SEARCH RESULT -- The Wall Street Journal Interactive Edition

The Wall Street Journal Interactive Edition -- December 10, 1996
Editorial The Delphic Dollar Financial markets figured out quickly enough that Alan Greenspan didn't mean it, but we hope the Federal Reserve Chairman and those around him take a moment to ponder the world-wide turmoil following his Thursday-night mumblings. It might occur to them, or at least it occurs to us, that the Chairman might be able to enjoy a more relaxed dinner if the Fed pursued a more transparent monetary policy. The grand tradition of central banks everywhere is to keep the public in the dark about what they're going to do next. Inevitably, then, markets hang on the Chairman's most delphic utterances. So it's understandable that the Dow might fall 145 points and markets tremble around the world if he happens to say something that can conceivably be read as somehow suggesting the Fed just might do something really stupid. A lot of other people just now suspect the markets are guilty of "irrational exuberance," but Mr. Greenspan is different because he could do something about it. What he could do is pretty well understood in the markets, and was outlined on this page by Henry Kaufman two weeks ago. The Fed could jawbone stocks down, or raise margin requirements or tighten monetary policy because stocks are too high. The jawboning effect figures to last about two days, as we saw when the Dow closed yesterday above where it was when the Chairman spoke. Margin requirements are an ordinary part of the financial plumbing, but the third possibility gets your attention. Because investors are doing too well, it runs, the Fed has to slow money growth, boost short-term interest rates and risk recession. In central-bank jargon, this is called "letting air out of the bubble." It may sound a bit foolish, but it was put into practice only a few years ago by Yasushi Mieno, Governor of the Bank of Japan. He set out to drain the stock and real estate bubble before it collapsed, and Japan has never been the same since. Asset values plunged, jeopardizing the banking system and collapsing the supposedly world-beating Japanese economy into a serious deflationary crisis. Governor Mieno's successors are desperately trying to puff a little air back into a leaky balloon--in central- banking jargon, "pushing on a string." In Governor Mieno's defense, Japan did have a problem. We certainly do not believe that financial markets spontaneously erupt into irrational "bubbles," but we have not the least trouble believing that Japanese tax and regulatory policy artificially boosted real estate values by limiting the market for land, and that these heady values were capitalized into unserviceable bank loans and unsustainable stock multiples. But if the cause of the "bubble" did not lie in monetary policy, neither did the solution. The recent exuberance of the Dow and U.S. Treasuries may or may not be irrational, but clearly is not caused by easy money. In the foreign exchange markets, the dollar is at levels it hasn't seen since 1993. The gold price is at a two-year low, and more general commodity indexes have been falling. None of the usual indicators are showing any sign of an urgent need to fight inflation, in short, so why should anyone believe for even a few hours that stock prices would lead the Fed to tighten? For the same reason, we suppose, that markets believe the Fed will tighten because of too much economic growth. This is by now an article of received wisdom, of course, and if the Fed will buy one non sequitur why shouldn't it buy a second one? The markets will follow whatever the Fed enshrines. At one time the market turned every week on the latest figure for M-1 (as most recently redefined). Currently they trade off on signs of growth, not because they're afraid of growth but because they're afraid of the Fed. The Fed threatening to tighten on increasing stock prices is a recipe for implosion. The solution for this turmoil, as Robert Barro stresses nearby, is for the Fed to declare that its job is to stabilize the general price level, period. Congress could certainly help by legislating precisely this, as Senator Connie Mack has proposed in his Economic Growth and Price Stability Act. (Senate Majority Leader Trent Lott co-sponsored this bill, and should have kept it in mind before letting Fox News Sunday trap him into a little week-end Fed bashing.) Relieved of the inflation-unemployment trade-off specified by the current Humphrey-Hawkins Act, the Fed would be free to specify some intermediate target such as a set of commodity prices. An irrational bubble, if indeed any such animal has ever been identified, will by definition go away of its own accord. For faster growth, the political authorities can always cut taxes and pare government outlays and regulations. The Fed should neither limit the economy nor stimulate it, except in the sense that low inflation speeds growth. And if the Fed had one simple goal everyone in the markets understood, the Chairman's dinner remarks could assume their appropriate role as a blessed bore. Copyright © 1996 Dow Jones & Company, Inc. All Rights Reserved.

