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February 25, 2000
Mr. Greenspan's determination to slow the economy took new effect this week: a deepening stock market swoon is suppressing long term rates.
So, despite pending increases in the overnight Fed funds rate, mortgage rates have fallen slightly, taking the low-fee deals under 8.50% for the first time since January.
The Dow looks like it won't hold the magic 10,000, and is down 12% year to date. The S&P 500 is down 7.90%, but tech-heavy lunatics marched the Nasdaq to a new record high at 4617, up 13.50% in the first 56 days of 2000.
Last week Mr. Greenspan addressed the House; this week he delivered identical prepared remarks to the Senate, but Senators forced him to elaborate.
The stunning prepared lines: "Interest rates will... bring the rise in asset values into line with that of household incomes, thereby stemming the impetus to consumption... that has come from rising wealth."
The conclusion of the very next sentence turned that observation into a direct order: "...these values will increase no faster than household incomes."
This household income target for stocks was sprung cold on the House, but Senators had a week to do their homework. They were not pleased.
Middle-road Senators -- Connie Mack and Jim Bunning -- snapped at the Chairman, "Why this focus on asset growth?" No prior Fed Chairman, no consensus among economists, nor anything in the Fed's political charter has suggested that the Fed should tie stock prices to household incomes.
The Chairman delivered his customary demur -- that he has no opinion on a possible over-valuation of stocks -- but stuck to his guns, and expanded on the link between stocks and incomes. His concern: since 1922, household wealth grew steadily with income, wealth holding in a tight range of 4.8 to 5.1 times income -- until 1996.
Since 1996, the ratio has exploded to 6.3 times household income, and the excess is fueling excess consumption. Excess, indeed: GDP growth for the 4th quarter 1999 was today revised to 6.9% growth, unsustainable in anybody's economic model.
The Chairman insists he does not have an opinion on stock market over-valuation, but if he says that asset values are out of line with his key historical benchmark... well, how else would anyone define an over-valuation?
Mr. Greenspan's elegant cape work and jive aside, he is targeting stock values, no matter how indirectly, and will continue to do so until the economy slows down.
As the general public figures out the Chairman's intentions for their wealth -- let alone politicians in an election year -- they're not going to be happy.
The hell of it is... Mr. Greenspan is probably right.
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