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Thursday, March 1, 2007

Greenspan and the Stock Market Crash of 27 February2007

GREENSPAN AND THE STOCK MARKET CRASH OF 27 FEBRUARY 2007


First let me say, I have never been a fan of ex Chairman Greenspan and I will tell you why later. But, for now let us analyze what happened to the Stock Market on 27 February 2007.
First they say it all started in China where rumors were that the Chinese government was going to begin taxing capital gains made in the market. Then ex Chairman Greenspan gave a speech in Hong Kong stating that there might be a recession in the United States before the year is over. Initially, the Chinese market began to tumble, and then Wall Street followed.
I do not understand why someone does not stuff cotton into the mouth of Mr. Greenspan He is no longer Chairman of the Federal Reserve. Realizing how much the markets follow his every word, he should realize the implications of what he says.

While Greenspan was Chairman of the Federal Reserve, probably the worst one we have ever had, and I know few would agree with me, no one could understand what he was saying. Every time he spoke there would be at least 5 analysts interpreting what he had said. His way of speaking was referred to as Greenspeak! No analyst would agree to what the Chairman had said.
I have always believed that a sign of an intelligent person was his ability to communicate. In this regard, Greenspan fell far short of the mark. Perhaps he is smarter than I give him credit for. Perhaps he intentionally wanted to be obfuscatory. If he did, he achieved his goal.

The problem with Greenspan is that he never saw an interest rate hike he did not like. He was so obsessed with curbing inflation he did not see the long term implications of his continued rate hikes. In my opinion, Greenspan pricked the market bubble in the market. Every market bubble will eventually burst. It is only a mater of time. But, it could have happened in a different way.
Every economist knows, and I am not an economist, but I do have an analytic mind, that it takes time before an economic policy to begin to be reflected in the market. Look at the tax cuts of President Bush. The market responded by developing one of the greatest economic booms which was reflected in 1) companies beginning to make money and becoming profitable, 2) tremendous job creation with the lowest unemployment rate I’ve seen in my lifetime, even considering the absorption of so many illegal aliens in the work force, and 3) relatively controlled inflation. But this all took time.
Greenspan was raising interest rates so fast he did not give a chance for the market to respond. By the time it did, it was too late. Greenspan overshot the target. He was not a good Chairman, at least, nothing in the class of Mr. Volker who, once he left his post, knew enough to keep his mouth shut , something Greenspan needs to learn.

Another aspect of this is the motives of Mr. Greenspan. Several years ago while he was Chairman I saw a report which stated that Greenspan has almost all his money in United States Treasury Bonds. And what aspect of the market responds favorably to a market downturn? They are Treasury Bonds. Comments of Mr. Greenspan about potential recession spooked the market to go down, and it did on 27 February 2007. But what went up sharply on the same day? You guessed it: Treasury Bonds. Perhaps Greenspan is not as dumb as I thought!

The market will recover. It always does. I do not know why the market has considered Greenspan so great. We tend to give credit to a person who is in power during good times and we think somehow that person caused the good times to happen. But, every thing is cyclical. Here will be good times and there will be bad times. Greenspan was there during one of the good times and people will remember him for that. But, he was also there during the beginning of a bad time. But we, Americans, easily forget the bad times, except, perhaps in the case of Richard Nixon.

Sometime soon: THE REST OF THE STORY!

nicola michael c. Tauraso, M.D.

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