Wall Street was initially skeptical that Mr. Greenspan could match the towering Mr. Volcker. But Mr. Greenspan won respect in responding to Black Monday, the stock market crash on Oct. 28, 1987. The Fed slashed short-term interest rates, pumping billions of dollars into the banking system. Within months, the stock market resumed its upward climb.
Lesson learned: decreasing short-term interest rates causes the stock market to go up. Perhaps, but maybe not.
But where did the billions of dollars that were pumped into the banking system come from? Did all these billions of dollars come from market investors who bailed the market before they lost everything?
John Williams Shadow Government Statistics web site suggests a slightly different interpretation of how Greenspan et. al. "solved" the 1987 stock market crash.
Systemic changes were introduced during the Reagan administration to boost reported GNP/GDP growth on a regular basis. The wildest manipulations, however, happened at the time of the 1987 liquidity panic. In addition to intervention in the futures markets by the New York Fed to help prop the stock market after the October 19th crash, direct and heavy manipulation of the trade deficit data, under the direction of the Federal Reserve and U.S. Treasury, was used in conjunction with massive currency intervention to help bottom the dollar and to contain the currency panic at year-end 1987.
Perhaps the wrong lessons were "learned." While reducing the interest rate and increasing the money supply appeared to "jump start the stock market," the Greenspan game plan merely propped it up. Reducing the interest rate by fiat, and increasing the money supply, again by fiat, failed to address any underlying systemic weaknesses.
The political lesson "learned" was that the financial system could be gamed to political advantage. Here are some more examples from John Williams:
As former Labor Secretary Bob Reich explained in his memoirs, the Clinton administration had found in its public polling that if the government inflated economic reporting, enough people would believe it to swing a close election. Accordingly, whatever integrity had survived in the economic reporting system disappeared during the Clinton years. Unemployment was redefined to eliminate five million discouraged workers and to lower the unemployment rate; methodologies were changed to reduce poverty reporting, to reduce reported CPI inflation, to inflate reported GDP growth, among others.
And of course, not to be outdone by Clinton:
The current Bush administration has expanded upon the Clinton era initiatives, particularly in setting the stage for the adoption of a new and lower-inflation CPI and in further redefining the GDP and the concept of seasonal adjustment.
All of which might well explain why, according to Richard Clarke, in Against All Enemies, President Bush's foremost concern after 9/11 was that the markets should open the next day.
So long as the health of the nation, and its financial well being is defined in terms of the DJIA (recently reconstituted to reflect the subtraction of AIG and the addition of Kraft), itself a fictitious number, and the GDP, another inflated figure, then we can all be happy because the "economy is growing" on some macro level.
Are you happy?
I'm not.
