Of course, there were other factors: Radical deregulation, globalization, labor restructuring, flat income, the rise of Asia and more. But it’s hard to imagine the rest of the 2000s as the debacle it became without this initial Fed overreaction.
Indeed, we can only imagine what the 1990s and early 2000s would have been like had the FOMC been more Volcker and less Greenspan. Former Fed chair Paul A. Volcker was a no-nonsense central banker who believed that the Fed’s job was to fight inflation. Whatever happened in the stock market was none of his concern. If you bought Russian bonds and they defaulted, you were supposed to lose your money. Bought into a bad hedge fund that blew up? You took the hit! The dot-com collapse should have led to a flushing out recession and market crash that took a few years to recover from. Not, as was the case, an attempt to offer a salve to leveraged traders who were caught leaning the wrong way when the tide went out.
What we got instead was the Greenspan Fed. The ills caused by cheap money and excess liquidity were apparently to be solved by even cheaper money and more liquidity.
Many of the subsequent problems of the U.S. economy derive from those decisions from a decade or more ago. They have been compounded by a variety of other bad calls; it’s not all the Fed’s fault. But much of what ails us traces back to the Greenspan Fed.
The easy money that corrupted Wall Street and shook the world economy was the prime spark to the wildfire. Had a more normalized Fed policy been in effect, much of what took place in the 2000s very well would have gone down quite differently. We most likely would have had a deeper, more painful recession in 2007-09, but we would be further along the path to recovery today.
Instead, we are like the late-night reveler who forestalls the hangover by having another drink. And another. And another, until we discover that we have become alcoholics.
For the long-term investor, this has created all manner of problems. Fixed-income yields remain thin; those seeking to live off of their assets find it increasingly challenging to do so. Stocks that yield dividends can help, but they come with additional risk and volatility. The average investor is not a momentum trader, but that momo crowd squeezes the most profit out of an easy Fed.
Which brings us back to this week’s FOMC announcement. We won’t see protestors in the street carrying signs reading “Two More Years!” but that is all it has left to give. The Fed cannot raise rates, lest it triggers another recession. And the Fed cannot keep rates here forever, lest it admits its own policy failures, debase the currency further and send oil over $100 and gold toward $2,500.
It is boxed in. And it has no one to blame but itself.
Barry Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, The Big Picture.
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