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Fed's Blame Game.(ISSUES & INSIGHTS)(EDITORIALS)
Economy: Fed Chairman Alan Greenspan says don't blame him for the bursting of the stock market bubble. Well, whom else should we blame?
Like many, we were surprised at Greenspan's comments during the Fed's recent Jackson Hole conference, which attracts the world's top central bankers to Wyoming's pristine wilderness each year.
Appearing before the annual assemblage of banking bigwigs, Greenspan tried to restore the Fed's good name. He said, in essence: Don't blame us for failing to burst the late-1990s stock market bubble. And don't blame us for the economy's tumble into recession.
Or in Greenspan-speak: "The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely an illusion."
We're confused. Wasn't the Fed's rapid jacking up of interest rates in 1999 and 2000 at least in part to "deflate" the stock market? At the time, there was no inflation to speak of. The GDP deflator, the economy's broadest inflation gauge, rose just 1.4% in 1999.
So what was the Greenspan Fed doing when it began hiking interest rates in June 1999? The bank's fear of soaring stock prices was no secret. It began way back in December 1996 with Greenspan's now-famous "irrational exuberance" speech.
But it didn't let up. Terrified that the stock market had become a casino, the Fed boosted interest rates 37% in the space of a year. Interest rates peaked in May 2000 -- not surprisingly, the month after the stock market did. The Fed got the "correction" it yearned for.
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