptured it all back. Shanghai is insane now.

[David Zephyr]

18. I think you are right.

I've put my money on it, too.

[Odin2005]

8. More proof that stock markets are all emotion and have no rationality.

As if any more proof were needed...

[Warren Stupidity]

9. So now we have two mouthpieces for the FED?

WTF is up with that? Sounds like that fucking criminal greenspan has decided to come out of retirement and fuck with my 401K again. Fuck him. I want all of these gangsters sent to some prison swamp in the lower missisippi delta where they stand a real good chance of getting drowned from the wrecked infastructure and crapped out climate that is their primary legacy to the world.

[Kagemusha]

Oh that helps. End his free speech rights as an American citizen. Sure.

Greenspan is a mouthpiece for Greenspan and nothing more. If the market reacts, that's a shame, but no one has any right to shut him up, any more than Hillary Clinton, Tom DeLay or Harry Reid.

I do sympathize with your anger.

[mcscajun]

16. Nevermind.

Got confused there for a moment.

[gravity]

14. Greenspan isn't God

You don't have to agree with him if you don't want.

The good news is that stocks will be cheaper to buy now.

[Xenotime]

15. WHY THE HELL DO PEOPLE STILL LISTEN TO HIM?!?!

[David Zephyr]

17. As of the first week in May, I'm out of the equities (most all were overseas)

Listen, I've missed the last three weeks in profits, but I'm sleeping better.

Greenspan is only saying what others I respect have already been saying. Shanghai is madness now and it will drag down every market when it goes.

I will sit out of the market until it happens and if I "lose" out on more of this bull run, then so be it.

Asset preservation is something I would suggest many think about now.

I may be foolish, but I am still betting on U.S. utilities to continue to perform. Also, they are very aggressive on alternate energy sourcing (wind, solar, wave).