The Wall Street Journal Interactive Edition -- December 10, 1996

Editorial
The Delphic Dollar

Financial markets figured out quickly enough that Alan Greenspan didn't mean it, but we hope the Federal Reserve Chairman and those around him take a moment to ponder the world-wide turmoil following his Thursday-night mumblings. It might occur to them, or at least it occurs to us, that the Chairman might be able to enjoy a more relaxed dinner if the Fed pursued a more transparent monetary policy.

The grand tradition of central banks everywhere is to keep the public in the dark about what they're going to do next. Inevitably, then, markets hang on the Chairman's most delphic utterances. So it's understandable that the Dow might fall 145 points and markets tremble around the world if he happens to say something that can conceivably be read as somehow suggesting the Fed just might do something really stupid.

A lot of other people just now suspect the markets are guilty of "irrational exuberance," but Mr. Greenspan is different because he could do something about it. What he could do is pretty well understood in the markets, and was outlined on this page by Henry Kaufman two weeks ago. The Fed could jawbone stocks down, or raise margin requirements or tighten monetary policy because stocks are too high.

The jawboning effect figures to last about two days, as we saw when the Dow closed yesterday above where it was when the Chairman spoke. Margin requirements are an ordinary part of the financial plumbing, but the third possibility gets your attention. Because investors are doing too well, it runs, the Fed has to slow money growth, boost short-term interest rates and risk recession. In central-bank jargon, this is called "letting air out of the bubble."

It may sound a bit foolish, but it was put into practice only a few years ago by Yasushi Mieno, Governor of the Bank of Japan. He set out to drain the stock and real estate bubble before it collapsed, and Japan has never been the same since. Asset values plunged, jeopardizing the banking system and collapsing the supposedly world-beating Japanese economy into a serious deflationary crisis. Governor Mieno's successors are desperately trying to puff a little air back into a leaky balloon--in central- banking jargon, "pushing on a string."

In Governor Mieno's defense, Japan did have a problem. We certainly do not believe that financial markets spontaneously erupt into irrational "bubbles," but we have not the least trouble believing that Japanese tax and regulatory policy artificially boosted real estate values by limiting the market for land, and that these heady values were capitalized into unserviceable bank loans and unsustainable stock multiples. But if the cause of the "bubble" did not lie in monetary policy, neither did the solution.

The recent exuberance of the Dow and U.S. Treasuries may or may not be irrational, but clearly is not caused by easy money. In the foreign exchange markets, the dollar is at levels it hasn't seen since 1993. The gold price is at a two-year low, and more general commodity indexes have been falling. None of the usual indicators are showing any sign of an urgent need to fight inflation, in short, so why should anyone believe for even a few hours that stock prices would lead the Fed to tighten?

For the same reason, we suppose, that markets believe the Fed will tighten because of too much economic growth. This is by now an article of received wisdom, of course, and if the Fed will buy one non sequitur why shouldn't it buy a second one? The markets will follow whatever the Fed enshrines. At one time the market turned every week on the latest figure for M-1 (as most recently redefined). Currently they trade off on signs of growth, not because they're afraid of growth but because they're afraid of the Fed. The Fed threatening to tighten on increasing stock prices is a recipe for implosion.

The solution for this turmoil, as Robert Barro stresses nearby, is for the Fed to declare that its job is to stabilize the general price level, period. Congress could certainly help by legislating precisely this, as Senator Connie Mack has proposed in his Economic Growth and Price Stability Act. (Senate Majority Leader Trent Lott co-sponsored this bill, and should have kept it in mind before letting Fox News Sunday trap him into a little week-end Fed bashing.) Relieved of the inflation-unemployment trade-off specified by the current Humphrey-Hawkins Act, the Fed would be free to specify some intermediate target such as a set of commodity prices.

An irrational bubble, if indeed any such animal has ever been identified, will by definition go away of its own accord. For faster growth, the political authorities can always cut taxes and pare government outlays and regulations. The Fed should neither limit the economy nor stimulate it, except in the sense that low inflation speeds growth. And if the Fed had one simple goal everyone in the markets understood, the Chairman's dinner remarks could assume their appropriate role as a blessed bore.

Editorial The Delphic Dollar

Editorial
The Delphic Dollar