The funny money boom of the new millennium

Well, maybe it was fate after all that caused the return to this blog with this name - with financial markets now reeling and the book tour gearing up for a September start, it all seems to make more sense now than it did a month or two ago.

No less than three of you sent a link to today's scathing Financial Times commentary about the old Fed chief - Greenspan has left more than a wall of worry to overcome($). Thanks.

Somehow it seems like old times again - maybe all that was needed was a little break.

We can trace the market’s current tremors back to the previous Federal Reserve chairman, Alan Greenspan. It was Mr Greenspan who, in the aftermath of the dotcom bust, practically drowned asset markets with a tidal wave of liquidity and easy money.
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The post-millennial stock market rescue was not the only time Mr Greenspan stepped in to “save” Wall Street. He has form as a serial inflationist, willing to slash interest rates to bail out investors who should not need rescuing from themselves: one thinks of the stock market crash of October 1987; the Savings and Loan crisis; the Asian crisis; the collapse of hedge fund Long-Term Capital Management; the feared Y2K crisis. No central banker has done more for the concept of moral hazard – the risk that the perceived support of the monetary authorities will cause financial institutions to play fast and loose with other people’s money.


It is abundantly clear that, having gorged on overly easy money for years, Anglo-Saxon financial markets are suffering from indigestion.
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The problem for financial markets now is that a functioning financial system ultimately comes down to trust. When trust is in short supply, there is no obvious price base for securities and credits that during the good times seemed to offer unimpeachable quality. Nor is this crisis of trust restricted to the corporate sector – national Treasuries have been busily debauching their own currencies with the help of the printing press. As Mr Greenspan himself admitted in 1999: “Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted.”

So the US now nurses concerns about credit quality and a possible credit crunch, a housing crisis, the sustainability of corporate profit margins and the logical response of consumer spending to deteriorating fundamentals. US lenders, mortgage brokers, investment banks and ratings firms will all, one suspects, enjoy their day in court.

But when the central bank itself was complicit in the funny money boom of the new millennium, one is left to wonder just how sizeable the “correction” and cross-market contagion could ultimately become.

Just like old times.